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Student Loans

The Student Loan Debt to Salary Ratio – What It Is & How It Works

The Student Loan Debt to Salary Ratio What It Is & How It Works

Using student loans to fund your education can be a worthy investment. After all, The George Washington University Center On Education and The Workforce found that a bachelor’s degree graduate earns an average of 84% more than a high school graduate, over a lifetime.

Still, when pursuing a higher education to take advantage this potential earning premium, there is a limit to how much student loan debt you take on.

This concept was totally lost on me when I was navigating the complicated process of financial aid and ended up graduating with massive student loan debt.

At the time, I thought any amount of money I borrowed would be worth the investment, but I have now learned that it’s not the case.

To avoid graduating with too much debt, the student loan debt-to-starting salary ratio is a good rule to thumb to use. In this post, I’ll explain what the student loan debt-to-starting salary ratio is and how to use it to estimate the maximum amount student loans you should borrow and how to improve your student loan debt-to-income ratio.

Student Loan Debt-To-Salary Ratio

The interest rate on your student loan is the amount charged on the loan, expressed as an annual percentage of the loan principal balance. You can determine the annual interest rate for your student loan from your loan promissory note.

The Student Loan Debt-To-Salary ratio is a measure of the amount of student loan borrowed for a college education divided by the expected starting salary after graduation.

The student loan debt borrowed should include all the loan funds used for your education. This means Federal and private student loans you and your family financed.

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Limiting Your Student Loan Debt-to-Salary Ratio

As a rule of thumb, you should limit your student loan debt-to-starting salary ratio to no more than a value of 1.

  • Student Loan Debt
  • _________________
  • Salary

  • 1

This assumes that you will repay your student loan in ten years with payments that make up from 12 to 15 percent of your income and the average of your student loan annual interest rate is no more than 9%.

How to Apply the Ratio To Your Major

If you are preparing for college or you are a current college student you can estimate the starting salary you can expect earn by using tools like the George Washington University Center On Education and The Workforce Economic Value of College Majors Tool or Comparably’s Salary Database.

Once you have an idea of your earning after graduation, then limit the amount you borrow for your education to that starting salary amount

The table below summarizes what the borrowing limit should be, based on the starting salaries for different majors, with data taken from The Economic Value of College Majors. George Washington University Center On Education and The Workforce, 2015.

College Majors, Average Starting Salary and Student Loan Borrowing Limit Based On Debt-to-Salary Ratio = 1

COLLEGE MAJOR

  • STEM
  • Health
  • Business
  • Social Sciences
  • Teaching/Serving
  • Career-Focused
  • Liberal/Arts, Humanities

_

STARTING SALARY

  • $43,000
  • $41,000
  • $37,000
  • $33,000
  • $30,000
  • $30,000
  • $29,000

_

DEBT LIMIT

  • $43,000
  • $41,000
  • $37,000
  • $33,000
  • $30,000
  • $30,000
  • $29,000

_

Note. The starting salary amounts are listed in 2013 Dollars. Career-focused majors include, industrial arts, consumer services, recreation, communications, journalism, law and public policy, agriculture, and natural resources, per the George Washington University Center On Education and The Workforce, study.

How To Reduce Your Ratio

A student loan debt-to- salary of more than 1 indicates that the earnings, you can expect to make, is out of balance with the amount of debt you took on.

If this is the case, you can improve your student loan debt-to-salary ratio (i.e. decrease the ratio to no more than 1), in at least three ways:

1. Reduce the amount you borrow;
2. Secure a higher salary; or
3. Both 1. And 2.

Related: Apply these steps to conquer your student loan debt

While Option 1 one is only applicable for prospective and current students, increasing your salary (or side income) to improve your student loan debt-to-salary ratio and pay down student loan debt, faster is an option you can use even you’ve taken more student loan debt than you earn in a year.

Did You Graduate With A Student Loan Debt-To-Salary Ratio of More than One?

~ Melisa Boutin



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10 Ways Your Caribbean Lender Is Robbing You Blind

10 Ways Caribbean Banks Are Robbing You Blind

When I signed up for a Caribbean student loan to fund my college education, I thought I made a simple agreement.

I know, now, that it was everything but a simple financial obligation, and after my own lender messed up my student loan, I identified 10 ways your Caribbean lender is (probably) robbing you blind.

Non Disclosure of Policies and Procedures

Although you signed and agreed to a promissory note for your student loan from your Caribbean lender, details on its policies for applying principal payments, the process to apply for deferment, what happens to interest that builds up during your in-school or post-graduation grace period and when you will have an opportunity to keep outstanding interest from being added to your loan’s principal balance, are not disclosed to you in writing.

The result: You lack a full understanding of what you agreed to, and your lender makes more money

Mysterious Account Transactions

When you signed up for a student loan, you expect transactions to involve disbursements of loan funds, accrual of interest, loan payments and not much else. Yet your Caribbean lenders apply mysterious fees without much explanation, set payments aside to phantom holding accounts, record disbursements you did not request, and fail to apply payments to your loan account even after the funds have cleared from your personal bank account.

The result: You pay more in interest & fees, and your lender makes more money

Not Issuing Regular Statements

Even though transactions occur on your student loan account monthly, you don’t receive regular statements. Most times, it’s impossible for you to know what the status of your loan is, whether your payments were properly applied, and you can’t even be sure if your principal balance is on an upward or downward trend.

The result: You’re confused about what you owe, and your lender makes more money

Limited Access to Account Information

You’ve tried to get up-to-date information about your account, but experience delayed responses and if your lender offers online account access, the account information is hard to discern. Getting a clear picture of what you owe in terms of outstanding principal and interest balances, or how many payments you have remaining, seems out of reach.

The result: You can’t stay on top of what’s happening on your loan account, and your lender makes more money

Outdated Methods of Payment

Because the options to pay your student loan are cumbersome, your on-time payments are delayed and show up on your account, days past the due date. Your lender’s idea of innovation is an online payment option that involves the multi-step process of downloading a form and submitting a copy of multiple forms of identification, to make a payment by credit card or by directing you to third-party bill payment platform, whose system has with varying payment delivery times.

The result: You get hit with late fees and default notices, and your lender makes more money

Losing Track of Payments

You submit your monthly payments using the options available to you, then months (or even years) down the line, when you are able to get a copy of your loan statement, you realize that multiple payments are missing or not properly applied to your account. Your loan’s principal balance, that you thought that you were chipping away at with each payment, is stagnant or reduces only slightly.

The result: You end up repaying your loan for a longer period of time, and your lender makes more money
Related Article: How I Shaved $6,000 Off My Caribbean Student Loan After Making $4,000 in Interest Only Payments

Capitalization of Interest Without Prior Notice

Capitalization of outstanding interest on your student loan has a huge impact on the total cost of the debt to you and the size of your monthly payments. Yet, your Caribbean lender fails to inform you of when it takes place, and what happens to outstanding interest after capitalization.

The result: You pay interest on top of interest, and your lender makes more money

Withholding Extra Payments

After making room in your budget to submit extra payments to pay down your student loan faster, your receipts fail to reflect how it was applied to your account. You contact your loan officer, and you are surprised to find out, that although the money for your extra has left your own personal bank account, it has never made it to your loan account.

The result: Your loan accrues more interest than it would if your extra payments were applied, and your lender makes more money

Not Warning About Interest-Only Payments

Although it’s easy to tell when your principal balance stays the same after on-time payments, it’s harder to figure out why. You are totally unaware of when your loan effectively becomes an interest-only loan and receive no warning from your Caribbean lender when your loan negatively amortizes.

The result: The total cost of your loan can potentially double over time, and your lender makes more money

Subpar Customer Service

On top of the inefficient operations of your Caribbean lender, the customer service is the worst. In order for you get a minimum level of service, you have to contact a friend of your family who works at the bank directly. Other than that, the best case scenario is to endure frustratingly long hold times, unanswered emails, and unresponsive and rude staff.

The result: You are repeatedly worked up by the low level of service, and your lender makes more money

All these practices work together to bring more profits to your Caribbean lender at your expense. Make sure to use these 7 steps to keep avoid these lender mishaps and cut the costs of your Caribbean student loan.

~Melisa Boutin


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How I Shaved $6,000 Off My Caribbean Student Loan After Making $4,000 In Interest-Only Payments

How I shaved $6,000 off of my Caribbean Student Loan After Making 4,000 in Interest Only Payments

I never expected that my monthly payments on my Caribbean student loan would go to interest only. After all, I made sure to read my promissory note and started making my required minimum monthly payments, as scheduled, 6 months after graduation. That’s why I was completely shocked to find out that almost all of first-year of payments, totaling $4,000, only to interest.

In spite of that $4,000 setback, I was still able to pay off my Caribbean student loan two years early and shave off $6,000 in payments by using these 7 steps.

1. I Made Sense of My Caribbean Student Loan

When I started my first full-time job after graduate school, I decided to take the time understand how my student loan worked, instead of just making my minimum monthly payments, without giving much more thought to what was going on with my loan account. From that point forward I wanted to be more proactive.

I requested that my lender send my statements directly to me at the US address, and not to my parent’s house in St. Kitts and reviewed my student loan statements to determine exactly how much of a principal balance I had outstanding, the annual interest rate and how many payments were remaining.

2. I Paid Attention To The Accrued Interest

After learning that how loan interest accrues, is capitalized or negative amortized, can increase the cost of my debt and the length of time it takes to pay it off, I started to pay particular attention to the interest on my own Caribbean student loan. And I honestly wished I had done so sooner.

Related Article: How My Caribbean Lender’s Dysfunction Messed Up My Student Loan

I determined what the daily interest rate factor for my student loan was, double-checked that the amount of accrued interest on my account statement matched up to my own projections and confirmed that my payments were applied to both principal and interest.

3. I Communicated With My Lender Often

Caribbean student loan lenders have a peculiar practice of providing quarterly account statements to borrowers, even though transactions are recorded monthly. This, of course, leaves borrowers in the dark about their outstanding principal and accrued interest balances and how their payments are applied to their account.

Although I could not change how often I received my statements, I made a commitment to requesting updates on my account after each payment I made, to stay informed.

Related Article: The Caribbean Development Bank Student Loan Scheme Assessment

As a borrower based in the United States, this involved spending hundreds of dollars on international calls and enduring a sometimes frustrating process or multiple follow-ups with bank staff to get my account information.  The upside though, was that I could keep on top of my student loan account, and position myself to limit confusion about my loan transactions.

4. I Tracked My Transactions & Loan Documents

Student loan lenders process a high volume of transactions, on numerous loan accounts, which means there is a good chance of at least one error on any given loan account.

This is why I created my own tracking worksheet to make note of each payment I made, including when the payment was submitted and processed, how much of the payment went towards principal and interest; and whether the principal balance decreased by the amount I had projected.

Requesting copies of past statements and completing a close review, also helped me identify errors on my account, like when I was charged late fees during an approved period of deferment.

Student Loan Answers Book

5. I Set Up My Own Pay-Off Plan

Like most student loan borrowers, there were two important questions that came to my mind when thinking about how to tackle my student loan:

  1. When will I be done paying off my student loan?; and
  2. How can I pay off my student loan faster?

My amortization schedule listed my required minimum payments over a 10-year period, with my last payment ending in the year 2017. In 2012, I opted out of that default repayment plan, and create one that would place me on track to pay off my Caribbean student loan, as soon as I could, by adding an extra $2 per month to start.

I then went on to create my own pay-off plan to increase the size of my extra payments, and to make extra payments as often as I could.

[clickToTweet tweet=”She shaved $6,000 from her #Caribbean #studentloan after making $4,000 of interest-only payments” quote=”How Melisa Shaved $6,000 Off Her Student Loan After Paying $4,000 in Interest-Only Payments” theme=”style2″]

6. I Disputed Errors on My Loan Account

When mysterious fees showed up on my student loan statement, I identified my Lenders chain of command, filed disputes with my own supporting documentation, escalated the issue when the fees weren’t reversed, followed up and requested and received credit for these unexplained charges.

7. I Refinanced Some Of My Debt To Save Interest

As I got closer to making my last student loan payment, I refinanced about $1,000 or so on a 0% credit card that reduced the amount of the cost of paying back my Caribbean student loan, a bit more.

If you have a Caribbean student loan you can slash the high-interest costs of your own loans, even after a four-figure back, using these 7 steps that I detail in my book Student Loan Answers.

~Melisa Boutin


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The Federal Student Loan Interest Rate: What It Is & How It Works

The Federal Student Loan Interest Rate - What It Is & How It Works

As the first person in my family to attend college in the United States, right after completing high school in the Caribbean, navigating Federal financial aid that offered me a menu of mostly student loans, was very confusing.

After signing up for Perkins, subsidized and subsidized Stafford student loans, I had no idea how interest rates were set, or that the loans were issued the same calendar year could have different fixed interest rates.

It was only after I transferred from my private university (to get off of the path to $100,000 in student loan debt) and I started to educate myself about student loans, was when I realized that the interest rate on the student loans I took out every semester, could vary over the course of my college career.

By the time I graduated from college in 2007, the annual interest rates of my Federal student loans varied from 2.77% to 6.8%, depending on which semester each loan was initiated.

In this post, I’ll go over how the annual interest rates for Federal student loans work.

Federal Student Loan Interest – What It Is

First, understand that the interest rate for a Federal student loan is defined as the money charged by the lender (i.e. the U.S. Department of Education in the case Federal student loans ) in exchange for borrowing money expressed as a percentage. The interest rate for each Federal student loan is fixed for its lifetime.

Federal Student Loan Interest – Who Sets The Rate

The interest on Federal Direct subsidized, unsubsidized and Plus student loans are set by the U.S. Congress at fixed rates over the life of each loan. As prescribed by the Higher Education Act of 1965, new interest rates for Federal Direct student loans are established July 1st of each calendar year.

The formula for those interest rate is as follows:

Federal Student Loan Interest Formula:
10-year Treasury Note Index + Add On Amount = Student Loan Interest Rate

Where: The 10- Year Treasury Note Index: is the high yield of the 10-year Treasury note at the final auction held prior to the June 1 preceding the July 1 of the year the new student loan rate will be effective. This index is announced on the US. Department of Education’s Office of Federal Student Aid Information for Financial Aid Professionals website.

Note: A Perkins student loan has an annual interest rate 5% regardless of the loan initiation date and is not dependent on the high yield of the 10-year Treasury note. Perkins Loans are backed by the U.S. Department of Education program where a student can borrow directly from their college and university.

Congress also defined what the “Add On Amount” would be, based on the type of Federal student loan and who is borrowing the funds (i.e. an undergraduate student, a graduate or professional student or a parent). These Add On Amounts are summarized in the table below.

ADD ON AMOUNTS FOR FEDERAL DIRECT STUDENT LOAN INTEREST RATES

LOAN TYPE

  • Subsidized & Unsubsidized
  • Unsubsidized Loan
  •  Plus Loan

BORROWER

  • Undergraduate Student
  • Graduate Student
  • Parent, Graduate or Professional Student

ADD ON

  • 2.05 %
  • 3.60 %
  • 4.60 %

=

In summary:

  • The rate is set by Congress as prescribed by the Higher Education Act
  • The interest rate is calculated using a formula based on the 10-Year Treasury Note Index and an Add On Amount
  • The 10-Year Treasury Note Index can change every year
  • The Add On Amount depends on the type of student loan and who is borrowing the funds

This is how the student loan interest rate is set, using all these variables.

[clickToTweet tweet=”Here’s How Federal #StudentLoan Annual Interest Rates Are Set & Change Every Year #StudentLoanAnswers” quote=”How Federal Student Loan Annual Interest Rates Are Set & Can Change Every Year” theme=”style2″]

Federal Student Loan Interest Rate – What Are The Current Rates

The 10- Year Treasury Note Index used to set Federal student loan interest rates effective as of July 1, 2017 was  2.40% (Source: ifap.ed.gov/eannouncements).

Based on the Federal Interest Rate Formula, the interest rate for Federal student loans disbursed between July 1, 2017 through and June 30, 2018 can be easily calculated using the interest formula.

Federal Student Loan Interest Formula:
2.40% + Add On Amount = Student Loan Interest Rate

By plugging in the Add On Amounts, defined in the previous section, into the Federal student loan interest rate formula, the resulting fixed annual interest rates are presented in the table below.

FEDERAL STUDENT LOAN INTEREST RATES
(For Loans Issued between July 1, 2017 & June 30, 2018)

LOAN TYPE

  • Subsidized & Unsubsidized
  • Unsubsidized Loan
  •  Plus Loan

_

BORROWER

  • Undergraduate Student
  • Graduate Student
  • Parent, Graduate or Professional Student

INTEREST

  • 4.45 %
  • 6.0%
  • 7.0 %

Federal Student Loan Interest – How The Change In Interest Rates  Affect You

When the Federal student loan interest rates change, they affect the cost of loans issued after July 1st of the year the change goes into effect. This means that any student loans issued prior to July 1st, won’t change and will remain fixed, whether you are a current student or a long time graduate.

For current undergraduate, graduate and professional students or parents, planning to sign up for Federal student loans after a rate change, the new rates will apply only to those newly disbursed loans (between July 1, 2017 and June 30, 2018).

It’s easy to understand how the fact that interest rates on Federal student loans that not only vary by the type of loan and who is doing the borrowing the money but also change from year, can cause so many student loan borrowers and parents to be confused about how much they can expect their student loans to cost them, after graduation.

Still, if you are a borrower, taking the time understand the debt you signed up for is essential to get rid of them, as soon as possible.

How much did you know about how Federal student loan interest rates are set?

I hope you found this breakdown useful.

~ Melisa Boutin

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Out-of-State Tuition Waivers for Caribbean International Students From The Florida-Caribbean Institute

Florida Caribbean Institute Out-of-State Tuition Waiver for Caribbean International StudentsThe Florida Caribbean Institute (FCI)  offers renewable Out-of-State Tuition Waivers for Caribbean International Students who have been admitted or meet the requirements for admission to any university or community college of the public education system of the State of Florida. Out-of-State tuition waivers can represent a 60% discount on tuition international students pay.

A limited number of these waivers are available, so run, don’t walk, if you are eligible to apply.

Scholarship Eligibility

To be eligible, applicants must:

  • Be an international student with a F1, or J1 visa.
  • Be fully admitted to a state college or university.
  • Have at least a 3.0 or higher GPA.
  • Be a citizen of the Caribbean from:
    – Antigua and Barbuda, Bahamas, Barbados      – Belize, Dominica, Dominican Republic          – Grenada
    – Guyana, Haiti, Jamaica, St. Kitts and Nevis     – St. Lucia, St. Vincent and the Grenadines               – Trinidad and Tobago 
  • Be committed to returning to your Caribbean country after the completion of your studies, for a length of time equal to their exemption period, as required.

[clickToTweet tweet=”Tuition Waiver For Caribbean International Students at Florida community colleges & universities!” quote=”Check out this great funding opportunity for Caribbean International Students!” theme=”style2″]


Application Deadline

All applications for this out-of-state tuition waiver opportunity are due June 1st.

The application can be downloaded, HERE and submitted by mail to:

FLORIDA-CARIBBEAN INSTITUTE (FCI)
Kimberly Green Latin American and Caribbean Center
Florida International University
11200 SW 8th Street
Modesto A. Maidique Campus
DM 353
Miami, FL 33199
Phone: (305) 348-2894
Fax: (305) 348-3593


Related: More Scholarships for U.S. & Caribbean Students

Where To Apply

For more information on the out-of-state tuition waiver and additional details on how to apply, visit The Florida International University Kimberly Green Latin American and Caribbean Center, funding opportunities, webpage, HERE.

Good luck and share this post to spread the word!

~ Melisa Boutin

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