New York, Austin, San Francisco and DC

Contemplating taking out student loans to fund college or grad school? Are you wondering whether a student loan is worth it in the long run? The merits of student loans have been debated at length for years, well before the last few election cycles.

We decided to approach this question differently by looking at what life is like with and without student loans and the practical cost of living in four major US cities to see how student debt is affecting lifestyle.

Living with Student Loans

A necessary evil

Student loans are what some people like to call a necessary evil because most people need them to pay for college. The trouble is the resulting monthly payment you have after college. For the 2020-2021 school year, annual private school tuition was estimated at $37,600 while public school tuition was estimated at approximately $9,400. Therefore, the total tuition for four years of education is $150,400 for private schools and $37,600 for public schools.

Even when you consider scholarships and grants, many students will struggle to pay for college without going into debt.

Higher education and better income

Most people who have earned a college degree earn a higher lifetime income. Studies show that those with a college education earn 57% more income than high school graduates. In many cases, the benefits of getting a college education outweigh the downsides of living on student loans. This is especially true if the expected annual salary of a person with your degree is higher than the total amount of student loans you have taken out.

However, there is a significant risk here of not being able to find work in your chosen field of study, which would almost certainly mean that your earnings would be lower. Changing careers and having to go back to school would seriously affect your financial options.

Good credit

Student loans can help college students and recent graduates build their credit records and credit score when used responsibly. By responsibly making your student loan payments each month, you show potential creditors that you have a low risk of defaulting on future loans, including a mortgage, car loan, and more.

If you take out a student loan that you can’t pay back, it will damage your credit score, make financing more difficult, and the interest rate will be much higher, costing you more money in the long run.

Delay of important life events

According to the Federal Reserve, the average monthly student loan payment is $393. This monthly payment makes it difficult for many people to buy their first home. The Fed found that “a $1,000 increase in student loan debt reduces the homeownership rate by 1.5 percentage points.” This is based on those who attended a four-year public school. If we take the average student loan debt of $17,000, that lag is approximately 3.5 years.

Student loan debt even keeps some from getting married and starting families because they don’t want a burden of debt hanging over them as they take on family responsibilities. Studies show a 1% delay in marriage for every $1,000 in debt. This results in a lag of 17% on average.

Cost of living in the United States

Where you live has a significant impact on how easily you can pay off your student loan debt. Below is a breakdown of popular cities with favorable graduate job markets and the annual salary you’ll need to afford to live there.

All numbers are gross income, not net, so taxes also play a role.

NYC

Rent for a one bedroom apartment in New York averages $2,045 per month. The standard metric to see if you can survive financially is that your housing expenses are no more than 30% of your gross income. According to this guideline, you should be making at least $82,000 per year to be able to afford housing in NYC.

Add in the average monthly student loan payment of $393 and you need to raise that salary to at least $86,600.

Austin, TX

To live in Austin, TX, you need to make about $60,000 a year using the 30% rule from above. The average monthly rent for a one-bedroom apartment is $1,519.

After factoring in student loans, your annual income must increase to nearly $66,000.

san francisco

San Francisco regularly tops the list of most expensive cities to live in the United States. The average rent for a one-bedroom apartment is $2,343. If you extrapolate this for the year and allocate 30% of your income for these costs, you need a salary of $93,720.

If you add student loans, you need $98,500 in income.

Washington, D.C

Washington, DC is another expensive city to live in, especially if you live within the city limits.

The average one-bedroom apartment has a monthly rent of $2,508. That means you’ll need a whopping $100,320 straight out of college salary to survive before student loan payments and $105,120 in student loan payments.

While these numbers are high, it’s important to remember that apartment rental numbers are average, meaning there are both cheaper and more expensive apartments.

Also, the salary estimates are just there for you to get by. They do not include entertainment expenses or other voluntary expenses. In other words, you can barely get by on the listed incomes.

Finally, you also need to consider that the $393 monthly payment for student loans is average. Many people have higher monthly payments and therefore need to earn a much higher salary.

For these reasons, many people in different cities across the country are struggling with student loan debt.

Thinking about skipping college?

Forgoing the traditional college experience is more than a financial decision, but there’s certainly a pecuniary argument here.

Start earning an income sooner

You can start earning an income sooner if you skip college and enter the job market right after high school. Compare this to those who attend college for four years and you have a solid work experience, whereas a recent graduate may only have a diploma.

Of course, as mentioned earlier, your salary will likely be less down the road, ultimately putting you behind graduate earnings.

Start-up assistance for old-age provision

If you start working right away, you can start investing money in a 401k plan or a traditional or Roth IRA. Being able to start saving early has a huge benefit. For example, if you invest $300 a month for retirement from ages 18 to 65 and get an average return of 8%, you’ll end up with $1.7 million. Between the ages of 22 and 65, if you invest the same $300 and earn the same 8% annually, you end up with $1.2 million – $500,000 less.

The opportunity cost of working and saving in those four years is higher than most twenty-somethings realize.

Lower net worth

If you have a lower income, you won’t be able to save as much money as someone with a higher income. Even when you consider that a college graduate has to pay off their student loan debt, they still have higher long-term net worth than those who didn’t go to college.

Does a Student Loan Prevent People from Saving for Retirement?

Student loans will definitely force people to save less (or nothing) for retirement. This is a big problem because the longer you invest your money, the more it can multiply and grow, leaving your current student loan payment costing you big bucks in your golden years.

For example, let’s say you put $250 a month into a retirement account between the ages of 22 and 65 and earn 8% annually. When you retire, you’ll have just over $1 million. However, if you wait to save until you pay off your student loans a decade later and save $250 a month between the ages of 32 and 65 and earn 8% annually, you end up with almost $473,000.

Saving for retirement is better than not saving at all. So, even if you have student loan debt, you should consider contributing to your $401,000. Even if you save $100 a month, that amount can add to your nest egg and keep it growing, so you’re not starting from scratch when you have more money to invest for retirement.

Conclusion

Taking out a loan is essential for most students. Without loans there would be no way for many students to finance the high study costs. But you shouldn’t rely on them just to cover your educational expenses.

Try to think outside the box when trying to cover tuition costs so you only have to withdraw the minimum amount required. That could mean working after high school and attending college part-time at night. In this case, you may be able to have your employer pay part of your tuition fees.

Other options include joining an adult education center, living at home instead of on campus, and/or taking advantage of scholarships and grants. The more you can do to keep your total loan amount to a minimum, the less impact your monthly student loan payment will have upon graduation.

Start saving and investing earlier, regardless of student loans or other common forms of debt. This gives your money more time to grow. Q.ai takes the guesswork out of investing.

Our artificial intelligence scans the markets for the best investments for all types of risk tolerance and economic situations. Then it bundles them into handy investment kits that make investing easy and dare we say fun.

Best of all, you can always turn on portfolio protection to protect your profits and cut your losses, no matter what industry you invest in.

Download Q.ai today for access to AI-supported investment strategies. If you deposit $100, we’ll add another $50 to your account.