Not Rich Yet | Managing higher incomes

May/10

24

How much tuition can you afford?

One big question that many people wrestle with is how much tuition and school loans they can afford to take on.

So I did a quick analysis to understand what a maximum reasonable amount of school loan a student could take on and still make ends meet.

Assumptions

My analysis calculates the maximum affordable tuition or total school costs given a post-graduation income and makes the following assumptions:

  • That all tuition and school costs are financed via loans
  • That schools loans run for 10 years at a 6% interest rate
  • That the student will be single and pay taxes in NY
  • That post-graduation the student will spend a minimum of either $1500 or 40% of his or her gross income on living expenses including food, mortgage, rent or car payments etc
  • That of the excess income – that what is left after taxes and living expenses – up to 75% can be used to pay-off school loans, the remainder is a safety buffer and for retirement savings

Results

Given those assumptions, the total affordable tuition or school loans amount roughly equals the post-graduate income.

That means if you think you will make an annual gross income of $60k after graduating from college, you can afford to take out school loans of up to $64k.  Similarly, a salary of $100k would support school loans of about $106k, and an income of $150k loans worth $160k.

If your income would be below $35k per annum, your affordable school loans drop quickly, e.g.  for an income of $30k you could only afford loans worth $11k.

This same math roughly holds true for both undergrad and grad programs.

What do you think? Share this with someone who is thinking about going to college or grad school!

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