How Much Debt Does It Take To Be Considered Drowning In It?

Many college students have graduated this past semester and are finding the prospects for jobs very limited. In a recent report, 2/3 of these students have a debt of at least $25,000. This amount reflects only students attending public colleges. Private college debt is said to be much larger.

These students should at least be congratulated for finishing their degrees. But as their reward for doing a great job they are finding a poor job market and a hefty monthly debt payment soon to begin. As a bonus, congress wants to raise the interest rate on the money owed.

If you were fresh out of college with no job and $25,000 in debt, would that be considered drowning in debt. According to FinAid.org the payment would be about $290 per month, on a 10 year repayment plan. This payment would be impossible even if the student had a job. You would need a salary of $34,000 and you would pay 10% of your income toward your student loan.

For new graduates finding an entry level job that makes that much, is tough to find. Add to that living in a medium to large city that might have such jobs is pretty expensive. Plan on spending 30-40% of your income on a resident.

With these kinds of obstacles in the college graduates way, it's no wonder the rate of student loan default is on the rise.

If these trends continue, the outcome won’t be good for this generation of college students or for the country as a whole. Especially if the cost of higher education continues to rise as predicted in this graph:

According to the Wall Street Journal, the administration has laid out a 3 part plan to help take off some of the pressure. 

1. 10% of Income — The income-based repayment program, which puts a percentage cap on the amount that individuals must pay toward their student loans, currently requires that people must pay at least 15% of their income, but Obama’s plan will drop that number to 10% starting in 2012 rather than in 2014 as previously mandated.
2. Forgiveness after 20 years — Also, starting in 2012 instead of 2014, participants in the income-based repayment program will have their debts automatically forgiven after 20 years rather than 25 years.
3. Consolidation of loans — Obama’s plan will allow people to consolidate all their federal and government-backed loans, which can translate to lower interest rates and lower monthly payments.

The proposal could cost the government as much as $1 billion. But the slow moving government has much to do to get this plan off the ground. Time will tell what the final result will be.