Student Borrowing: the 8% Rule

Student borrowing: the 8% rule

To manage student debt comfortably after graduation, your loan payment should be no more than 8% of your monthly income. Start from the salary the career or major you are considering actually pays, and this works backwards to the most you should borrow for the whole degree.

Future salary

Future annual salary Early-career pay for the major or job you are considering — not mid-career. Payscale publishes both: look up a major at payscale.com/college-salary-report and use “Early Career Pay”, or a job at payscale.com/research/US/Job and use the 1–4 years figure.

Monthly salary

Loan payment ceiling

Most you should borrow, all four years

Assumes loans at — repaid over 10 years. —. That is the total across every year of the degree, not per year.

A sample monthly budget

Two rows are set for you: taxes, which the government decides, and the loan payment, which is the ceiling above. What is left is what you actually get to plan with — and it has to add up to your whole monthly salary.

Budget choices

Housing Rent, utilities, internet. Keep it under 35% of your monthly salary.

Savings Retirement and future big purchases. Aim for 10% or more — the section below shows what that becomes.

Expense category	Amount	Percent
Taxes	$0	0%
Loan payment	$0	0%
Savings	$0	0%
Housing	$0	0%
Everything else Commuting, eating out, gym, phone…	$0	0%
Total	$0	0%

What that savings becomes

Saving early matters more than saving a lot, because of compound interest. This assumes you save that same amount every month for 10 years, then stop adding and let the balance grow on its own at 8% a year.

After	You would have	You put in

What if you borrow more than the rule allows?

Borrowing above the ceiling does not just cost interest. The bigger payment has to come out of some other row of the budget — and taking it out of savings is what it really costs.

Extra borrowing

Borrow this much more On top of the ceiling above, over the whole degree.

New monthly payment

On $0 borrowed — $0 a month more than the ceiling.

Savings left after the bigger payment

Down from $0 a month.

Over 40 years that smaller savings habit ends at $0 instead of $0 — a difference of $0, to borrow $0 more.

How these numbers were built

The borrowing ceiling. Your monthly salary is the annual figure divided by twelve. 8% of that is the biggest loan payment the rule allows. The ceiling is then the loan balance whose payment equals exactly that amount over 10 years — standard amortisation, the same maths a lender uses.

Taxes. Federal income tax on your salary less the standard deduction of $0, run through the marginal brackets, plus 7.65% for Social Security and Medicare. State and local taxes are not included, so a family in a state with income tax should expect this row to be higher.

Savings growth. Contributions are treated as one deposit a year, growing at 8% annually. It is an illustration of compounding, not a market forecast, and no real return arrives evenly.

Every figure is an estimate for planning. Nothing you type here leaves your browser.