Student loan repayment often becomes easier for graduates as their earnings increase, but graduates of some majors continue to struggle under typical repayment programs and loan amounts, according to a recent analysis from The Hamilton Project.
The analysis is the second in the Project’s “Major Decisions” series, the first of which focused on lifetime earnings of graduates. This second analysis focuses on loan repayment and earnings growth across 80 college majors, breaking down the share of monthly earnings needed to make monthly loan repayments under the traditional 10-year repayment plan.
About 70 percent of U.S. bachelor’s graduates carry student loan debt, with an average balance of $26,500. While earnings can vary widely by major, graduates typically see a 65 percent increase in earnings in the first five years after completion due to finding full-time employment and switching jobs, according to the analysis.
In addition, graduates from majors with low earnings at the start of their careers are more likely to see steeper earnings trajectories in the early years of their careers, with some of these graduates experiencing increases of over 100 percent. To compare, graduates from other majors see gains of only 30 percent.
The analysis also shows that as a graduate’s earnings increase, the burden of student loan repayment declines. For example, payments under the standard 10-year repayment plan for students with average debt levels and typical earnings take up 14.1 percent of the graduate’s earnings in the first year. By the tenth year, those payments are down to 6.5 percent of earnings.
Eight in 10 borrowers with typical earnings and debt levels will pay more than 10 percent of their earnings in the first year of repayment, with that level declining to fewer than one in eight in the fifth year and none by the tenth year, the report said.
However, the burden of student loan repayment under traditional programs can be difficult for graduates of some majors like drama and theater, whose graduates pay 24 percent of their earnings in the first year of repayment and 10 percent by the tenth year. In comparison, energy and extraction engineering majors pay only 7 percent of their earnings in the first year and 4 percent by the tenth year.
One possible solution for this “mismatch” between early-career repayment and mid-career earnings is the use of income-based repayment (IBR) programs, according to the analysis. Data shows that 99 percent of borrowers with the average amount of student loan debt would qualify for the “most generous” IBR plan in the first year of their careers, followed by 82 percent in the fifth year, and 54 percent in the tenth year.
Along with the analysis, The Hamilton Project released an interactive student loan repayment calculator that includes major-specific earnings data, which allows users to see how much of their earnings will be put toward repaying their student debt throughout the entire repayment period.
Publication Date: 1/13/2015