There’s proof in the notion that higher education is an investment in your future. According to the National Center for Education Statistics (NCES), in 2017, young adults with a master’s degree or higher earned a median salary of $65,000 per year, while those with a bachelor’s degree pulled in a median of $51,800. Those who completed high school took home a median annual pay of $32,000.

Heading back to school can also help with job security. The Bureau of Labor Statistics notes that the unemployment rate for Americans whose highest degree is a bachelor’s degree was 2.2 percent in 2018, compared to 2.1 percent for those with a master’s degree. The unemployment rate for Americans whose highest level of education was high school was 4.6 percent.

With these findings in mind, it’s easy to see college and grad school as an important requirement for entry into a prosperous and financially secure future. At the same time, the cost of higher education is among the fastest-rising financial undertakings in America today.

When considering undergraduate education alone, The College Board estimates that the average cost of attending public institutions was $12,000 during the 1998-1999 school year, while the average cost for public university students was about $8,850. During the 2018-2019 school year, those figures increased to $21,370 and $14,880, respectively.

As the cost of higher education soars, student loan debt does too. According to the credit reporting agency Experian, the total amount of outstanding student loans reached an all-time high of $1.41 trillion in 2019. During the same year, the average American carried $35,359 in student loan debt. That's a 26 percent increase in five years and a 2 percent increase compared to the first quarter of 2018.

Intimidating, right? It doesn’t have to be. As you consider making the jump into higher education, what matters most is that you give serious thought to its cost—and how much you’ll need to make after graduation to pay for it. After all, how much you borrow and how you manage your loans can have a major impact on whether your basic needs and risks are covered, and ultimately, you don’t have to constantly stress about money.

It Starts With Your Debt-To-Income (DTI) Ratio

Your debt-to-income (DTI) ratio measures how your debt stacks up compared with your gross income, which is your pay before taxes and other deductions are taken out. This ratio is an ideal tool for getting a better look at how much of your monthly income will go towards debt payments.

What’s more, it will allow you to gain a better understanding of how much you’ll need to earn to make payments without feeling financially burdened—and avoid missing payments altogether. Keep in mind, however, that this ratio takes all of your debt into consideration, not just student loan debt alone.

Determining your monthly student loan payment

Your monthly payment depends on how much you borrowed, your interest rate, and your loan type. The U.S. Department of Education’s Federal Aid offers a repayment estimator, which approximates your monthly student loan payments by taking these factors into account.

If you’re already making payments, just assess the number of repayment plans you’re currently juggling and add up how much money you pay towards them on a month-by-month-basis.

__(While we're at it: Are Student Loans Worth It? Consider the Data.)__

Determining your monthly income

There’s a lot to consider when nailing down your post-graduation salary besides the actual role you’re pursuing—or the one you’ll return to with a newfound degree in hand.

This is where PayScale’s Salary Survey is especially helpful, offering a personalized annual salary estimate based on your unique skillset, job title, years of experience, and location to better understand both your true market value—and give you an idea of what you’ll be making in your field.

After answering specific questions, you’ll receive a pay snapshot that shows how your total pay compares to professionals with a similar background and cost of living. Dividing your total pay by 12 will give you an accurate look at your expected monthly income.

How to Calculate Your DTI Ratio

To calculate your DTI ratio, you’ll need to tally all your monthly debt payments. For example, if you expect to pay $180 per month for credit card debt, $100 per month for a car loan, and $400 a month payment in student loans after graduation, your monthly debt payments will be $680.

Next, divide your total monthly debt payment amount by your monthly gross income ($680 ÷ $4,500 = 0.151). The result yields a decimal, so you’ll need to multiply it by 100 to achieve your DTI ratio, which in this case is roughly 15 percent. In other words, you’re putting 15 percent of your monthly gross income goes to debt payments each month.

What Constitutes a Good DTI Ratio?

According to Wells Fargo, a ratio of 35 percent or less is a solid ballpark to aim for and will most likely allow you to have money left over for saving or spending after you’ve paid your bills. A high DTI ratio, on the other hand, may indicate that you have too much debt for the amount of income you earn each month.

As a result, banks and financial credit providers prefer to see low DTI ratios from borrowers in the case they take out any additional loans, such as a mortgage or a loan to pay for medical bills. Essentially, these lenders want to be sure that you can comfortably cover your existing loan payments before they approve new loans and increase your debt.

How to Improve Your DTI Ratio

The average monthly student loan payment of $393 might not be an issue for graduates with a degree that puts them running for a comfortable salary. But even if you land a job that doesn’t pay well, the good news is that there are many ways to lower your monthly payments.

Boost your income: Whether negotiating a raise, picking up a side gig, or flipping furniture on Etsy, any additional work you take on can help. The goal isn’t to overextend yourself, but to recognize opportunities where a sense of entrepreneurship and work ethic can lead to extra money.

If refinancing, add a cosigner: A cosigner with a strong credit score can help you qualify for a refinanced student loan with a lower interest rate. Once your refinancing loan is approved with your cosigner, you're both essentially co-borrowers and are responsible for the loan.

Conversely, it’s crucial to remember that if you default on the new loan payment, your cosigner’s credit score will be in jeopardy as well. What’s worse, some lenders won’t allow a cosigner to be released from a loan even after you establish a positive payment history and can manage the loan on your own.

Hold off on additional loans: With student loans on your plate, it’s best to avoid taking on other debts your education is paid for. In addition to being less a stressful experience, you’ll also reap measurable financial benefits, like saving money by eliminating debt early, advancing your status as a borrower, and moving on the fast track to becoming debt-free.

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