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tax matters

James Lendall Basford was a watch maker and jeweller who lived in Massachusetts in the late 1800s. He published two books of his own aphorisms. These books were "the result of ideas which have forced themselves into expression during a period of the author's life, extending from early youth to middle age, amidst the many cares and perplexities of a business life."

There's nothing like publishing a book to convince your kids that you actually have something worthwhile to say. I've tried it – although I'm still waiting for my kids to acknowledge that I know more than they do about some things.

In his book Sparks from the Philosopher's Stone (1882), Basford did wisely suggest, "The man who never has money enough to pay his debts, has too much of something else." Although Basford surely wasn't thinking of postsecondary students when he wrote these words, they can apply to the life of many graduates who have borrowed to pay for an education that, so far, has not provided a sufficient income to pay back those debts. Is it possible to have too much education? Perhaps – if you have to borrow to pay for it.

The concept

Now, hold on. I'm not suggesting that borrowing money for postsecondary education is a bad idea. Borrowing too much, however, can be a bad thing. I've always believed that borrowing money to acquire certain assets can make sense. If you borrow money to acquire something that will appreciate in value over the long term, produces an income, where the interest cost is low, and there are tax savings that can result from those interest costs, then you've likely taken on "good debt"

A good education is one such asset. But it's important to understand that different types of education will produce different results. That is, some courses of study offer a higher income potential than others. And some educational institutions generally lead to higher incomes as well.

Why does this matter? Shouldn't a student focus on areas of study and the type of school that they will enjoy most, without being so concerned about income levels after graduation? Shouldn't a student follow his or her passions? Sure. But if a student is going to borrow for an education, he or she needs to understand how much debt is okay, and how much is too much, given the school and course of study they're attending.

The stats

If you look around, you'll find all kinds of research on postsecondary education and the earnings of graduates. I think of the 2012 study published by the Canadian Journal of Higher Education, as an example. The research confirms that graduates with applied and technical skills generally do better financially than those with more generalist skills provided by a liberal-arts education. So, graduates of engineering and computer-science programs report the highest earnings two years after graduation, followed closely by those in health sciences, and then those with business-related credentials.

In the study, it was also clear that college graduates generally reported lower earnings, followed by graduates of trades programs. Both groups earned quite a bit less than university graduates. The median earnings (two years after graduation) of university graduates in each field of study were as follows: liberal-arts grads – $38,958; sciences – $39,191; business – $44,886; engineering and computer sciences – $51,671; and health grads – $52,141. When looking at community college grads, the ranges weren't as big, from median earnings of $31,095 for liberal-arts grads to $38,038 for graduates with diplomas in engineering and computer sciences.

The rule

What does all this mean for students? Follow your passions, for sure. But if you're going to borrow money for school, understand what your earning potential is upon graduation. Allow your potential earnings to govern how much you're willing to borrow.

I suggest following the Rule of Tens: For every $10,000 in student loans, you should be able to earn about $10,000 annually over a base of $10,000, when you graduate, in order to repay those loans in 10 years. Here's an example: If you graduate with $30,000 of student loans, you should earn $30,000 a year, plus a base of $10,000, for $40,000 in total annually. This will enable you to pay back those loans over 10 years when you graduate.

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices.

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The Canadian Press