Student Loan Borrowing for College: How Much is Too Much?

It’s true what they say: too much of a good thing can be bad. No where is this truer than with student loans. Education loans enable students to bridge the gap between the cost of college and what they can afford to pay after scholarships and financial aid have been applied. In this, they are necessary to helping students achieve their goals and can be viewed as a good thing. On the other hand, it can be difficult for students to make loan decisions that will impact them for years to come. The sum they are considering today can have a great bearing on what they do in the future, like when they buy a house, get married, or decide to start a family of their own. However, it’s hard to visualize that today.

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To combat overborrowing to pay for college, students should exhaust all of their financial options first. This means searching for scholarships, applying for financial aid, and looking for a part-time job. If students still require money to pay for college, it’s time to look at student loans. First, however, students should build out a budget for life after graduation, which would include their monthly student loan payments. Students can check average starting salaries in their field at Salary.com and the U.S. Department of Labor's Occupational Outlook Handbook. Most importantly, students must view each dollar they borrow for college as a dollar that they will be unable to spend to buy such essentials as a car, a house, or to start a family, and a dollar that they cannot put into a retirement-savings account.

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After students come up with a number for the amount they expect to borrow, they should make sure the loan amount, plus other expected debts such as rent and car payments, do not exceed 33% of their expected future income. Free online calculators are available to help put together a budget and estimate future costs. For example, your budget may look like this: Monthly budget based on roughly $50,000 net yearly salary:

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• Rent - $890 • Debt - $305 • Phone - $70 • Utilities - $240 • Television Subscriptions/Internet - $50 • Food - $175 • Car Payment/Insurance - $600 • Personal - $240 • Medical - $600 TOTAL: $3,200 (take home after taxes) As students contemplate borrowing for college, they should also know that it is extremely difficult to get rid of student loan debt, compared to other forms of debt, because of bankruptcy laws and policies. Borrowers must prove that they cannot repay their student loans and maintain a minimally adequate standard of living. At the same time, it would be detrimental to a student to utilize credit cards to pay for college. Credit cards carry nominally higher fees than traditional loans, and borrowers could spend a lifetime trying to pay off their debt. Before you borrow, carefully consider taking out $60,000 worth of student loan debt when you may only have a $30-, $40-, or $50,000 salary upon graduating.

What to Keep in Mind as You Borrow Student Loans

First, don’t wait until your financial aid package arrives to consider borrowing money to pay for college. As you begin searching for a college during your junior year of high school (or sooner, in some cases), you should also give thought to how you will pay for college. At this time, you and your parents should have some honest discussions about who is paying for college and what you can realistically afford. Next, use a net cost calculator to figure out the true cost of college. You can find these on admission and financial aid websites for each college you’re interested in attending. Net price calculators take into account the basics of your academic performance and family financial circumstances. The school then uses that information to provide a picture of what paying for school will look like for you each year. It includes: • Expected Family Contribution (EFC) • Merit scholarships from the school based on academic performance • Financial aid, such as grants • Loans Again, the amount you see will be a rough estimate; however, you can use it as a guide for what to expect to pay. Take special note of how much the net price calculators say you’ll have to borrow in order to attend the college. If you multiply that figure by four, is the number more than the average starting salary for a recent college graduate? If so, you may want to consider a school that will cost less. When it comes to borrowing money to pay for college, it’s a good rule of thumb to always borrow federal first. Federal student loans have the lowest interest rates, meaning they will accrue less interest over time and cost less to pay back. If you max out the federal loan amount that you qualify for, ask your financial aid officer for a preferred lending list. This list is put together by the college and includes private lenders that they feel comfortable working with as you finance your education. Typically, these are private lenders that other students at the school have used in the past. Borrowing money to pay for college is not a bad thing. In fact, it’s how most students pay for college. However, borrowing can go bad if you take too much. You will spend decades of your life repaying that burden, which can sometimes create a domino effect in how you save and spend for a lifetime. Graduates with too much student loan debt have been known to put off marriage, buying a home and retiring because of the amount they have to pay back. There are also many individuals out there who begin payments toward their children’s higher education while still paying for their own student loans. If you have to borrow, do it smartly. Your future self will thank you.