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

Too much of a good thing can be bad, as Shakespeare demonstrated, and the axiom is true of loans for students. Students may believe it is difficult enough worrying about the big exam next week or whom to take to the spring dance. Yet students must stretch themselves and imagine a much greater consequence, years into the future, when they consider how much money to borrow to pay for a higher education. The first step is to try to avoid borrowing in the first place, experts say. “Students should thoroughly explore scholarships, grants and community service awards before they begin borrowing for college,” said Marianne Ragins, author of Winning Scholarships for College and publisher of ScholarshipWorkshop.com, based in Centreville, Virginia. The next step is to set up a budget based on the salary you’ll likely make after you graduate from college, Ragins said. 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. If there is ever a time for discipline and independence, this is it, experts say. That’s because lenders are in the business of urging students to borrow as much as possible, and won’t warn of the financial consequences. 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. If college-loan and other debts consume more than a third of future income, look for alternatives. For example, your budget may look like this: Budget based on roughly $30,000 net yearly salary:

• Rent - $550
• Debt - $130
• Phone - $45
• Utilities - $100
• Cable/Internet - $20
• Food - $100
• Car/Insurance - $205
• Personal - $240
• Medical - $100
• Savings - $110

TOTAL: $1,600 (take home after taxes) Students must take into account new laws and policies that make debts nearly impossible to write off. Student loans are no longer easily swept away under today’s tougher bankruptcy laws. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 extended non-dischargeable debt to student loans from private lenders, so they cannot be automatically written off. Instead, people seeking bankruptcy protection must prove that they cannot repay a student loan and still maintain a minimally adequate standard of living. The idea that using credit cards to pay for college will be easier is a delusion with terrible consequences, said Dr. Robert D. Manning, author of Credit Card Nation, Professor and Chair of the Department of Business Administration at Prince Mohammad University in Khobar, Saudi Arabia, and Senior Research Fellow at Institute for Higher Education Law and Governance (IHELG) at the University of Houston Law School. Credit cards carry even higher fees than traditional student loans, leaving the unsuspecting to fall into a situation where it would take their entire lifetimes to pay off a credit-card debt, Manning said. Students who want to attend graduate school or another professional school after college must include those debts in any calculation of their future standard of living, Manning said. “It forces people to say, ‘If I’m going to graduate with $50,000 of student-loan debt, how am I going to make it on a $40,000 salary?’” he said.

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.