With all the news about the student loan crisis, and all the problems that can come with going into debt, it’s not surprising that many college-bound students and their families are concerned about how much is safe to borrow in student loans.
Our suggestions are relatively straightforward, and they apply whether the people who’ll be paying off the loan are students or their families:
1. Borrow the minimum you can to get the education you want
You can get a great education at many lower cost colleges, provided you put in the effort. But if you find you need to take out loans, it's important to know what those loans will cost you, and if you'll be able to afford them over time. The two charts below can help you estimate that.
One gives you a rough estimate of what your monthly payments would be on different loan amounts, assuming a 5.5% interest rate on a ten year loan. The other shows you what type of salary you'd need to earn to comfortably make those payments. (Note: the $28,000 amount is the most you can borrow in Federal student loans over 4 years in college. Any amounts over that are calculated at 9% interest, to represent the cost of borrowing from a private lender.)
Interest rate on first $28,000 = 5.5%
Interest rate on any amount over $28,000 = 9%
"Safe amount" is 10% of salary per year
10 Year payback
Interest rate on first $28,000 = 5.5%
Interest rate on any amount over $28,000 = 9%
"Safe amount" is 10% of salary per year
10 Year payback
3. Consider how much you’ll earn in a job based on your major (but recognize this can change)
Some colleges will even post potential salaries by major, and while this is helpful, it’s not foolproof. Some majors do provide a better starting salary, but others catch up fairly quickly. Also the job availability in different fields can change over time, sometimes rapidly.
For a long time, the conventional wisdom was “Your total loan amount for four years shouldn’t exceed more than you expect to make in your first job’s starting salary.” We used to give this advice too, but we no longer believe that it’s helpful.
First, many students change their idea about what their career will be, both during and after college. Many come into college not having any idea at all of what they intend to be.
Also, you might find a good job in a field different from the one you originally planned.
Finally, starting salaries are increasing, due to the number of jobs available vs the number of people looking, but that can always change. It doesn’t make sense to base the amount you borrow on something so variable.
As we have said elsewhere on this site, what you will take away from college depends not only on the quality of the school, but in the amount of work you put into the academic and social challenges. And because you may need more money for a graduate degree (which, by the way, is where much of the student debt comes from), one good strategy is to save your funds for graduate school.
It comes down to a simple message: Treat college like any other major purchase: make sure you get a good value for your money, and don’t take out a loan for any more than you can afford in the long run.
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