How Much Can You Afford to Borrow in Private Student Loans?
One of the biggest problems with student loans is getting yourself in too deep. But how deep is too deep? It depends on your future ability pay. Unfortunately, this can be difficult to determine while you’re still in college, but you’ll have to do your best to figure it out so you can set reasonable limits on your borrowing. Many borrowers aren’t even sure exactly how much they owe until they graduate and get their first student loan statement from their federal and private lenders.
One of the basic guidelines for determining how much you can afford to borrow is that it should not exceed your first year’s salary. If you’re an art history major and are looking at a modest docent’s salary, borrowing $75,000-$100,000 isn’t wise. Modest borrowing is your best chance of success in the long-run.
Borrowing to finance your education is a risk. The less you borrow, the less risk. USAFunds.org recommends capping your debt to a percent of income. Cautious borrowers should plan for no more than 8% of income to go to loan payments, 10% for the moderately cautious and 15% for those more accepting of risk.
There are some reasonable exceptions to the guidelines. If you know that you will be eligible for Public Service Loan Forgiveness because you’re planning a career in nursing or civil service, borrowing more may not be as risky. And careers such as medicine and law that start out with a modest salary that greatly escalates can support higher student loan debt levels.
Often it’s hard to gauge the impact student loans will have on your life. Even if you know your total debt is $20,000 or $40,000, you may not understand what this really means. $40k at
6.5% over 10 years will result in payments of $454 per month. On a $40k salary, this will be 18-20% of your pay. This can be a budgeting challenge and you can quickly see how more debt can quickly become unmanageable.
One thing you don’t want to do is over-borrow. This means that loans should be taken out only to cover bona fide educational costs – tuition, room, board, books and fees. Borrowing to have pocket money isn’t a good strategy neither is using student loans to buy a car or other personal items.
Federal student loans have built in limits that you can’t exceed, but this is not true of private student loans. Because loaning is also a risk, the lender will assess your total debt to decide how they cap you. Every lender varies in their policies and applies different criteria on aggregate loans allowed.
Minimize What You Borrow
Smart borrowers take on as little debt as possible to make it through school. Working while in school and on summer breaks to pay as much of your own way as you can is recommended. Cutting back expenses and living frugally while in school will benefit you in the long-run.
One way to make sure that you don’t get in over your head is to always know how much you owe and what you’re facing in future monthly payments. Sign up for Tuition.io’s free student loan tool so that you can see all of your student loans – both federal and private in one simple dashboard. You’ll see what this will cost you each month and you can see how this grows as your balance increases. Be sure to read our blog for more tips on coping with student loans.
Image courtesy of Flickr Creative Commons user CollegeDegrees360.