6 Steps to Determine How Much to Borrow for College

As long as you're prepared and frugal, student debt can be helpful, some experts attest

By Katy Hopkins
Posted 2012

Student loans are a popular way for students to cover some of the costs of college. But is borrowing for an education a good idea?

"Taking out a loan to pay for your education is an investment in yourself and your future," says Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial. "At the highest level, it's a very positive use of debt. But like any debt, you do want to make sure you are not taking out an excessive amount, and that you will have the ability to repay it."

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There's no one right number for all students to borrow, de Baca notes, but following these steps can help you arrive at a manageable amount:

1. Estimate your full cost of college: Figuring out what college will cost is not often a quick calculation—but it's a crucial step toward borrowing the correct amount of loan debt for you, de Baca advises.

"The first thing that any student needs to do is really, truly understand what the cost of their education is going to be," de Baca says. "People look at tuition and think, 'Oh, that's what I need.' They don't really make a good list of all the different expenses that are involved, and then match that with various ways to actually meet those needs."

When you're comparing financial aid packages from colleges, make sure you're factoring in costs including room, board, school materials, and transportation. Don't forget to factor in other means you'll use to cover costs, including grants and scholarships from schools, savings, and potential earnings from a part-time job.

2. Take only what you need: Student loans aren't free money. You'll pay back what you take and then some, after interest is accounted for—so make sure to be frugal when possible, de Baca recommends.

"Student loans are really intended for tuition, books, and room and board," she says. "The room and board is probably where there's some fungibility in terms of how a student might be thinking about their money. Students should try to keep their living and entertainment expenses as low as possible and not use those funds in inappropriate ways."

3. Research your earning potential: For a student loan burden to be manageable, the total amount you owe should be less than your starting salary after graduation, notes Mark Kantrowitz, founder of FastWeb.com and FinAid.org.

"If your total student loan debt is less than your annual income, you'll be able to repay that debt in about 10 years," he says.

Forecasting your future at age 17 might seem hard, but researching the published salaries of recent graduates—both from colleges you're considering and majors you're interested in­—can pay off down the road. To get started, explore online offerings such as NerdWallet's college comparison tool, which lists average starting salaries by major and college.

4. Think long term: It can be challenging to think about bills that won't come for years, but it's critical to consider the month-to-month implications of what you borrow. That's a commonly skipped step when it comes to taking a student loan, de Baca of Ameriprise Financial says.

Students can find repayment calculators online, including through financial aid sites FinAid.org and PayBackSmarter.com, that can help estimate monthly student loan payments. If you have a rough estimate of an average starting salary for your intended field, that's even better. Experts typically advise that monthly payments of roughly 10% of your income is manageable.

"It's always better for students and parents to be informed, and think about what the end will look like—not just what the first year looks like," notes Brian Lindeman, financial aid director at Macalester College in St. Paul, Minn.

5. Weigh loan options: Ultimately, your monthly payments may be affected by the type of loan you take.

Student loans fall into two main categories: federal and private. Federal loans, which are offered through the government, come with fixed rates and borrower protections, including the ability to lower or postpone payments if you experience financial hardship. Private loans may have fixed or variable rates and don't typically offer flexible student loan repayment options.

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Even if you were to borrow the same amount, you could end up paying more for one loan than another, in interest or in missed opportunities to have some debt forgiven. Make sure to thoroughly research your options to see which best fits your situation.

6. Keep a healthy mindset about debt: The horror stories of students drowning in hundreds of thousands of dollars of debt are, in reality, quite rare, financial aid expert Kantrowitz wrote in a recent paper, "Who Graduates College with Six-Figure Student Loan Debt?" Before you start to fret about student loans ruining your life, keep in mind that well-researched, manageable amounts of student debt can add a variety of positive aspects to your educational experience, including motivation and real-life training, financial aid experts have noted.

"I think we've given the impression to some parents and students that borrowing at all is dangerous when it comes to college," says Lindeman of Macalester College. "So, it's a nuanced message that's difficult to deliver quickly and easily, but I think a reasonable amount of student debt can be one of the best investments a student will ever make."

Originally published at USNews.com on August 13, 2012.

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