College Loans: How Much is Too Much?

/ BY / Managing Debt

With college costs continuing to rise, student loans are a popular choice for financing a college education. The amount of student loan debt in the U.S. has now reached more than $1 trillion-more than the total amount of credit card debt in the country.

According to the student financial aid site, almost two-thirds of undergraduates today take out loans to cover college costs. Their average debt is $23,186, but there are numerous stories of students who graduate facing much higher loan repayment burdens. Many financial experts advise limiting the total amount you borrow for college to your expected annual salary the first year that you work after graduation.

Here are some suggestions to help you avoid getting in over your head with college loans.

  1. Take a realistic look at what your education is going to cost you. First, add up tuition and fees plus the cost of books, room and board, and miscellaneous expenses. Many colleges will provide estimates of how much you should budget for each year of study, and there are several college loan websites with calculators that can help you figure out a reasonable total.
  2. Determine what resources you have to offset those costs. Is the college willing to offer any financial aid? Are you eligible for scholarships? Sites like Fastweb and the College Board's Big Future may help you find additional sources for funding.
  3. Can you work part time—or work full time, and go to school part time? A regular income that you can depend on will allow you to reduce the amount that you have to borrow.
  4. Try to determine what a new college graduate with your degree is likely to earn when he/she gets a job. The National Association of Colleges and Employers publishes an annual survey on starting salaries for new college graduates. If you’re entering a profession like computer science, which has an average starting salary of $59,221, you’ll be able to repay college loans faster than someone with a humanities degree, who’s likely to earn only $36,988 a year immediately after graduation.
  5. Understand your loan options and how and when you’re required to pay them back. Government-backed options include direct subsidized loans (for which you must demonstrate financial need) and direct unsubsidized loans, which you may take out regardless of financial need. Government loans (such as Stafford loans and PLUS loans) generally have fixed rates of interest, but there are annual limits on how much you can borrow.

    Private loans that you get through banks or other lending institutions are not limited by law as to how much interest they can charge. Make sure that you understand not only what the current rate of interest is but also how much that rate of interest can go up. What may seem like a good deal today may not be as attractive in four or five years if the interest rate on the loan (and with it the amount of your loan repayment) goes up each year.

  6. Borrow only what you absolutely need. Although student loans may seem like free money—especially with government loans, which have a deferred payback schedule—you are going to have to pay the money back. The sooner you can eliminate that debt, the sooner you’ll have more money available to save, to invest or to buy a home.
  7. Know your options if you can’t afford to make loan payments. It may be possible to consolidate some of your loans and extend payments over time. One program, the Income Based Repayment Plan caps the amount of monthly repayment based on your current income levels.
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Please note your financial situation is unique and our tips & advice presented here may not be appropriate for your situation. recommends that you seek different advice & opinions from your own accountant or financial adviser who understands your individual circumstances before making any important decisions or implementing any financial strategy.