How To Determine the Right Amount To Borrow as a College Student

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If you have the income and available assets to pay for college without borrowing money, more power to you. For most, however, the decision will not be whether to borrow, but how much — finding the balance between borrowing too much and taking on too much debt or borrowing too little and being cash poor. 

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The right answer, of course, is different for every person, but there are a few guidelines that you can follow to find the sweet spot. 

Start By Learning the Net Price

The sticker price for a college education is enough to make anyone weak in the knees, but the net price is usually a lot more forgiving. That’s the amount that you’ll actually pay to attend a college or university for a single year after you factor in scholarships and grants. 

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Start by visiting the U.S. Department of Education’s Net Price Calculator Center, where you can search for a specific school’s net price calculator. From there, you can enter information about yourself to get a personalized estimate of your net price for that school. Then, you can start your calculations on how much you’ll need to borrow to cover the net price.

Don’t Worry, There’s a Formula

There’s a simple but effective formula for determining how much money to borrow, and you’ll be able to work through it even if you didn’t get into college on your mathematical prowess. 

“A good rule of thumb,” according to FinAid, “is to borrow about 125% of the difference between your net college costs and the amount of income and savings you can devote to paying those costs, rounded up to the nearest $1,000.” 

The publication gives the example of a person who has $6,000 to cover $10,000 in college costs. According to the formula, the student would borrow $5,000, leaving $1,000 to cover the loan payments. 

Presuming 8.5% interest on a 10-year loan, the payments would be $744 per year. So, one year later, you’d have $5,250, at which point you’d borrow $6,000 more, leaving $1,250 to cover the $893 yearly payment you’d have to make on the new loan.

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The Future-Earnings Strategy

The Consumer Financial Protection Bureau (CFPB) offers a different perspective, which says that your student debt should never exceed what you expect your starting annual salary to be when you graduate and enter the workforce.

Unlike the 125% formula, that is one painfully imprecise calculation. The salary expectations of an 18-year-old going into college in 2022 will probably bear little resemblance to the reality facing the 22-year-old who is applying for jobs four years later. 

To help you along, the CFPB created the Your Financial Path to Graduation tool, which lets you compare prospective salaries for different programs and majors. The tool also helps you plan to take on an affordable amount of debt and develop a plan for covering the remaining costs of what you don’t borrow. 

To account for the imprecision of theoretical four-year salary projections, it encourages users to keep coming back to the tool to update their plans as their situations on the ground evolve.

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An Alternative Version of the Starting Salary Plan

Forbes also recommends using your estimated future income as a basis for deciding what to borrow, but with a twist. In this variation, your salary should be 1.5 times higher than your student loan balance. You can find the number by dividing your salary after graduation by 1.5, which mathematically limits your monthly payment to 12% of your take-home pay after taxes.

If You’re Looking to Over-Borrow, It Won’t Be Hard

In all cases, the CFPB cautions against borrowing the maximum possible amount just because you were approved for the loan. Forbes expands on that concept by explaining that student loans are different than mortgages, credit cards, auto loans and every other kind of debt where the lender evaluates the likelihood that you’ll be able to repay the loan before they hand over money or extend credit. 

Student loans rarely consider potential future earnings or starting salaries. Schools have streamlined the process for students to be able to apply for loans and receive them without considering whether it’s an appropriate amount of debt for the borrower to take on. 

Unlike other debt, according to Forbes, the system is designed to lend more money than borrowers will likely be able to repay.

Borrow only what you absolutely need.

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About the Author

Andrew Lisa has been writing professionally since 2001. An award-winning writer, Andrew was formerly one of the youngest nationally distributed columnists for the largest newspaper syndicate in the country, the Gannett News Service. He worked as the business section editor for amNewYork, the most widely distributed newspaper in Manhattan, and worked as a copy editor for TheStreet.com, a financial publication in the heart of Wall Street's investment community in New York City.

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