Student financial aid packages generally include a mix of grants (gift money), work-study and loans. Loans may be offered to either the student or the parents and may be subsidized or unsubsidized. With loans often accounting for a substantial portion of the financial aid package at many colleges, it is reasonable to ask just how much is “too much” to borrow for college?
Unfortunately, there’s no one hard and fast answer; each student’s situation is made unique by choice of major, cost of education, additional sources of support, and expected earnings. According to the Project on Student Debt, the average recent college graduate owes nearly $27,000 in student loans. For most graduates, that should be a manageable amount, but individual circumstances may vary. For example, students may amass still more debt if they plan to attend graduate school, or if they choose a career with very low initial pay. Future musicians or artists probably should take on less debt than engineering or computer science graduates. A general rule of thumb is to cap your student loan debt below the total salary you expect to earn in your first year after graduation. (Check out www.bls.gov for average first year salaries.) Since the average college graduate takes five years to earn her bachelor’s degree, she should borrow no more than one-fifth of expected earnings each year of college. Your goal is to spend no more than 10% of your expected gross monthly income on student loan debt once you graduate. Even though your earnings will rise as you progress in your career, so will your obligations. Someday you’ll want to use those earnings for a house, car, furniture, retirement savings, and even for college for your future children.
Parents, too, should be wary of taking on loans that might affect their own ability to retire. While college students can and should seek scholarships, we know of no such option for funding a comfortable retirement.
