Borrow Student Loans

How Do You Know How Much Is Okay to Borrow For College?

Dayana Yochim  |  June 23, 2020

A big factor in affordability is your future earning potential. The rule-of-thumb is to borrow no more than you'll earn your first year after graduation.

Note: This story is sponsored by College Avenue Student Loans 

Here’s the frustrating thing about figuring out how much money is reasonable to borrow for college. The answer is actually a question: How hard is it going to be to pay back your student loans? And to field that question you’ve got to think through a few more:

  • How much will my degree set me up to earn when I graduate? 
  • How much will my student loans payment be each month??

In an ideal world, you’d have an obscenely lucrative, soul-enriching, entry-level job already lined up for the Monday after graduation day. But of course, that’s not something you can know four years ahead of time, so…

Consider this rule of thumb

There’s a common college borrowing guideline that’s based on your expected post-graduation income: The aim is to borrow no more than what you’d earn your first year after graduation — and to be able to pay off the loan within 10 years (a standard repayment period). That means devoting roughly 10% of your income per year to student loan repayments. 

That’s a pretty big chunk of change, especially when you’re just starting out and every paycheck is stretched to the max. Having to put too much of your first decade of paychecks toward paying off your education is going to limit how you move through the rest of life. That’s why many experts are now recommending shooting lower and limiting your repayments to 8% or less of your projected future salary. That’s why it’s so important to shop around for loans, like those from College Ave Student Loans, that offer flexible repayment options, competitive rates, and great customer service.

Here’s how that 8% plays out in real life, according to a student loan calculator: Let’s say you borrowed $30,000 (roughly the average debt incurred by a member of the class of 2018) at a 6.8% interest rate. If you paid nothing on that debt while you were in school, your estimated loan payment after graduation would be $356 a month. Using the 8%-of-future-salary rule of thumb, you’d need to earn around $54,000 a year to comfortably be able to handle debt load. 

How realistic is that?

Rules of thumb are a good starting point. But you can do better than just ballparking a borrowing number. 

One big factor in loan affordability is your future earning potential. According to PayScale’s 2019 College Salary Report, the highest-paying jobs in the first five years after earning a bachelor’s degree are in the fields of engineering, computer sciences, and economics. Examples of the lowest paying right out of college are education, the arts, community services, and mental health fields. (The Bureau of Labor Statistics also breaks down earnings by industry.)  

Choosing a major based solely on salary potential is a recipe for future misery. However, salary data can go a long way in informing your borrowing decisions.  For example, if you’re aiming to go into early childhood education, you’d want to borrow less than a future electrical engineer. Similarly, if you plan to train for a high-paying gig that requires more education, borrowing more may be a reasonable decision. (Check out the cost of college by profession to see how much school you’ll need based on the career path you envision.) 

Think about how you’re likely to live

Your future lifestyle — and your willingness to live small (i.e. cheap) — is another factor to consider before you borrow money. Your student loan payment will be only one of your monthly bills. There’s rent, utilities, food, and medical care all competing for a chunk of your paycheck. It’s easy to get stretched thin. In fact, in 2018, two out of 10 of those who still owed money on their student loans were behind on their payments, according to Federal Reserve stats.

The best way to ensure you’re not overwhelmed by what you owe is to be realistic about what life will be like during those first years after graduation and continue to live like the poor college student you were for as long as possible. Maybe living in New York or San Francisco isn’t in the cards right out of college.  

Also know that there are options if you ultimately find your loans unwieldy — options like extended or income-driven repayment plans, and refinancing your student loans to reset the repayment period and lower your interest rate. Some employers even offer relief. According to the Bureau of Labor Statistics, 3% of civilian and private industry workers and 4% of state and local government employees have access to student loan repayment benefits at work.  

Give yourself some wiggle room

Picture the mid-to-late twentysomething (or thirtysomething) with student loan debt you’ll eventually be. Keep in mind that the less you borrow, the more freedom you’ll have to take a lower-paying but more satisfying job, buy a home, start a family, and all that other grownup (read: costly) stuff. 

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