Dollars & Sense
A student should be an informed borrower whether considering a student loan, a car loan, or a mortgage. An informed borrower knows his or her rights and responsibilities. The money borrowed to finance an education can affect the borrower's lifestyle after leaving school and the money will still have to be repaid even if the student doesn't complete a degree, isn't satisfied with his or her education, or is unable to find a job.
Tips On Borrowing
Be Realistic Before Borrowing
Students should borrow only what is needed to cover educational costs. Borrowers should consider the future and assess how much salary is needed to repay student loan debt.
Students should assess real needs and borrow the minimum amount to pay for these costs.
Be Aware of Excessive Borrowing
A student may be awarded the maximum amount of loans for his or her grade level, but he or she doesn't have to borrow the entire amount. Excessive borrowing now will limit future purchasing power.
Set a Limit
Students should set limits to the amount of debt they can afford. Uninformed borrowing can mean trouble in the future.
Be Aware of Cumulative Loan Debt
If students are not required to repay their loans while in school, it is easy to for them to lose track of how much they have borrowed each year. Students can regularly access their loan records in the National Student Loan Data System to help assess their total indebtedness.
Be a Good Record Keeper
Student borrowers should keep copies of all promissory notes and correspondence related to student loans. The table below shows estimated monthly student loan repayments and the salary required to assure repayment is manageable. Repayment should not exceed 8% of a student's first-year starting income following graduation. The student borrower should research the average starting pay for his or her major vs. how much he or she has borrowed.
|$ Borrowed||# of Payments||Monthly Repayment||Manageable Income|
One of the ways to determine how much debt the student borrower can handle is to figure a debt-to-income ratio. This involves measuring current money obligations against projected income. Currently, the standard is that no more than 37% of income should be used toward debt.
Use This Worksheet to Figure the Student's Debt-to-Income Ratio
|STEP 1||Expected monthly gross income||$|
|x||(.37) - Industry standard for manageable debt||$|
|=||Portion of monthly gross available for debt payments||$|
|STEP 2||Monthly rent or mortgage payment||$|
|+||Monthly car payment||$|
|+||Minimum monthly payment on installment loans||$|
|+||Minimum monthly payment on all credit cards||$|
|=||Total monthly payments||$|
|STEP 3||Total from Step 1||$|
|-||Total monthly payments (total of Step 2)||$|
|=||Total available for additional monthly debt||$|
The student borrower can ask his or her lender how much the monthly payment will be for his or her loans. If that amount is larger than the total of STEP 3, then the student borrower should be concerned about his or her ability to manage additional student loan debt.
- Funding Education Beyond High School: The Guide to Federal Student Aid – a comprehensive resource on student financial aid from the U.S. Department of Education
- Your Federal Student Loans: Learn the Basic and Manage Your Debt – a working draft on federal student loan basics from the U.S. Department of Education
- Repaying Your Loans – Federal Student Aid on the Web site for repaying your student loans