How Much Student Loan Debt Is Too Much?
While student loans can help pay for college, they can become burdensome if you borrow too much. But how much student debt is too much?
The answer will vary based on your future earnings and budgeting skills, which can be difficult to calculate right now. However, there are steps you can take to estimate your student loan limits and keep debt at a minimum.
Rule of thumb for how much student debt to take
There’s a general rule that you shouldn’t borrow more in student loans than you expect to make in your first year out of college.
A bachelor’s degree recipient’s average student loan debt in 2021 was $29,100. In theory, a graduate with a salary above this could handle a 10-year standard repayment plan. You’d pay $309 a month with $29,100 in loans at a 5% interest rate, according to our student loan payment calculator.
Some experts go even further, advising student loan payments remain at 10% or less of your gross income. In the above example, a salary of $29,100 would suggest that you should seek to pay just $243 a month or less.
Of course, there’s no guarantee you’ll even land a job immediately. You might not know what you want to do or major in. However, it’s worth doing some research before taking on debt to clarify your career goals and ensure your degree offers a good return on investment.
Here’s a sample of average starting salaries by undergraduate major from the National Association of Colleges and Employers (NACE):
- Humanities: $50,681
- Communications: $55,455
- Business: $60,695
- Social sciences: $61,173
- Engineering: $73,922
- Computer science: $75,900
You can also use sites like the Bureau of Labor Statistics (BLS) or Glassdoor to learn about starting salaries. Your school will likely have information on this, too.
9 ways to avoid too much student debt
You’ll want to understand the details of your repayment plan before taking out student loans. Consider the following questions:
- How long will you be paying off your loans?
- What is your interest rate?
- What will your monthly payments look like?
You can use the Loan Simulator tool from Federal Student Aid to compare loan payments on different repayment plans. By crunching the numbers, you can make a clear decision about taking out student loans. You might even decide to attend a less expensive school if your preferred school would require too much debt.
Some students feel pressure to attend the most highly ranked colleges, but the cost of tuition and financial aid availability are also important considerations. Rather than automatically choosing the college with the highest academic rating, make sure to compare costs among schools as well.Along with looking at your potential school’s cost of attendance — which includes tuition, fees, supplies and living expenses — be sure to check out its financial aid policies. There are even “no loan colleges” and tuition-free colleges dedicated to eliminating the need for student loans completely.
At the same time, don’t rule out community colleges. These institutions can offer a quality education at a lower price, helping you earn credit toward a degree. You can reduce your expenses further by living at home and attending a nearby school.
Although attending a school with a big reputation might be tempting, entering the workforce with unmanageable debt could be challenging. Even if student loan repayment feels far off in the future, you’ll have to deal with that monthly bill soon enough.
Federal student loans typically have lower interest rates than private student loans. Interest rates for undergraduate federal loans range between 4.99% and 7.54%. But private interest rates can creep much higher.Plus, the government offers more borrower protections than private lenders. For instance, with federal student loans you may qualify for special student loan forgiveness programs or income-driven repayment.
That said, the government has a $31,000 borrower limit for dependent students, so some students take out private loans to make up the difference. Since most private lenders usually require a good credit score, parents tend to cosign these loans.
If you’ve hit your federal borrowing limit, consider whether taking out more student loans is the right choice. The college experience you’ll get now may or may not be worth the additional years of repayment for you or your parents.
Filling out the Free Application for Federal Student Aid (FAFSA) is your first step in receiving federal financial aid, including grants and student loans. Get a head start on this important application to avoid scrambling at the last minute.In fact, missing the FAFSA deadline could mean losing out on much-needed aid. This is because some aid awards, including grants, are generally given out on a first-come, first-served basis.
Likewise, although most states open their FAFSA applications around the beginning of October each year, some states are earlier. Connecticut, for example, has a priority deadline in February. Give yourself plenty of time since you may need to provide additional paperwork or correct any mistakes on your FAFSA application.
One of the best ways to avoid student debt is to apply for scholarships and grants. Typically, this is free money for college that you don’t need to repay, so long as you follow the terms of the award.There are tons of scholarships at both the local and national levels. Online scholarship search tools such as Scholly, Fastweb and College Board help you locate funding opportunities. The more scholarship funds you receive, the less you’ll rely on student loans.
Both federal and state governments offer loan forgiveness and assistance programs. Some of these might be reserved for specific geographic areas, usually based on where you live or went to school.Other awards are earmarked for certain occupations, such as doctors, nurses or teachers. You might need to work in a high-need or critical shortage area to qualify for such programs. Research the criteria and details to see if any match your career goals.
Meanwhile, members of the armed forces can seek out loan relief with military student loan forgiveness.
Prevent your student loan debt from getting out of control by taking a part-time college job. A steady income stream can hopefully limit the loans you need to cover living expenses.Among the best such opportunities are work-study jobs which you can qualify for via your FAFSA, and which might be more likely to work around your school schedule. These programs help those with financial need, with many positions aligned to your field of study. Speak with your school’s financial aid office to see what’s available.
For those who don’t qualify for work-study placements, consider a regular part-time job, such as an academic tutor or babysitter. You can often find something that pays more than the minimum wage, and you might even find remote work opportunities as well.
Be careful not to spend student loan money on expenses such as monthly bills, eating out or extravagant vacations.This is important because anything you buy with loan funds can end up costing far more than the sticker price —due mainly to the interest you’ll have to pay.
Create a budget for all your expenses so you’re not spending more than you can afford during college. If you get in the habit of budgeting now, you’ll be much more prepared for life post-college, especially when you need to start paying off your student loans.
If you have time to plan ahead, opening a 529 college savings plan can help reduce or eliminate the need for student loans.In many cases, this is something your parent(s) might do for you, allowing them to contribute to your education tax-free with no withdrawal penalties (if you use the money for qualified educational costs).
Aside from a parent or guardian, you can open a 529 account for yourself and then get friends and family to contribute for a birthday, holiday or graduation gift.
There are also alternatives to 529 plans, such as high-interest savings, brokerage or custodial accounts.
The downside of borrowing too much money
Student debt can become a huge burden if you take on too much. Many studies show that debt-saddled millennials are waiting longer to get married or delaying buying houses due to the amount they owe.
Are student loans worth it? Yes, as long as you borrow within your (expected) means. You’ll want to fully understand your repayment plan — including details like capitalized interest, grace periods, deferment and more.
And if you find yourself with more than you need, you can always return unused student loan money.
Limiting your student loan debt now can help ease the financial burden on your future self. Once you’ve borrowed, explore different repayment strategies to see if you can pay off your student loans ahead of schedule.