How Much Student Loan Debt Is Too Much?

How Much Student Loan Debt Is Too Much

BIG Ideas:

  • Excessive student debt can make it difficult to manage a monthly budget, pay your bills, and get the credit score you need to qualify for future loans.
  • The amount of debt to take on depends on your career prospects, financial situation, and risk tolerance.
  • There are a few guidelines to help you decide the amount of debt you can comfortably afford. 

Having money? Fun.

Having to borrow money? Not so much fun. 

But if you’re a student or a parent looking to afford the soaring cost of college, chances are you’ll need to take out federal or private student loans. It’s why 42.7 million federal student loan borrowers owe $1.693 trillion and the total average balance per borrower exceeds $38,000.

Don’t get us wrong, borrowing money for an investment in your future can be a very wise decision. What’s not so wise, though, is borrowing more than you need, which can lead to costly student loan debt, long after college ends. Totally not fun.

So, how much student debt is too much?

Before we answer that question, you must understand the impact that excessive student loan debt could have on your financial life. It can:

  • Place strain on your budget, making it difficult to meet your monthly bills and other goals, such as renting an apartment.
  • Reduce your credit score, which could limit your ability to qualify for future loans like buying a car or home.
  • Impact your career choices and flexibility, forcing you to focus only on jobs that yield higher salaries.
  • Create financial stress that could result in physical and mental health challenges.

With so much at stake, it’s important to set a budget before you apply for federal and private student loans and know what you can afford. Unfortunately, there’s no single answer to determine how much you should borrow. It all depends on your financial situation, future career prospects, and level of comfort with debt. There are, however, a few guidelines that can help you decide:

  • You could limit the amount of your monthly student loan debt payments to a certain percentage of the monthly salary you expect to make the first year after you graduate. that the percentage should be 8 – 10% of your expected salary. So, if you expect to make $50,000 after graduation, which equates to $4,166 per month, your student loan payments could range from $333 – $416.
  • Your total student loan debt should not exceed your first year’s salary. So, if you expect to earn $50,000, you don’t want the balances on all your student loans (federal and private student loans) to be more than $50,000. To help with your planning, consider the type of job you would be seeking and research the average salary.
  •  Another financial guideline involves your debt-to-income (DTI) ratio, which compares your total monthly debt payments to your gross monthly income. You can calculate DTI as follows:

    Your total monthly debt ÷ gross monthly income X 100

    Most lenders recommend keeping your DTI at 36% or lower. That means no more than 36% of your gross monthly income should go toward repaying debt, including your student loans. Keep in mind, your DTI includes all your monthly debt obligations, such as credit card payments, auto loans, and your mortgage or rent. So, when deciding how much to borrow for college, it’s important to budget carefully and factor in other monthly expenses that will impact your overall financial picture after graduation.

Whichever guideline you apply, know your cost of attendance and work to reduce your college expenses by maximizing federal aid and applying for grants and scholarships. Look at other ways to reduce college costs.

Again, the amount you borrow depends on your financial outlook and tolerance for debt. However, the less you borrow, the less debt regret and stress you’ll have after graduation. So, borrow wisely. It’s much more fun in the long run.

Brazos Offers Private Student Loans to Help Make College Affordable

For more than 40 years, Brazos Higher Education has been helping make education more accessible for students and parents. As a Texas non-profit, we offer great rates and no fees on private student loans. Contact us to learn more.