The quick answer is, only as much as you need. If you’ve already exhausted scholarships, grants, and personal resources, then you may find you still need to borrow money to go to college. In fact, according to College Board, 64 percent of undergraduates end up borrowing at some point before graduation. If you need to borrow, here are some things to know in order to avoid borrowing more than you need.
Talk to someone you trust who is experienced in money matters. Perhaps that’s a parent or grandparent. Or, it could be someone in your school’s financial aid office. You’ll learn tips and gain valuable real-life perspective.
Finance your education, not your lifestyle. Don't borrow more than you need. Student loans are intended to finance your school expenses, not your trip to Mexico for spring break. In fact, your school will usually be asked to certify that the loan will be used for school expenses. Remember, every dollar you don’t borrow is a dollar — plus interest — that you don’t have to pay back later.
Think about your life after college — you’re going to have expenses. You might want to get a new car, take a vacation, or, eventually, buy a house. Smart planning now can help you afford those things later on.
Be responsible. Before agreeing to the terms of your student loan, find out what your expected monthly payments will be once your loan is in repayment. Keep in mind that you may need additional student loans to complete your degree – or even for graduate school. Be sure you’re comfortable with your projected repayment amount.
Borrow less than what you expect to make your first year out of college, say many experts. While it’s not guaranteed that you'll earn this amount, you can estimate what your potential first year’s salary might be. The U.S. Department of Labor offers a helpful salary estimator.
Be aware of your future debt-to-income ratio. Generally, a financial advisor will encourage you to understand your “debt-to-income ratio” — the total of monthly payments on your debt load as a percentage of what you earn every month. After graduation, when you’re looking to make a big purchase like a car or home, lenders will use this number to determine your ability to repay, given your current level of debt.
To figure out your debt-to-income ratio, try to estimate your future monthly debt payments — rent (or mortgage), car payment, student loans, credit cards, etc. — and your anticipated monthly gross (meaning pre-tax) income. Once you begin working, your total debt payments should be no more than 36% to 40% of your monthly gross income.
The concept of debt-to-income applies to student loans, too. You can calculate a student loan debt-to-income ratio by estimating your student loan payments as a percentage of your total income. After you’ve checked out the salary estimator above, Sallie Mae’s Education Investment Planner can help you calculate what starting salary you’ll need in order to afford your student loan payments. Then, based on the percentage of your income that will need to go toward your student loan payments (use the scale below for some benchmarks), you can build a responsible budget to help you live comfortably.
10% or less: Manageable
Your student loan payments are likely to be easily manageable on your starting salary.
For example, if you graduated with $25,000 in student loans (a typical amount for the 60-some percent of college grads who borrow), the monthly payments would be $288, so you would need a starting salary of approximately $35,000 to easily manage these payments.
Your student loan payments may be manageable as long as you don’t have high credit card payments, car loans, or housing costs. If your other expenses are higher, your loan payments may take up too much of your overall starting salary and you should explore other scenarios to pay for school so you can reduce the amount you need to borrow.
20% or more: Red flag
You may have difficulty meeting your student loan obligations and other living expenses. You may want to reconsider how you will pay for school and explore lower-tuition schools.