How Much Debt is Too Much? The Complete Guide for College Students

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There are no two ways about it: college is expensive. Besides tuition, there are costly books and other fees students are responsible for. If you live on your own, you also need to cover the costs of a dorm or apartment as well as food and transportation.

Throughout your time in college, these costs add up — and most people need assistance to pay for everything. In fact, 70% of college students graduate with a substantial amount of loans. According to the Institute for College Access and Success, students owe an average of $28,650 post-graduation, so you’re definitely not alone.

While debt is often regarded as detrimental to your financial health, the right amount can be beneficial. Paying off debt responsibly and on-time can help build your credit — making it easier to be approved in the future for a large purchase, like a home or new car.

Managing your student loans can be overwhelming. Whether you borrow $10,000 or $80,000, you can better understand your loans and how to pay them off with this comprehensive guide.

Do You Understand Your Student Loans?

Loans are often offered as a part of your financial aid package for your specific college or university. Each semester you can choose which loans you want.

Choosing the financial aid that’s best for you and your unique situation can be stressful if you don’t understand how student loans work.

Types of Student Loans

Different types of loans are available to help you pay for college expenses. You may even combine a couple options in order to cover your needs.

Subsidized Loans

  • For undergraduate students with a demonstrated financial need
  • No interest during deferment or while you’re in school at least half-time
  • Better terms than unsubsidized loans

Unsubsidized Loans

  • For undergraduate and graduate students
  • No requirement to prove financial need
  • Interest accrues during all periods

PLUS Loans

  • For graduate students and parents of undergrad and grad students
  • Must meet eligibility requirements (i.e. solid credit history)
  • If parents are taking out the loan, they must agree to the terms

Consolidation Loan

  • For undergraduate and graduate students
  • Allows you to combine multiple loans into a single payment
  • Could result in a lower interest rate
  • You can only consolidate once — consider waiting until closer to your graduation or when the interest rates are low

With any of these loan types, you can choose between federal student loans and private loans. In general, federal student loans offer better terms, more flexible repayment schedules, and lower interest rates. They also carry fixed interest rates, meaning your rate will stay the same for the life of the loan. Private loans are offered through banks and financial institutions and don’t always have fixed interest rates.

Choosing the best loan depends on how much you need to cover your costs after factoring in any scholarships and grants you receive. For instance, you may want to pay tuition using a subsidized loan, because it offers the best terms. If you need more, you can take out an additional amount through an unsubsidized or PLUS loan.

Types of Repayment Plans

As you make your way through college and take on additional expenses, your student debt will add up. Make a plan for how and when you’ll pay off your student loans.

Here’s a breakdown of the main repayment options, so you can choose the one that’s best for you.

Standard

  • Same monthly payment amount for 10 years
  • Pays off loan faster
  • Saves money because you’ll pay less interest overall

Graduated

  • Monthly payments start lower and get larger over time
  • Allows you to pay less now and more later when you’re earning more
  • Likely to pay more in interest than with standard repayment

Extended

  • Ability to pay off loans over 25 years
  • Available if total loan balance exceeds $30,000
  • Likely to pay more in interest than with standard or graduated repayment

Pay as You Earn

  • Monthly payment amounts are based on your earnings
  • Generally 10 percent of your discretionary income
  • Repayment schedule is typically 20 years

Income-Based

  • Monthly payments based on income
  • Generally 10-15 percent of your discretionary income
  • Repayment schedule is typically 20-25 years

Depending on your loan and the type of work you do, you may be eligible for student loan forgiveness. With federal student loans, for example, you may be able to have some of your loans forgiven — meaning you no longer have to make loan payments.

Common loan forgiveness programs are the Teacher Loan Forgiveness, Public Service Loan Forgiveness, Closed School Discharge, and Total and Permanent Disability Discharge. Through the Teacher Loan Forgiveness program, for example, you may be eligible to have your loans forgiven if you teach for five years at an eligible elementary or secondary school.

How to Manage Your Student Debt

After selecting your student loans and deciding on a repayment schedule, make a plan detailing how you’ll manage your finances while navigating loan repayments. With a few basics in mind, you can successfully set aside money each month to pay off your student debt.

Calculating Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is the ratio of your total monthly debt payments to your monthly income.

To calculate your DTI:

  • Add together your debt payments, including your rent, student loans, and credit card payment.
  • Divide that amount by your monthly gross income (pre-tax earnings).
  • Multiply the result by 100 to find your DTI percentage.

Your DTI indicates how likely you are to repay a loan. A low DTI is more desirable because it shows that you earn substantially more than you owe. If you have a high DTI, a lender may be more hesitant to issue you a loan. When you’re in the market for a house or a car, your DTI is something that lenders will look at.

Most lenders, like those that issue a mortgage, look for a DTI of 36 percent or less.

Budgeting

It’s important to plan how you’ll repay your student loans every month. Setting up a monthly budget will help ensure you have enough.

Look at your after-tax income and compare that amount with your costs. Factor in your living expenses, like rent, food, and groceries. Include your student loan repayment amount and other important savings like an emergency fund. The goal is to monitor your earnings, spending, and debt repayment. If you don’t have enough for your student loan repayment, you may need to scale back in a certain area, like eating out or shopping.

To make budgeting easier, set up a budget using an app like Mint. You can keep track of all of your bills and allocate a monthly amount to paying off your student loans.

Find Additional Income

It can be hard to find extra cash every month to put toward paying off your student loans, especially if you’re in the early stages of your career.

Besides trimming expenses — like limiting your streaming services or your gym membership — consider a side hustle or part-time job to close the gap. Freelancing, babysitting, or being an Uber driver once a week can give you enough for your monthly student loan payment.

When is it Okay to Have Debt?

Having some debt can be positive for your credit. Your student loans can help you build your credit history and show that you’re a responsible borrower. When you have good credit, you can apply for larger sums of money like an auto or mortgage loan. You could also be approved for credit cards with lower APR

You certainly don’t want to take on too much debt, though. If you’re unable to make payments on time, for example, it could harm your credit score and lead you into more debt.

Most importantly, you don’t want to have more debt than you can pay off. The goal is to have manageable monthly payments that also allow you to live comfortably.

6 Small Ways to Save Big

Throughout your college years, there are several ways to save big amounts of money — allowing you to take out fewer loans and put yourself on a better long-term financial track. That’s right, minor adjustments to your day-to-day activities can add up to significant savings.

Here are six easy ways to save throughout college, which can add up to hundreds and even thousands of dollars.

  1. Rent or Buy Used Books: Instead of handing over cash for shiny new textbooks, consider renting or buying used books to save yourself 40-60 percent. College students spend approximately $700 a year on textbooks, so going the used route could save you over $300 a year.
  2. Shop Second-Hand: Need a couch for your apartment or a jacket for chilly walks on campus? Opt for gently used items from a second-hand store or an online marketplace. You can save hundreds of dollars on furniture and dozens on clothing and accessories.
  3. Sell Your Stuff: Earn cash by selling things you no longer need, like textbooks, clothes, and furniture. If you’re heading back to your hometown for the summer or taking a semester abroad, sublease your apartment for extra funds.
  4. Take Advantage of Student Discounts: Many businesses offer students a discount with a valid student I.D. Places like movie theaters, restaurants, and retail stores can give you anywhere from 10-30 percent off.
  5. Avoid Unnecessary Expenses: Part of budgeting is scaling back in your discretionary spending or forgoing things that aren’t essential. For example, cut back on going out to eat, shopping for new clothes, or buying a latte. While these expenses might seem small, they add up quickly.
  6. Take Public Transportation: Ride the bus or metro, instead of owning a car (think no car insurance or gas costs). Many colleges offer free transport around the campus and local area with a student I.D.

Handling the expenses of college, including student loans, is like a boot camp for adulthood. It gets you ready to manage your living expenses, debt repayment, and other parts of your budget.

Most importantly, understanding your student debt and repayment will put you on a better financial track. You’ll be able to confidently approach your finances — giving you the tools to be successful no matter which field you choose.

Additional Resources

Student Loans

Managing Debt

Ways to Save

Sources

CNBC | Consumer Financial Protection Bureau | Federal Student Aid 1, 2, 3, 4, 5, 6, 7 | Forbes | Great Lakes Higher Education Corporation & Affiliates | Great Lakes Higher Education Corporation & Affiliates | Intuit Turbo | Investopedia | Mint | Mint Life | The Institute for College Access & Success | University of Florida | U.S. News

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