College Loans - How Much Should You Borrow?
With the cost of college increasing every year, more and more students are taking out private and federal student loans to help assist with covering college costs. In fact, private student loans are increasing in volume annually by approximately 25% while federal student loans increase by approximately 6% each year.
To meet these demands new student loan programs seem to continuously crop up. Students and their parents are faced with many considerations as they approach how they are going to pay for higher education. The key factors of deciding which lender to use and how much needs to be borrowed affect the life of the loan and must be made early on in the process.
How much to borrow may seem like an easy question to answer. You want to borrow however much is needed to cover the costs of college. But in an attempt to do this many students end up borrowing too much. Having these additional funds may not seem like much of a problem until you consider the interest rate paid for the ability to borrow the money.
The average student leaves college with nearly $20,000 in student loan debt, which is a considerable amount if you’re just starting a career. So, how does a student go about deciding how much is a sufficient amount to borrow?
There are several ways a student can determine what is necessary.
Figure Out Financial Aid Coverage Before You Borrow Money
It must be said that before entering into a student loan, whether federal or private, a student first needs to exhaust all other avenues for obtaining financial aid. This includes grants, scholarships, and work-study programs which are forms of financial aid that don’t require repayment.
The first thing a student should do is contact the financial aid counselor of the school they’ll be attending. Your financial aid counselor is there to guide students and parents on exactly what the costs are for that particular college now and in the near future, as well as what federal, state, and institutional financial aid is available to the student.
At that point a student can apply for grants and scholarships based on what they’re eligible for and begin to get an understanding of how much they will actually need to provide for college costs. Financial aid counselors are also in charge of handling financial aid applications and can help students in preparing the Free Application for Federal Student Aid.
Federal loans actually have a maximum amount that can be borrowed per year based on what year of school the student is in. This makes it a little easier to determine a range for borrowing with these types of loans.
Utilize a Student Loan Calculator
The knowledge supplied by the financial aid counselor can then be put into a college cost calculator. A number of these calculators can be found on the internet, making it quick and easy to run the numbers and get a good estimate of the actual cost of attending college. After deducting the financial aid received through scholarships and grants the student is left with the actual cost of attendance or the amount they will be responsible for. That is your guide to how much possibly needs to be borrowed.
Student loan calculators will then give you a better idea of how much of that total amount you can afford to borrow. The better calculators will take into account what year of school you are in, the type of student loans you are taking out, and how much you intend to make in your career after college. Students and parents can find out how much a certain loan amount, including the interest, will cost monthly.
This is a vital tool for ensuring that the loan will be manageable and that the wages made after college can cover the expense of the loan years down the line. It’s advisable to borrow only what is absolutely necessary to reduce the chance of taking on too much debt and not being able to make payments which can ruin your credit.
Do note that most of the student loan calculators assume there will be a fixed interest rate and standard monthly payments.
Need to figure out how much you can afford to pay monthly? We cover budgeting for expenses in the Repaying Your Loans section.