How Much Is Too Much? Setting Your Own Max Loan Limit

You’ve submitted your FAFSA. You’ve applied to all the grants and scholarships available through your school. You’ve written essays and submitted scholarship applications across the internet. You’ve gathered up what you could from savings, summer jobs, and family contributions. But you still need to take out student loans to pay for college.

How much is too much, when it’s all said and done?

This is an area where it helps to have your own limits in mind at the outset. When it’s all said and done, you are the one who has to live with the loan payments and burden that entails. Ultimately, if you know what kind of student debt is manageable for you, that can help you make choices about where to go to college and what to study.

We asked our own Jeannie Tarkenton, founder and CEO of Funding U, to help students frame the question so they could comfortably set their own limits. How much student debt is reasonable?

3 ways to answer the question

“There’s three common ways to think about the level of debt that is affordable and manageable in your life,” says Jeannie. “But they each ask you to guess at what the future will look like. So, I would actually encourage students to answer the question all three ways.”

The 1st way: Borrow less than your expected starting salary

One of the shorthand rules in the lending world is to limit your total borrowing to be under your expected starting salary after graduation, says Tarkenton. 

Of course, that assumes you know what your intended field pays to recent grads. Fortunately, that’s info you can easily find online. We trust a dataset from a company called Payscale to make future income projections, but your own calculations should be further refined for your specific school and city you intend to live in when you start your career. You can also look through your school’s financial aid information to see if they publish any salary data for recent grads by major or by job title.

The 2nd way: Project your future monthly loan payments

“Think of it in terms of your future monthly or yearly loan payments,” says Tarkenton. “What’s going to be manageable for you?” 

One shorthand that you’ll see tossed around is 10%: Your annual loan payments should be less than 10% of your gross (pre-tax) income. So if you expect to have a $40,000 salary after graduation, you’ll want your loan payments to be $4,000 or less per year, which is roughly $333 per month. 

So how much debt can you take on to get to that level? That all depends on the interest rate of your loans. Federal undergrad loans had an interest rate of 4.53% in 2020, but loans from private lenders carry higher interest rates, some ranging as high as 13%. 

Loan calculators are widely available online, so you can play with those to see how much debt looks affordable based on different interest rates. Or, use our cheat-sheet table, which shows what the future monthly (or annual) payment is per $10,000 of debt depending on the interest rate. So if you have $10,000 of debt at an average rate of 10%, your monthly payment will be about $132. If you have $20,000 of debt, double that payment to $264, and so on.

Source: Funding U calculations

The 3rd way: Borrow below the average of your peers

“This is a fuzzier metric,” says Tarkenton, “but it’s still a useful data point. Look at how much your peers are borrowing and aim to stay below average.” 

Start by figuring out the average debt level for students in your state. This interactive map is an excellent source of info. But don’t forget to check with your financial aid office, who might be able to show you more specific data about your peers.

Put it in the context of your life

“The right answer for you depends on your specific life,” says Tarkenton. For instance, maybe you know that you’ll need to take out a car loan after school to cover transportation to work. That should factor into your loan decisions, prompting you to stay at the lower end of student debt. 

Or maybe you don’t have a clear picture of life after graduation. What if you don’t know what kind of job you’ll get?

“Not every 18, 20-year old student has that clarity,” says Tarkenton. “But you have to try to identify your options and paint a clear picture of what your future looks like. It’s the only way you can approach this adult decision to take on debt.” 

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