In this article:
Borrowing to pay for a college education is necessary for many students, but too much student loan debt can be a financial burden for a long time. The amount you borrow in pursuit of higher learning is a big decision, and there's much to be considered before you agree to take on student loan debt. The most important factors to consider have to do with your current financial situation, your career goals and college costs.
As you try to figure out how much you should borrow in student loans for your college education, here are the different things to think about.
Popular College Majors and Expected Salaries
One of the most important things to consider when deciding how much student loan debt to take on is how much you expect to make once you start working. While it's impossible to know the future, it's wise to study up on the average income for jobs you'll be qualified for once you graduate. If the average income for your chosen field of study is on the lower end of spectrum, you'll likely have a harder time paying back large amounts of student debt.
According to the U.S. Department of Education, here are the expected salaries for 25- to 29-year-old workers with bachelor's degrees in 10 popular fields:
- Computer and information sciences: $70,100
- Finance: $65,300
- Accounting: $60,000
- Nursing: $58,700
- Political science and government: $50,600
- Communications and communication technologies: $45,600
- History: $45,100
- English language and literature: $44,600
- Education: $43,000
- Liberal arts: $40,300
Of course, your expected salary can be more than that if you choose to get a graduate degree. Your future income can also vary depending on the different career choices you make after graduation. But in general, it's good to get a basic idea of what you can expect.
Try Matching Your Student Loans to Expected Salary
According to some experts, you should try to limit your student loans so they won't cause you to spend more than 10% of your gross income on monthly payments. Once your salary expectations are clear, you can use an online student loan calculator to find out how much your student loans will cost you on a monthly basis and determine how much you can afford.
For example, let's say you're expecting to earn about $40,000 in the first years of your career—that's roughly $3,333 per month, which means you should try to limit your student loan borrowing to keep your payments below $333.
With the current undergraduate federal loan interest rate at 2.75% and a standard repayment term of 10 years, aiming for a $333 monthly payment would allow you to borrow up to about $34,900. Just keep in mind that interest rates change each school year, so you'll need to run this calculation every time you plan to borrow money.
What to Consider When Deciding How Much to Take Out in Student Loans
Your expected salary is an important indicator of how much you may be able to afford in student loan payments, but that doesn't mean you should borrow as much as you think you'll be able to repay. First you need to understand your financial needs as well as what you can do to secure income from other sources to reduce the amount you'll have to borrow. Here are some more factors to consider:
- Cost of attendance: The cost of attending college is more than just tuition and fees. You'll also need to pay for supplies, books, housing, food, transportation and more. Also, some colleges are more expensive than others. Your university will provide an estimated cost of attendance, which can give you more insight into how much your college experience will cost.
- Employment income: If you're working during school, you can use that money to reduce your need for student loans.
- Scholarships and grants: These sources are the best way to pay for college because they don't require you to pay any money back. Also, most scholarships and grants don't have tax implications, so you don't have to worry about that expense either. Apply for scholarships and grants through the Free Application for Federal Student Aid (FAFSA), directly with your school and with private organizations through websites like Scholarships.com and Fastweb.
- College savings: If you or your parents have managed to set aside money to help pay for college, those funds can make a big difference in how much you need to borrow in student loan debt.
In general, the more money you can get from sources that don't require repayment, the better off you'll be in the long term.
Student Loans and Your Credit Report
Taking out student loans isn't ideal, but may be necessary to get you through school and start your career. Another benefit is that student loans can also help you build your credit history.
Like any other loan, your student loans will be reported to the three national credit bureaus—Experian, TransUnion and Equifax. Once you start making payments after you graduate, your payment history will also be reported and can help you establish a credit file.
Even after you pay off your student loans, that information can remain on your credit reports for 10 years after the account is closed, which can further support your credit score if the information is positive.
On the flip side, student loans can harm your credit if you miss even one payment. The more payments you miss, the more damage your score will suffer. Defaulting on a loan can make things much worse.
If you ever anticipate that you might miss a payment on your student loans, reach out to your loan servicer and request some relief in the form of an income-driven repayment plan, forbearance or deferment. Be forewarned, however, that some of these options are available only on federal loans. Relief options for private loans are generally less generous.
Building Credit in College Can Give You More Savings Opportunities
Building credit in college can be challenging, but establishing your credit history now could make it even easier to pay off your student loans in the future.
More specifically, building and maintaining a good credit history may make it possible for you to refinance your student loans after graduation at a lower interest rate than what you're paying right now. Even if you can't or don't want to refinance your student loans, a good credit score will save you money with other loan types and in other areas of your financial life.
If you find one that appeals to you, a student credit card can help you build your credit history. In some cases, you may need a cosigner to get approved. If you can't, try asking a parent to add you as an authorized user on their credit card account. The entire history of the account will be added to your credit report if it's positive, which can help you start the process of building credit.
Make it a goal to monitor your credit regularly to keep track of your progress and address potential issues as they arise. As you continue to pay off your student loans and build a positive payment history, you should see your credit scores start to reflect your progress.