How to Borrow Federal Student Loans Responsibly

It’s difficult to determine how much you should borrow to pay for a college education. College is definitely an investment in yourself, in your future, and countless statistics point to a college degree increasing your earnings power over time. The question is, just how much is too much, and how can you tell?

Most sources for responsible borrowing give relatively generic (but sound) advice - borrow what you can afford to repay, consult a financial planner, borrow only what you need, and borrow as little as possible. That said, there are a few measures by which you can judge what will be tolerable repayment situations.

Like other lending industries, student loan companies often tell you how much you can borrow, but not necessarily what’s right for your personal situation. Generally speaking, many financial planners advocate that consumer debt such as student loans be 8% - 10% of your monthly expenses as an ideal target. For the purposes of this article, we’ll use 10%, meaning that for every dollar in your paycheck that you get to keep, 10% should go towards consumer debt and student loans.

There are two ways to determine how much to borrow. If you really, really know what you’re going to be doing after college without doubt or hesitation, you can use your estimated salary to make borrowing decisions. Here’s how:

1. Look up your profession and current salaries at popular salary comparison sites like Monster.com and Salary.com. For example, if you know that you’ll be working in technical support in the metro Boston area, the general entry level salary is $49,519.

2. Knock off 1/3 for taxes and other associated government withdrawals. In our example, this works out to $33,012.

3. Take 10% of that - $3,301 - and divide THAT by 12 (12 months in a year, or the monthly payment) - which in this case is $3,301/12 = $275. This amount is the maximum monthly payment you should be making on your student loans.

The catch with this method is that most people don’t know what they’ll be doing after college. To compensate for this, if you know roughly where you’ll be living, you can take the average income for that regional area and use that figure in place of a profession’s salary. This information is available from the US Government’s Bureau of Economic Analysis web site. Visit:
http://www.bea.gov/regional/reis/

To use the Boston area again, the average income is $47,168. Knock off a third to the government, leaving you with $31,445. 10% of that is $3,144 and monthly that’s $262. If you know you’ll be working in the Boston area after graduation, your monthly payment shouldn’t exceed $262.

If you’ve already borrowed money for school, you can estimate your monthly payment using this free calculator:
http://www.studentloanconsolidator.com/calc

Keeping your consumer debt payments to 10% of your monthly net income is how we define responsible borrowing.