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As the costs of higher education continue to rise, millions of college students (and their parents) have had to obtain loans to help pay for school. Student loans help bridge the gap for many who otherwise wouldn't be able to afford school, but as with any form of borrowing, it's important to understand how much is too much.
To figure out how much you should take out in student loans, you'll need to look at your expected income and your estimated school expenses. The student loans you take out should cover the difference and not much more.
Calculate Any Income You Will Have While in School
While previous generations may have been able to put themselves through school by working a part-time job, this is typically no longer enough to fully cover the costs of college. But part-time work is a useful supplement that can make a big difference in how much you'll need to take out in student loans.
Before you can calculate how much to borrow, estimate how much income you'll have while in school. The more you earn, the less you'll need to borrow, so if you plan to work while in school, try to put a number on how much you'll earn each month. Use this number later when you're making your budget.
Did family set aside money for your education in a college savings plan? If so, factor that in as well. Additionally, consider whether you will participate in a work-study program or receive scholarship money, as these forms of income can also reduce your need to borrow student loans. Add it all up to come up with an estimate for your income. Depending on your circumstances, you may want to look at it either monthly or by semester.
Create a Budget
Now that you know how much money you'll likely have to help pay for school, it's time to put together a budget. In simple terms, a budget helps you track how much money you have coming in and how much you have going out. There are many ways to make a budget, from using an Excel spreadsheet to online apps that can partly automate the process.
To finish determining how much you need in student loans, you'll have to figure out the expense side of your budget. Your university should provide estimates on costs, which you can use to calculate how much you'll likely spend on tuition, books and housing.
When adding up your expenses, you will also need to factor in additional monthly costs, such as:
- Food, if not included in your on-campus housing costs
- Rent, which may be included in your education costs if you plan to on campus (be sure not to double-count)
- Utilities, if your dorm or housing situation requires you to pay for water, electricity, internet and cable
- Transportation, such as car payments, a campus parking permit, gas or public transportation passes
- Entertainment, including the occasional night out and things like streaming services
Figure Out How Much You'll Need in Loans
If you followed the first two steps, you now have an estimate for how much income you'll bring in each month or semester, in addition to how much you'll have to spend each month for both your education and living. Knowing the difference between the two numbers will help give you a sense of how much you'll need to borrow in student loans. The amount can vary greatly depending on whether you plan to attend a public or private school.
As you determine how much you need in student loans, keep in mind that you should aim to only borrow what you actually need to get through school. Unlike scholarships or grants, loans have to be repaid, and with interest. This can be a challenge for those just entering the workforce, so don't use your loans to live beyond your means, and borrow as little as you can.
Once you've got the amount you think you'll need dialed in, it's time to start thinking about what types of loans you'll want to borrow and what types are available to you. There are two broad types of student loans: Federal loans from the government and private loans from financial institutions like banks. There are major differences between the two, including in terms of how much it will cost to borrow. Before committing to a loan, understand which type will get you the best deal and end up costing you less in fees and interest charges.
How Much Should You Get in Federal Student Loans?
Since federal student loans are administered through the U.S. government and therefore highly regulated, they offer some benefits over private loans. This includes fixed interest rates, no credit checks, and sometimes more flexible payment terms and loan forgiveness programs.
Some undergraduate students can qualify for subsidized federal loans, where the government covers interest that accrues during school. Unsubsidized federal loans are an option if you reach your cap on subsidized loans, but they do charge interest while you're in school. Unsubsidized loans are your only option for a federal loan if you're a grad student.
All federal loans have borrowing limits, so if you're going to an expensive school, you may max out their limits. The U.S. Department of Education recommends starting with federal student loans due to their (usually) lower interest rates and benefits. For borrowing needs beyond that, private student loans are available, although their terms and benefits are often less than ideal.
How Much Should You Get in Private Student Loans?
If you can't qualify for as much as you need with federal loans, you can supplement the difference with private loans. These require a credit check, so if you haven't yet established credit, you'll need someone to cosign.
There's really only one circumstance in which you should consider turning to private loans first: If you or your parents have stellar credit and can qualify for a loan with lower interest rates and fees than a federal loan. Some private lenders also offer deferment and flexible payment options, but terms are decided by each individual lender, so shop around before you decide on a lender.
Whether you're borrowing federal or private loans, you'll also want to research the estimated starting salary in your desired field of work. This can help you think about how long it will take you to repay your loans, and if it's wise to take on large loan amounts for a career that isn't super lucrative. Additionally, most federal loans have income-driven repayment plans, where your payment is based on how much you earn. It can result in you paying more interest over time, but it can make things easier if you're not earning much after school. Private loans don't have this option, so it may be harder to make payments depending on your starting salary.
Start Building or Improving Your Credit Score
While federal loans don't have any credit requirements, private lenders do consider creditworthiness in the borrowing process. If you anticipate needing private loans but haven't yet established credit, you may want to speak with your parents or guardians to find out their credit status and see if they're willing to cosign on a loan for you. If not, start making efforts to build your credit. You can do this by becoming an authorized user on a friend or relative's credit card or getting your own secured credit card.
Additionally, whether federal or private, all student loans impact your credit. But whether they hurt or help your credit depends on your behaviors. If you're trying to establish credit, having a student loan on your credit report can help since it adds to your credit mix and gives you a way to create a history of regular, on-time payments.
However, making late payments or missing any can damage your credit. For this reason, prioritize making on-time payments to help establish strong credit. If, in the future, you think you'll miss a payment, reach out to your lender before your due date to see if special accommodations can be made including forbearance and deferment.
Get Familiar With Your Credit
Not sure where your credit currently stands? Monitor your credit report and scores for free with Experian, and check back to see how your efforts to establish credit pay off over time. Having a strong credit report will make life easier after school, especially if you need to obtain an auto loan or credit card. Plus, landlords and employers typically check credit reports to ensure financial responsibility, so your actions now can make a big difference in your future.