4 guidelines for taking on student loan debt

Identify the average starting salary for the field the student is planning to go into, and the family should not have any more than that number in total education loans.

Considering a school that would leave you with $35,000 debt for an undergraduate electrical engineering degree? That would pass the test for an acceptable amount of debt for the investment. Considering a school that would leave you with $80,000 in debt for an undergraduate teaching degree? Not a great idea.

Prioritize the Federal Direct Student Loan

The Federal Direct Stafford Loan is the only one a student can take out themselves without a co-signer, and has many benefits such as a fixed interest rate and wide variety of repayment options. In order to access the loan, however, a family must complete the FAFSA.

Federal loans have annual limits, so consider the amount of debt needed to cover all years of college before declining them in a given year.

Families often exhaust 529 Plan or other college savings first and then cover any remaining amount in the last years of college through loans. But that may also inadvertently push them into private loans, which usually have higher interest rates and less favorable terms than the federal loans.

As an example, if a family has a $20,000 gap left to cover in the senior year after using its college savings to pay for the previous years, they are limited to borrowing $7,500 from the Federal Direct Stafford Loan and would need to cover the remaining $12,500 from state or private student loan programs, or the Parent PLUS loan program.

However, if they spread out their distribution of college savings over the 4 years instead of front-loading to account for the annual limits on the federal student loan, they would easily be able to cover the $20,000 gap entirely as a student can borrow up to $31,000 over his or her undergrad years.

For every $10,000 in loans you take out, it will be roughly a $100/month loan payment

Related to the previous tip, it is important for students to consider how much of their monthly income will be devoted toward repaying student loans, and what that lifestyle would be like. Are they able to rent an apartment, have a car payment and still have some fun with friends, or are they scraping by, borrowing their parents' car and living in their basement?

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