How Much Should a Family Borrow for College?

How Much Should a Family Borrow for College?

April 18, 2023

There is no magic formula to determine how much you or your child should borrow for college. But how much is too much?

Starting Salary Guideline

One guideline is for students to borrow no more than their expected first-year starting salary after college, which, in turn, depends on their specific major and/or job prospects. But this is not a hard-and-fast rule.

Student loans will generally need to be paid back over a term of 10 years or longer, and a lot can happen during that time. For example, a student's assumptions about future earnings might not pan out; other costs for rent, utilities, and transportation might consume a larger share of the budget than expected; or a borrower might leave the workforce for an extended period to care for children and will not earn an income during that time. There are many variables, and every student's situation is different.

Federal Student Loan Limit Guideline

To build in room for the unexpected, a more conservative strategy could be for undergraduate students to borrow no more than the federal student loan limit, which is currently $27,000 for four years of college. Over a 10-year term with a 4.99% interest rate (the 2022-23 rate on federal Direct Loans), this equals a monthly payment of $286. If a student borrows more by adding in private loans, the monthly payment will jump, for example to $477 for $45,000 in total loans (at the same interest rate) and to $636 for $60,000 in loans. Before borrowing any amount, students should know exactly what their monthly payment will be after graduation. Keep in mind that only federal student loans are eligible for income-based repayment options, as well as temporary loan deferments.

Note: These hypothetical examples of mathematical principles are used for illustrative purposes only and do not represent the performance of any specific investment.

As for parents, there is no one-size-fits-all rule on how much to borrow. Many factors come into play, including the number of children in the family, total household income and assets, and current and projected retirement savings. The goal, though, is for parents to borrow as little as possible, either in their own names or by co-signing loans.

Ideas to Trim Costs

To help avoid excessive borrowing, here are some ways students might try to reduce college costs: pick a school with a lower net price (a net price calculator on a college's website will show the net price); consider in-state colleges; aggressively seek out need-based and merit aid; graduate early; attend community college for a year or two and then transfer to a four-year college; live at home or become a resident assistant to get free housing; and work part time throughout college and budget wisely.