College Loans – How Much Is Too Much?

by Isabella Craig on 2013/04/30

When I first found out that my friend’s brother’s loan payments were more than my monthly rent, I was shocked. It seemed a little excessive, to be honest.

So I did some digging  and found some shocking facts about college loans. An average American student has more college loan than a mortgage payment. For most students, college loan repayments are their biggest monthly expense. They struggle the entire month to meet their financial needs after paying a big chunk of their income towards repayment of their college loan.

The good news about my friend’s brother was that he was much ahead of the curve. This means that he still has time to make financial plans for repayment of his loans. For most students, it is not until their first loan bill that they actually realize the weight of their loan repayments.

According to a study by an independent firm NERA Economic Consulting, almost half of those who apply for college loans, never really consult anyone. The findings also reveal that the students feel they had a handle on their expenses and understood their finances well enough while making a decision on applying for exorbitant college loans.

However, upon graduating, their understanding about their finances deteriorates. For an average professional, who earns about $30,000 to $40,000, a college loan of about $25,000 is manageable. Any more than that, and you certainly feel the strain on your finances, just as my friend’s brother is feeling right now.

If you are eligible for a government loan, you get a 20 year term for repayment. So your installments are not much. If you are spending about $150 a month as repayment of your student loans, you will not be spending more than any average household pays for a used car in a year.

However, if you decide to borrow more than your earning potential, as a lot of students often do, you will be in trouble. My friend’s brother, for instance, had taken about $50,000 in college loans. Now that he has graduated, he earns about $29,000 and has a monthly loan repayment of $450. To make ends meet, he had to move back into his mother’s house because he just could not afford rent.

Even for someone earning between $40,000 and $50,000, repaying a loan of $50,000 can be hard, but if you are earning less, it simply means you are paying about as much towards your college loan as you would pay for food.

About 6% of total borrowers, as I understood from the report, borrow about $75,000 in student loans. Though this is a small percentage, this is generally the most financially strained section of graduates. When you are applying for a student loan, you have to think about repayment.

There is no ‘one size fits all’ theory when it comes to student loans. It all depends on your earning potential and your repayment capacity. If you have a huge earning potential, you can borrow $75,000 without worrying about how to repay the loans. However, if you do not have any good job prospects, it is wiser to take as little as possible so that you do not strain yourself financially as my friend’s brother seems to be doing.

How much do you think you would be able to comfortably repay once you have graduated?

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