How Much Should You Borrow in Student Loans?

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How Much Should You Borrow in Student Loans?


When you're applying to colleges and universities, picking a school where you feel comfortable and can pursue your interests is essential. But finances can also play a significant role in the decision-making process.

You may receive financial aid offers with grants, scholarships, loans or work study, but you don't need to accept all the offers. Understanding the federal student loan process, types of aid available and the cost of borrowing money can help you make better financial decisions.

Applying For A Federal Loan: The Basics

You can fill out and file the Free Application for Federal Student Aid (FAFSA) between January and June before your first term at college. (Starting in the 2017-18 school year, you can file an application as early as October 1 of the year before you start college).

Some school, state and federal aid programs grant awards on a first-come basis, meaning it may pay to file the FAFSA as early as possible. There are also state, federal and school deadlines, so make sure you file in time. The application determines your eligibility for federal aid and is sent to each of the schools you list.

Within three weeks of submitting the FAFSA, you'll receive a student aid report (SAR). The SAR is a summary of the FAFSA and shows your expected family contribution (EFC), an estimate of how much you and your parents are able to pay toward school. Review the document closely and if there's an error, make a correction online or by indicating the correction and mailing the SAR back.

You can also contact a financial aid office at one of the schools you listed and they may be able to make the change for you.

In addition to having the FAFSA sent to each school, you can contact the financial aid office and notify them of special circumstances that may be impacting your finances. High unreimbursed medical expenses, a recent divorce, the death of a family member or the loss of employment may impact your financial aid offer.

Around March or April, you may receive financial aid award letters from the colleges. Your award letter details the aid package, which is typically made up of federal, state and local loans, grants and work-study offers. It may be broken down by term, show the EFC and give an estimated cost of attendance. You can compare the offers from each school and weigh the cost of attending with the fit of the school.

After you pick a school and accept federal aid offers, you'll sign a master promissory note (MPN), a legal document stating you'll repay the loans plus interest and fees. If you need additional money, you may be able to take out private student loans.

In subsequent years, you'll need to refile the FAFSA and review and accept financial aid offers again.

How Financial Aid Offers Can Influence Your School Choice

Mark Kantrowitz, a student loan expert and publisher at, suggests looking at the net cost of attending each school before deciding where to attend. He says the offer letter may list a price, but sometimes it's only for tuition and fees.

Do your own calculations by subtracting the grant offers from the entire cost of attendance, including tuition and fees, books and supplies, room and board, transportation, extracurricular activities and an estimate for miscellaneous expenses. If you know an upperclassman, getting input can make creating a budget easier.

Kantrowitz says if the difference between schools is less than $5,000 in a year, many students decide to go with the one that is the best fit, regardless of price. When the difference rises above $5,000, it may make more sense to go with a cheaper school.

You may be able to change your aid offers.

Aid offers aren't negotiable, but the financial aid office may make changes under the right circumstances. If your personal situation changed since submitting the application -- perhaps a parent lost a job or you developed an illness -- you can ask the financial aid offices to recalculate your award based on the new information. Need-based offers, such as grants and subsidized loans, rarely change unless there are special circumstances.

It also doesn't hurt to ask even if your circumstances haven't changed. You may be able to increase your unsubsidized loans if the school didn't already offer you the maximum allowable amount. You can also try moving money from one type of aid to another, such as from unsubsidized loans to work-study.

Try to only borrow what you need.

After you pick a school, you'll need to determine how much to borrow. A general rule of thumb is to try to avoid borrowing more total student debt than your expected first year's salary. That may be hard to determine before your first term at school, and you may want to ask the financial aid office for guidance.

Keep in mind that you don't need to accept everything you're offered. You can turn down all or part of each award, and it may be best to only borrow what you need.

Barry Coleman, senior director for the National Foundation for Credit Counseling's (NFCC) student loan counseling program, says that students may get a refund for the portion of their grants or loans that isn't used for tuition and fees. While the money is intended to pay for necessary educational and living expenses, some students quickly blow through the "free money" and wind up having to ask their parents for money, find a job or borrow more money to pay for necessities.

Consider the different types of aid.

The aid offers you receive may have different terms, and it's important to consider the pros and cons of each.

Grants and scholarships are often the best offers. Because you don't need to repay the money, you may want to accept them all.

Need-based subsidized Direct Loans generally have a relatively low interest rate, and the government pays the interest while you're in school.

Unsubsidized Direct Loans accrue interest immediately, but they have the same low rate. PLUS loans, offered to graduate and professional students and parents of undergraduates, accrue interest immediately and have higher rates than Direct Loans. Payments start immediately, unless you place the PLUS loan in deferment.

You may be able to accept a Federal Work-Study award and find a part-time job rather than take out loans.

The work-study award pays part of your wages, so, for example, if you have a $12 an hour job, half your pay comes from your employer and the other half comes from the award. This can make you an attractive job applicant. Often you can find on-campus jobs and work for the school, or work at a local nonprofit or a for-profit if the job is related to your studies.

If you need additional assistance, you may be able to increase the offer for unsubsidized loans, turn to private lenders or find scholarships.

The Cost of Borrowing Money

It can be hard to internalize the impact of taking out loans, especially if you don't have much experience borrowing money. To put things into context, the average student loan debt for a 2015 graduate was about $35,000. If you're repaying the loans on the standard 10-year plan, it may require monthly payments of about $360 and in total you'll repay about $43,000. If you can decrease the loan amount by $5,000, your monthly payments may lower to about $300 and you'll repay about $37,000 in total.

The estimated calculations above are based on the current Direct Loan interest rate, 4.29 percent, and don't factor in the loan fee -- about 1 percent of the amount you take out. It's assumed that the loans are all subsidized and interest doesn't accumulate while you're at school.

Repaying Loans Once You Graduate

After you graduate, leave school or enroll in school less than half-time, there is a six-month grace period before you need to start repaying Direct Loans. You can either choose a repayment plan or stick with the standard 10-year repayment plan.

There are options if you're struggling to make payments on the standard plan. You could switch to an income-driven repayment plan, consolidate or refinance your loans, or consider deferment or forbearance.

Bottom Line

Consider the cost of attending a school by comparing the total cost to your grants, scholarships and family contribution. Use the budget to help determine how much financial aid you need, and try to take out as few loans as possible.

About the Author: Louis DeNicola is a personal finance writer and educator. In addition to being a contributing writer at Credit Karma, you can find his work on MSN Money, Cheapism, Business Insider and Daily Finance. When he's not revising his budget spreadsheet or looking for the latest and greatest rewards credit card, you might spot Louis at the rock climbing gym in Oakland, California.

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