Borrowing money for college can be daunting. The amounts are often huge. Is it really a good idea to take on tens of thousands of dollars in debt while in your teens? Will you ever pay it off? These are just two of the questions facing undergraduate students.
College loans are different from other forms on unsecured debt. It's almost impossible to avoid repaying them in full. Even if you file for bankruptcy, college debt will not be erased. Despite this, college loans are generally considered to be good debt. They're an investment in your future. The question when it comes to education debt is how much is too much?
The first thing you should ask yourself is what kind of a job you're likely to get when you graduate. How much does an entry-level position in your field pay? Will you be able to find a job at all? With unemployment the highest in years, many graduates struggle to find unpaid internships, much less paid work. How will you pay back the loans when you don't make enough to pay the rent?
Even if you do find a well-paid job after graduation, taking on large amounts of debt may not be a good idea. What will you have to sacrifice to repay those loans? The more you owe, the longer you'll have to wait to buy a home or to start saving for your retirement. Delaying these things by a few years can be costly.
For many people, however, the debt is worth it. Without loans, many people can't afford to go to college at all. So if you're going to borrow a small fortune, here are a few guidelines to follow:
1. Since the interest rate [1] on college loans is often variable, you'll have to estimate your monthly repayments. 8% is a good bet. It means that for every $1,000 you borrow on a 10-year loan, you'll have to repay $12 a month.
2. If you're a student, your repayments shouldn't exceed 10% of your income.
3. If you're a parent, your total debt (including mortgage, loans and credit cards repayments) should not exceed 35% of your gross pay.