Student Loans: How Much Should I Borrow?

Student Loans Borrowing

The short answer: Avoid student loans at all costs. Alright, maybe you want more explanation than that.

In some cases, that’s not always practical, but it is preferred. There are some helpful rules to live by to save yourself from the student loan bubble. Note that these rules are intended to keep you from exiting college with more monthly student loan payments than a typical job in your degree field can support.

Here are some scenarios, in order of the most preferred to the least preferred.

1. Most Preferred – Debt-Free College

This one is pretty self-explanatory. If you can get a two or four year education without any amount of student loans, you need to do it. Trust me, you will thank yourself later in life. And I don’t mean a simple “thank you,” I mean you will throw yourself the biggest most spectacular party you’ve even seen. Especially when you talk to your friends who are your age, but still paying back $40k or more in student loan debt. Or, to put it another way, take $500 cash in your hand. Now, to simulate making your student loan payment, take the cash and flush it down your toilet. Watch it spin and leave you. That is what happens when you leave school with debt and get your job and start paying back your loans. Trust me, the least amount of student loan debt, the better.

How do you make this happen?

Start small, do a community college for two years. I don’t care what anyone says – anyone! Not your friends, not your guidance counselor, not your parents, not your well-meaning Aunt Bessy who thinks you need to go from High School to Harvard. Remember, none of those people will be making your student loan payments or living your life. A community college 2 year Associate degree with no debt will be worth far more than any degree saddled with thousands in debt.

Plus, you can take your Associate Degree, and then decide if you need to further your education in your specific field with a four-year Bachelor’s Degree. The good news, you already have two years of that completed, and it’s totally paid for.

You’ll most likely need to work your way through college, which means you may do it slower, which is completely fine. Here’s another scenario, lets say it takes you five years to finish a Bachelor’s Degree program because you did it debt-free with no student loans. You friend did it in three years but finished school with $50k (could be much higher, like $100k) in student loan debt. You’re both getting out of school and looking for jobs. The difference is that you will get out of school, find any job you want, and immediately begin making money. Your friend will get out of school, start working at Starbucks, and then have $600 in monthly student loan payments which will be with him or her for the next twenty years, or likely longer if they’re deferred or refinanced down the road.

So, in this scenario, you break even immediately when leaving school and begin earning real money that stays in your pocket. Your friend is done with their degree sooner, but they’re constantly broke because they are stuck with a monthly payment amount that is higher than some mortgages. Which situation would you rather be in? For me, it’s a no brainer and I wish I had taken the debt-free path when I had the chance. The extra time makes absolutely no difference other than to set you on a solid financial path instead of the fast-track to financial misery.

Caution: You will be tempted at times, to give in. Your fried with massive student loans will take the summer off while you’ll be working to save money and pay for school out of pocket. This is a short-term sacrifice for long-term gain the rest of your entire life. Your friend will have his summer and a lifetime of student loan payments. You, on the other hand, will work hard and have a lifetime of enjoying your lake house. You will invite your debt-ridden friend to your lake house, he or she will be jealous and ask how can afford such luxuries. To that, you will explain, you saved that extra $700 a month that you didn’t pay in student loans, and bingo, now you have a lake house.

2. Practical Reality – Minimal Student Loans

As much as I will recommend and preach the most preferred scenario, a good number of people will fall in this category of needing to take at least some student loans out to completely pay for college. Pretty much anyone can scrape together the cash to pay for an Associate Degree at a community college, which you should strive to do. However, when moving past that to a four-year school, the costs skyrocket. Again, this is why I’d recommend doing two years at community college and save yourself untold fortunes.

What is a reasonable amount of student loans?

If you can finish a four-year education and keep your student loan total to less than $20k, you’re doing OK. If you can keep it less than $15k, you’re doing very good. If you can keep it to less than $10k, you have won a gold star and deserve a medal.

The costs vary by school, and you should take that into account when selecting a school. If you devote $20k a year in cash to your schooling, then going to a school that costs $25k a year might be reasonable if you take out the extra amount in small student loans. However, if you can only devote $20k per year in cash, don’t pick a school that costs $50k a year, that will leave you with over $100k in debt by the end and it won’t be worth it.

Here’s a simple rule. Your goal should be to pay at least 75% of the annual cost in cash. That may seem high, but if you don’t stick to it, you’ll still be stuck taking out loans and accruing huge sums of debt along the way.

Another way to look at it is to try and make sure that your student loan debt total is less than what your starting salary should be. See this article for a deeper look at those numbers.

3. Least Preferred – All Student Loans

Don’t do it. Just. Don’t. Do. It.

This is not an ideal situation, even if you’re becoming a doctor or a lawyer. You think doctors or lawyers right out of school enjoy paying their $100k to $200k in student loan debt doing basically entry-level jobs? Think again.

So explain how you, assuming you’re not in law or the medical field, are going to pay back your cool $50k in student loans until you’re the ripe old age of 70? There are very few degree programs that are worth going into debt for, and even fewer that will actually give you a decent return on that investment the first five years after graduation.

Here’s a fun budget example. Let’s be generous and say you get out of school, and find a job making $30k a year. In reality, you could be making $25k or less. Here’s a monthly budget for debt-free and debt-full.

Monthly Budget ItemDebt-freeDebt-full
Amount Remaining$700$50
Monthly Income (after taxes)+$2,200+$2,200
Rent-$600-$600
Food-$300-$300
Car-$200-$200
Entertainment-$200-$200
Unexpected Expense-$200-$200
Student Loans-$0-$650

I’d rather be the one with $700 left over at the end of the month to do with what I see fit. Maybe build a savings account, maybe go on vacation, maybe splurge on a shopping trip, anything! The point is, you have actual cash left over even on a small salary.

And trust me, there will always be unexpected expenses, that is the line item that always hurts budgets the most. Just plan for it it. Your car needs something, your apartment or house needs something, your friend needs something, you need to travel unexpectedly – these things happen and they happen all the time. No worries though, you’ve got lots of extra money in the budget each month because you have no student loan debt eating all your extra income. Therefore, you avoid doing more dumb things like getting into credit card debt because you have no money left each month.

In Conclusion

Hopefully this is helpful to someone considering student loans as a source of funding their college education. I know how hard it is to go against the grain and resist the student loan push from colleges, parents, everywhere you look. They act like it’s free money, when it’s really just deferred suffering.