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A Note on Borrowing

 Over the last 20 years, loans have replaced grants as the primary source of financial aid to college students. Loans make going to college more manageable financially, but you do have to repay them with interest after leaving school. Loans must be paid back even if an individual decides not to complete school or obtain a degree. For many college students, the decision regarding how much to borrow plays a central role in determining which college they can afford. How much debt individuals are willing to incur to finance their college education is an extremely important and necessarily individual decision. Many people are concerned about borrowing too much.

To give you an idea of what you will face, we provide information concerning the amount of debt a recent group of college students had built up by their final year in school. This is broken down according to the type of school they attended. You will also find information about the amount of income (before taxes) that would probably be sufficient to comfortably repay varying levels of total educational debt. The sufficiency of any income, of course, depends on what other expenses you have. Therefore, these figures are only rough estimates.

The table below shows the percent of students in their final year at college who borrowed money to attend college. Note that slightly less than a third of public 2-year students were in debt, while over half of all students at 4-year colleges were. Typical debt amounts varied quite a bit depending on the type of college attended. For example, for seniors with loans who attended public 4-year colleges, the typical debt range was between $5,000 and $14,500. Remember 49 percent of seniors at this type of school owed nothing.

Total indebtedness among final-year full-time students at different types of colleges
  Percent with Debt Typical range of debt
From to
Public 2-year 31% $1,000 $5,000
Public 4-year 51% $5,000 $14,500
Private 4-year 55% $8,500 $17,900

SOURCE: U.S. Department of Education, National Center for Education Statistics, National Postsecondary Student Aid Study: 1995-96.

The next table shows the monthly payments required to repay various levels of student loan debt over the typical repayment period of 10 years. We assume that a current interest rate on a major loan program (Stafford Loans) remains in place (8.25 percent). Lenders often assume that payments that constitute between 5 to 15 percent of a new college graduate's income are manageable. The amount of money individuals can comfortably devote to student loan payments again depends on what other expenses they face. We have chosen an 8 percent payment to income ratio to estimate sufficient income levels.

Based on this ratio of payments to income, students borrowing $2,500 each year during a 4-year college career, for a total of $10,000 in loans, will need to find employment with an income of at least $18,400 in order to be able to comfortably manage repayment. In this case you have to pay $123 every month for 10 years to repay this debt after you complete your studies.

Amount borrowed, projected monthly payment, and sufficient annual income
Amount Borrowed Projected Monthly Payment Sufficient Annual Income
$5,000 ($61) $9,200
$7,500 ($92) $13,800
$10,000 ($123) $18,400
$12,500 ($153) $23,000
$15,000 ($184) $27,600
$17,500 ($215) $32,200
$20,000 ($245) $36,800

SOURCE: Tabulations by the American Institutes for Research assuming an interest rate of 8.25 percent, 10-year repayment plan, and defining income as "sufficient" if monthly payments constitute 8 percent or less of monthly income.

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