How to use student loans to pay for college without ruining your financial future

For most college students these days, loans are a necessity with more than two-thirds of college students taking on some form of debt. Student loan debt is the fastest growing debt in this country, growing more quickly than even credit card debt.

Good Debt?
While economists and financial advisors have long argued that student loan debt is “good debt” because it will result in a higher-paying job in the future, it is also wise to use some common sense when it comes to taking out loans. Unfortunately, many students are signing on for huge student loans without realizing the future financial impact.

Loans and Future Earnings
Financial aid expert and FinAid.org founder Mark Kantrowitz suggests that you should keep the total amount of loans at no more than you can expect to earn annually when you graduate. Ideally, according to Kantrowitz, you should try to limit your loans to half of your future annual salary. Kantrowitz argues that by following this rule of thumb, you will use no more than 10% of your future monthly income to repaying your loan.

Debt and Your Major
If you know what major you want to pursue, do some research to determine future earnings. For examples, take a look at Georgetown University’s “What’s It Worth: The Economic Value of College Majors—Interactive Summary Tables.” These tables list the median wages for majors for college graduates. If you have an idea of a specific career you plan to pursue, take a look at PayScale, a website that collects salary information from 10 million users.

If you aren’t sure about your future major or career plans, let’s start with this figure: $46,000. That is the average salary of a college graduate in this country, according to the U.S. Department of Education. Once you have a best guess of your future annual salary, jot it down.

Loan Repayments
So now that you have an idea of your future annual salary, let’s take a look at various repayment plans for loans at different amounts. This will give you an idea of what your monthly payments might look like once you are out of school.

Here, you will find a calculator that will determine what your monthly loan payments will be, given different circumstances, including the balance, interest rate, and degree program. You should play around with numbers on this calculator to see what different loan amounts will mean for your monthly payments after you graduate.

Here is an example. A student plans to major in History. The median salary for History majors is $50,000, according to the “What’s It Worth.” So this student should try to keep their total student loans to less than $50,000 and, ideally, to no more than $25,000.

The monthly loan repayment for a $50,000 loan (at 6.8% interest) works out to about $575 per month; for a loan of $25,000, the monthly payment is around $287.

It is critically important that you have a sense of this repayment figure before you sign on for a student loan.

We’ve all heard these horror stories recently about students taking on $100,000 in debt (including private loans)

How Much Debt Can You Handle Comfortably?
It is also a good idea to come up with an idea of how much student debt you are comfortable taking on. It is important to have this number in mind before you receive financial aid offer letters. You need to know what your student loan ceiling is and have a clear idea of how the repayments will affect your financial life after graduation.

College can be a very good financial and intellectual investment. But, like all investments, you need to make sure you do your homework and don’t get in over your head.

This is a guest blog post by Jane Dabel, a professor and college admissions consultant. She blogs about college admissions and financial aid at the Six-Step College Application. Follow her RSS feed here.