Affordability Analysis Helps Students Hit the Target for Wise Borrowing

Mary Jarett WhislerBy Mary Jarett Whisler, Account Executive

We’ve all seen the headlines. Student loan debt in the United States totals more than $1 trillion, and sometimes students simply borrow too much to pay for their college education.

But we also know that millions of current and former students simply could not afford to go to college without loans, and the vast majority of borrowers have been successful in repaying their loans.

So where’s the tipping point between manageable student loan debt and too much student loan debt?
Here’s one way to help borrowers make that distinction: Do an “affordability analysis” with each student loan borrower. Last week I noted this approach in a presentation at the annual conference of the Florida Association of Student Financial Aid Administrators.

Here are the three questions to ask students to consider when they’re deciding whether and how much to borrow:

1. How much income will I have?

It’s hard to hit a target if you don’t know what that target is. So discuss with students their projected income and the key factors for determining that figure:

  • Type of job or profession.
  • Job prospects where the student wants to live.
  • Starting salary.

A number of resources can help. Check out:

USA Funds®’ financial literacy and student success curriculum also includes resources to help students determine their income. USA Funds Life Skills® course “101 How Will I Pay for My Higher Education?” offers interactive exercises and tools, as well as links and tips for estimating salaries.

2. How much of my income am I willing to spend on my loans?

Financial experts generally recommend that student loan payments not exceed 8 to 10 percent of a borrower's gross monthly income during repayment. A couple shortcuts can help students with these calculations:

  • To land near 10 percent of your annual income in student loan payments, don’t borrow more than three-fourths of your expected starting salary.
  • To be around 8 percent of your annual income in student loan payments, stay closer to borrowing around half of your starting salary.

Three USA Funds brochures provide a chart that shows the maximum affordable student loan debt for selected salaries:

3. How much can I borrow before my loans no longer are affordable?

Here’s where your students translate what they’ve considered so far into an actual affordable amount of student loan debt for them.

Students can use the USA Funds Student Loan Repayment Calculator to estimate their future monthly payments, interest costs and total loan costs under various available repayment plans — based on amount borrowed.

And this is a good point to remind students that the numbers they determine to be affordable may not match those on their financial aid award notifications. Just because a student can borrow a higher amount doesn’t mean that student should borrow a higher amount.

So assist your students in making wise student loan decisions by helping them establish specific numbers to target when borrowing. These figures will give them something tangible to keep in mind as they make decisions about loans throughout their academic career.

Do you have questions about promoting wise borrowing and financial literacy and student success at your school, or communicating with borrowers to prevent student loan default? Contact USA Funds.