Before using loans to pay for your college education, be reasonably sure that you can repay the loans after graduation. The smaller your loan debt, the lower the salary you'll need to repay the debt. Conversely, the greater your student loan debt, the higher a salary you'll need.
The job placement office at your school can give you some idea about the average starting salaries for certain professions. Given your choice of profession, you should be able to determine how much you can reasonably borrow to finance your education by focusing on that profession's typical starting salary.
The chart below provides a guideline for the estimate minimum salary you would need to repay different levels of student loan debt. The chart assumes a fixed 6.8 percent interest rate, and a minimum of 120 monthly (or 10 years) payments.
The chart also assumes that student loan payments that exceed more than eight percent of your income (for those with an undergraduate degree) or 15 percent of your income (for those with a graduate degree) are an excessive financial burden.
|Amount Borrowed||Monthly Payments(120)||Estimated Income Level|
|$ 10,000||$ 115||$14,400|
Defaulting on Your Loan
If you fail to repay your loan, you will be in default. Your lender and the state and federal governments can take action to recover the money:
- your tax refunds may be withheld
- part of your salary may be withheld if you work for the federal government
- you may be sued and taken to court
- credit bureaus will be informed, and your future credit rating may be affected, which may make it difficult to borrow money for a car or a house
- you may be required to repay your debt under an income contingent repayment plan and thus repay more than the original principal and interest on your loans
- you will not be able to obtain additional state or federal student aid until you make satisfactory arrangements to repay
Income Based Loan Repayment
Income based repayment is a new federal program, in which the amount a borrower pays on federal Stafford loans each month is based on their income and family size. Because this program has the borrower making smaller payments in the first years of repayment, borrowers will pay more interest on the loan over time. More information about income based repayment at the federal website listed below. The federal government website includes a calculator that helps a borrower determine what their monthly payments would be.
Public Service Loan Forgiveness
Public service loan forgiveness is a new federal provision available to people working in public sector and nonprofit jobs, once they have made 10 years of payments on their federal loans. Payments made on or after October 1, 2007 qualify, so the federal government will not begin providing the loan forgiveness until October 2017. Public school teachers and state employees qualify. The eligibility criteria and list of occupations are available from the U.S. Department of Education.