Maximum Amount to Borrow for Student Loan

The maximum amount should be a financial decision and not an emotional decision. Consider the impact it may have on your finances over 10 years after you graduate when deciding how much to borrow. IMHO, the best option if taking a loan is one can repay in 10 years or less easily. 

Here is a simple calculation to do before taking out a student loan.

I have read of two different rules of thumb.

1. No more that one's expected salary.
2. No more that 10% of expected take home pay.  

Assuming one's first job is $60,000 per year which is the average for a college graduate. Take home pay for $60,000 is estimated at $4,187 per month not including state income tax deduction.  

Rule #1 maximum is $60,000 borrowed.  That results in a $678 per month payment at 6.39% interest for 10 years.   That's 16.2% of one's take home pay.

Rule #2 maximum is $37,000 borrowed.  That results in a $418 per month payment since 10%  of $4,187 per month take home is $419.   

Both of these seem reasonable for loan payments.   However, what if the starting salary is only $40,000 when one assumed $60,000.     Now, one's take home pay is only $2848 per month.  Now the monthly payment is either 23.8% for Rule #1 or 14.6% for Rule #2 based on borrowing against one's expected salary of $60,000.  Ouch. 

With a recommended budget that has 20% of take home pay going to savings and debt, the above student loan examples would take about take up 50 to 138% of that 20% based on assumed or actual starting salaries.   

Instead of thinking of a student loan as an investment, think of paying off a student loan as a future budget item and whether the future payment is affordable.

Disclosure:  Student loans I took had payments of about 5% of my take home starting salary.  Although many years ago, I recall that percentage to very manageable.

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This is not financial, higher education, nor debt advice. Please consult a professional advisor.

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