Borrowing money to help pay for college is a common practice, especially helpful when scholarships, grants, or income and savings don't cover all of the expenses. According to How America Pays for College 2018, 65 percent of families who borrowed money for college reported they had always expected loans to be a part of their paying-for-college strategy.
The balance between contributing money out-of-pocket and borrowing for college differs by parents and students. Parents typically provide more funds from savings and income than students, and don’t borrow as frequently. On the other hand, students, who, by and large, don’t have much savings or a steady income, often contribute to paying college expenses by taking out student loans. About two-thirds of borrowing was done by students vs one-third by parents.
About one-third of families say the parent will share responsibility for student loan payments—typically they’ll make payments until the student is financially stable. Ultimately, though, the majority of families (63%) state that the student will be solely responsible for paying his or her student loans.
Developing a student loan strategy
Why and when families decide to borrow can be driven by a variety of reasons and family circumstances. Deciding how much to borrow can sometimes be difficult. These three strategies can help families determine the amount of money to borrow for college.
- Estimate the student’s debt-to-income ratio
This is one of the most important concepts a student should understand, yet only one-fourth of borrowers say they’ve researched it.
Evaluating the student loan debt-to-income ratio can help a family measure a loan’s affordability. It involves looking at a future monthly student loan payment (the combination of all outstanding student loans) as a percentage of monthly income. For example, a debt-to-income ratio of 10 percent means a borrower’s monthly student loan payment should not exceed 10 percent of his or her take-home (after taxes) pay. In other words, if you think you’ll take home $4,000 per month, your total student loan payment should not be more than $400. (Note: Sallie Mae does not recommend a specific ratio, only that borrowers consider affordability of future loan payments.)
Another rule of thumb for looking at the amount of debt in relation to income is to estimate a college grad’s first-year annual salary, then capping the student’s total undergraduate loan debt at that amount. Find out about estimating how much to borrow in student loans.
There is no single debt-to-income ratio that uniformly applies when determining the amount a recent grad can afford to pay each month. Factors to consider include other expenses such as cost of living, other debt (besides student loan payments), total income (higher incomes can typically support higher debt ratios), and potential for increased earnings (as income increases over time, student loan payments will become a smaller part of the ratio).
- Consider making loan payments while in school
Student loans typically have an option to defer (or postpone) payments while the student is in school. The assumption is that when students are studying, they aren’t working full-time, therefore they aren’t expected to make payments. But making payments—whether a full payment, interest payments, or some other amount—can save money because less interest accrues (capitalizes) on the borrowed amount.
Knowing this, nearly half of families (47%) with federal or private student loans say they are making some type of monthly payment on those loans while the student is still in school. The student is nearly twice as likely as the parent to be the one making the payments during that time.
- Make a plan for repaying the student loans
While paying back student loans may seem far in the future, planning can help ease that transition when the time comes. Families should be aware of all repayment options that may be available to them, along with any eligibility guidelines. Knowing options ahead of time can help families estimate how much they can afford to borrow. Only one-fourth of families (or fewer) who have borrowed, however, have researched each of the following topics:
- Income-based repayment plans (25%)
- Loan consolidation (20%)
- Federal loan forgiveness programs (19%)
- Loan refinancing (18%)
Parents and students have very different views on future responsibility for repaying loans. While 72 percent of students say they will be solely responsible for repaying their loans, only 50 percent of parents say they expect that. This wide gap in expected repayment responsibility could be indicative of the need for more communication between parents and students. Families should discuss beforehand who will borrow and who will be responsible for making payments.
Setting expectations by communicating within the family, researching payment options and debt-to-income ratios, and understanding cost-saving strategies can lead to a more successful loan borrowing and repayment experience.
Find out more about How America Pays for College 2018.
Families and the FAFSA—filing, finances, and fears
The paying-for-college combo families rely on
Using student loans to pay for college
First-in-family college students pay for college differently
Most families are using scholarships to pay for college—is yours?
About this study
How America Pays for College 2018, a national study by Sallie Mae and Ipsos, explores how much families of undergraduates spend on college, how they pay for it, and how they reach their funding decisions.