How should you decide how much student debt to take on?

Whether you’re a student or parent thinking about taking out loans to pay for college, understanding the basics is an essential first step.

How should you decide how much student debt to take on?
[Photos: MD Duran/Unsplash; Sharon McCutcheon/Unsplash]

Student loan debt in the U.S. topped $1.6 trillion in 2019, according to the Federal Reserve Bank of St. Louis. And it’s not hard to understand why.


The conventional wisdom that student loan debt is “good debt” is being challenged. Too many students and parents don’t have a good grasp of what the debt means over time, says college funding expert Fred Amrein, founder of PayForEd, a suite of digital tools to foster greater college financing transparency. “We don’t see the financial consequences [of borrowing] because the information from the college is always only given one year at a time, so you don’t see the accumulation. There’s no pain as you accumulate more debt until after you graduate,” he says.

That can lead to regrets. As Fast Company reported in November 2019, roughly two-thirds of people with advanced degrees said they had regrets related to college, mostly about their student loans. Roughly one in four (24.6%) of bachelor degree earners regretted their student loans, but nearly one in three (31.5%) of those with debt from a master’s or law degree had misgivings about their debt.

With the average cost of private, four-year university tuition at $36,801 and public four-year university tuition at $22,677 for out-of-state students and $10,116 for in-state, it’s no wonder that half of families borrow to cover college costs, according to a 2019 report by Sallie Mae. Before students or parents agree to that education loan, here are the factors you need to keep in mind.

Types of loans

Student loans may be part of the federal student loan program or from a private lender. Loans that are part of the federal program offer a number of advantages that may include fixed interest rates, income-based repayment plans, loan forgiveness for public service work, interest rate reduction, and looser credit requirements.

To receive a federal student loan, you must fill out the Free Application for Federal Student Aid (FAFSA). Federal loans may be subsidized or unsubsidized. Subsidized loans are granted to students who meet certain thresholds that demonstrate need, and the federal government pays the interest on the loan until after the student graduates. Interest begins accruing immediately on unsubsidized loans, which will make the balance larger when the student graduates. There are many good calculators that can help you determine the impact of interest on your loan total.


The federal government offers direct subsidized and direct unsubsidized loans for students and direct PLUS loans (unsubsidized) for parents. Each loan has an annual borrowing threshold. Private student loans are available from banks and credit unions.

Earning potential

Another factor in weighing how much to borrow is what your earning potential will be in your field, says Stephen Gunter II, an associate adviser with Bridgeworth, a financial planning firm. “[If] you’re interested in the field, look up what the median income is or what the average income is in the area that your specialty will be in or in the geographic area that you want to land in,” he says. You can get this information, as well as the outlook for the field, from the Bureau of Labor Statistics Job Outlook. Also, look at the average employment rate and starting salaries in your field published by the universities in which you’re interested. Some schools with sought-after programs or specializations may give you an edge, but those are relatively few and far between, Gunter says.

“If you get a chance to go to Harvard or Yale or something like that, it may be worth it. But for your average student that’s going to your average college, chances are you’re going to be better off by having less debt to service than by graduating and having 10-plus years of student loan debt that you’ve got to get off your shoulders before you can reasonably start doing the other things that help set you up for your financial future,” he says.

Student loan expert Daniel J. Mendelson, author of BYE Student Loan Debt, says that, when thinking about how much debt to incur for college, you should consider the reason you’re going to college. Do you have a dream profession that requires a degree? Without a college degree, what profession would you choose and how much could you approximately make now and in the future with that profession? And is a two-year associate’s degree—free or very inexpensive in many states—the best first step to cut your costs? Mendelson says he speaks from experience. He and his wife once had a combined $150,000 in student loan debt. So he advises caution in taking on too much debt.

Also, consider whether you will need to go to graduate school for your field and the impact that will have on future earnings, Gunter says. In some cases, you may be required to hold a master’s or doctorate to work in the field, or it may give you greater earning potential. In other fields, it doesn’t matter, he says.


Graduation rates

Look at graduation rates of the schools in which you’re interested. Colleges and universities publish graduation rates, but they may be six-year graduation rates rather than four-year. Look at the commitment and resources the school devotes to helping students graduate in four years, then look at the outcomes. If a school has a higher price tag, but you may be more likely to graduate within four years, you’re not only saving the cost of additional schooling; you’re also adding an additional year of earnings, Amrein says. Let’s say an additional year cost you $30,000, and your first-year earning potential was $50,000. “Depending on what the package was, I’ve lost the opportunity to make $50,000. So that extra year was not a $30,000 mistake . . . it was an $80,000 mistake, because I lost a year of revenue,” he says.

Repayment options

Federal student loans may be eligible for as many as eight different repayment plans, ranging from fixed amounts to income-driven repayment programs. Parent loans have different repayment options as well. Keep in mind that repayment options may change over time, so it’s a good idea to ensure that you can manage the payment over a fixed 10-year period. And choosing certain repayment plans can have consequences.

“With income-based repayment, you’re dramatically reducing your monthly payment, and it’s based on how much income you have,” Mendelson says. “But the problem is, you’re actually accruing more interest in the long run. And you’re really kicking the can, and you’re going to pay off more in the long run by pointing that option.”

Student loan debt is also the only consumer debt that cannot be discharged in bankruptcy, making it very difficult to find relief if you incur too much debt. So, before signing on the dotted, line, be sure you understand the long-term ramifications of the loans you take, he says.

About the author

Gwen Moran is a writer, editor, and creator of Bloom Anywhere, a website for people who want to move up or move on. She writes about business, leadership, money, and assorted other topics for leading publications and websites