Updated April 10, 2023

Will student loans come to your rescue or sink your financial life? Here’s what you need to know before you borrow.

Soaring college costs over the past 30 years have driven many families to use student loans as a means to cover those costs.

Now, student loan debt nationwide has reached epic levels, with more than $1.7 trillion outstanding, and average student borrowing of more than $30,000, with full repayment of those loans stretching between 10 to 20 years.

The impact to students of being saddled with debt before they even graduate from college can be painful – by ultimately paying higher costs, taking on greater financial risks, as well as having more limited life choices, all of which can last for several years.

Although student loans can help fill a gap in college funding, families need to proactively manage the use of those loans in order to avoid getting caught in a college debt spiral.

Here are a few insights that can save you from years of financial heartache and help you better protect your future.

1. Student loans increase your out-of-pocket costs for college

Families may initially lose sight of that fact as they review their financial aid awards, where schools often present loans as if they are somehow reducing college costs.

But, just like other forms of consumer debt, student loans require repayments that include interest and other loan fees. And, the more you borrow and the longer it takes to repay the loans, the higher your costs will be.

More importantly, during periods of deferment when loan repayments are not required, like during the years students are in school or the 6-month grace period after graduation, the interest that is not paid gets tacked onto the principal loan balance. The impact of this capitalized Interest is a higher loan balance and higher future monthly repayment amounts. The snowball effect of deferments with capitalized interest can be more significant for students who pursue advanced degrees and take on additional student loan borrowing.

To avoid or reduce the impact of capitalized interest or to reduce your overall loan costs, consider making some type of loan repayment earlier rather than later, such as by making interest-only payments during deferment periods.

2. Consider student debt level in proportion to potential future income

Taking on too much student debt is a risky proposition, as there are no guarantees of specific post-graduation employment and income levels. More debt equals more risk, you’ll need more income to cover bigger loan repayments.

And, those future repayments of several hundred dollars per month will interfere with your ability to otherwise spend, save and invest. Your life choices and decisions will instead be constrained by always having to prioritize repaying your loans over everything else.

To avoid getting in over your head with student loans, focus on keeping debt more manageable, where you can repay it more quickly.

Although future income levels are not guaranteed, a current rule of thumb to avoid excessive debt – borrow less than the potential annual salary after graduation. Check-out resources like the annual PayScale College Salary Report for research on income by majors and which schools better serve students for chosen majors and future income potential.

If you are in the early stages of the school search process, build your list by considering how generous schools are with their merit-based aid (scholarships or other gift aid that does not have to be repaid.)

Look for the average size of merit awards and compare that to the cost of attendance.

You can also research the average student indebtedness for a school, which is another way to gauge if schools rely heavily on student loans in their financial aid awards.

If you are further along in the college planning journey and have been accepted to schools and received financial aid offers, which most likely include loans, only accept what you absolutely need, not more. And, if circumstances warrant, appeal financial aid awards to try to reduce your out-of-pockets costs all together.

3. Prioritize Federal student loans over private loans

Federal student loans tend to have lower, fixed interest rates versus the fixed or variable interest rates with private loans, potentially saving you thousands of dollars over the life of your loans. Federal loans also offer several repayment options and possible loan forgiveness, which are not options found with private loans. Federal loans do not have prepayment penalties, private loans may or may not have them.

Types of Federal Student Loans

Direct Subsidized

Available to students with demonstrated financial need. The Federal government pays the interest on the loan while the student is in school as well as post-graduation during the 6-month grace period before loan repayment begins.

Direct Unsubsidized

Available to all students and not need-based. The student is responsible for all interest payments. If student elects to defer interest payments, interest accrues while the student is in school and during the post-graduation 6-month grace period before loan repayment begins. The accrued interest will be capitalized, or added to the loan principal balance.

Direct Plus

Also called Parent Plus loans, these loans are available to the parents of dependent, undergraduate students. A credit check will be required to qualify for these loans. Adverse credit history will require a co-signer for the loan. Loan repayments can be deferred until after the student graduates. The accrued interest will be capitalized, or added to the loan principal balance.

Borrowing Limits for Federal Student Loans

Dependent Undergraduate Limits

First year$5,500 overall; $3,500 subsidized
Second year$6,500 overall; $4,500 subsidized
Third and Fourth year$7,500 overall; $4,500 subsidized
Total limit$31,000 overall; $23,000 subsidized

Independent Undergraduate Limits

First year$9,500 overall; $3,500 subsidized
Second year$10,500 overall; $4,500 subsidized
Third and Fourth year$12,500 overall; $4,500 subsidized
Total limit$57,500 overall; $23,000 subsidized

Graduate and Professional Students (Unsubsidized)

Annual limit$20,500
Total limit$138,500 including undergraduate loans

Less is More

Managing gaps in your college funding is extremely challenging. But, drowning in student loan debt is not the solution.

Take a more strategic approach to using student loans:

  • Focus on your affordability factor – schools that are too expensive will become more expensive to you with the use of student loans. Consider less expensive schools and schools that are more generous with financial aid in the form of grants/scholarships.
  • Be OK with saying no to schools with financial aid packages with too many or too much in student loans.
  • Avoid excessive student loan debt – limit your borrowing amount to what can be repaid quickly. Consider borrowing less than your anticipated annual salary after graduation.


Less is more with student loans. Less debt will leave you with more options and opportunities for a brighter financial future.


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