How Much is Too Much Debt

Debt Management-How Much Debt Is Too Much Debt?

When you undertook loans for your higher education, you took on serious financial and legal liabilities. Your indebtedness can have a critical impact on your professional and personal life for many years. However, the debt that you assume can be managed if you are informed, disciplined and determined. If you practice debt management, which is a systematic approach to controlling your debt level, repaying obligations and integrating repayment into your overall financial plan, you will be able to fulfill your professional and personal ambitions and goals. In short, debt management requires you to look at the overall picture and see how the pieces of your life fit in with this picture.

While no standard formula can absolutely predict how much money you can borrow and still manage your educational debt, it is crucial that you make informed decisions about what level of indebtedness you are willing and able to assume, and how you will manage your loan repayment. The level of indebtedness each graduate can manage will vary depending upon his or her: lifestyle, expected starting salary and earnings prospects.

The best way to manage your educational debt obligation is to be aware of your indebtedness, not over-borrow and plan for the future. Hopefully, you took this into consideration when you borrowed. Student loan repayments should generally not be more than 8 percent to 15 percent of your income. Remember, you will have other needs and goals after graduation (buying a home, starting a family, starting a business, marriage, etc.). See the Education Resource Center ( section on Financial Planning and Debt Management—Mapping Your Future.

To begin to get an estimate of "How much debt is too much?" first, review the average indebtedness levels and ranges of recent graduates from your school and specialties you are interested in. Recognize that these are ranges and averages only, yet they will help you in your projections of your own budgeting. Using the Monthly Repayment Calculator, estimate your expected monthly payments. For loans with variable interest rates, estimate an average interest rate. Please note that loans with variable interest rates, monthly payments cannot be estimated with great accuracy because the rate is adjusted annually or quarterly. Do this with each loan and add the total for all the loans you have or expect to have at graduation to determine your total loan repayments on a monthly basis. Finally, you should research the starting and average salaries for the specific professions, specialties and disciplines you are pursuing. This information may be found in the occupational Outlook Handbook, published by the U.S. Department of Labor, Bureau of Labor Statistics, or from the career planning office of your school, the professional and/or educational associations of the profession or discipline. The financial aid office of your school may have information that will help you estimate your income for the early years of residency/employment in your chosen discipline. Some financial aid offices have computer software available to help with projections of income and loan repayments.

The following Web sites will also assist you in projecting your loan repayments and estimate your income:

EDWISE (—EDWISE™ is an online financial planning tool developed by EDFUND and UCLA. You can calculate how much you can afford to repay and budget your money while in college and after. It's easy to use and provides a printed report with your financial information.

Occupational Outlook Handbook (—Here you can look up your job prospects and how much you can expect to earn in your future career. With your estimated monthly loan repayment schedule and estimated income, you can use the budget worksheet to project a monthly budget. Remember, you need to plan around your "take-home pay"—the amount of your monthly pay check(s) after your employer has made the necessary payroll deductions for federal and state income taxes, Social Security, and any additional deductions you authorize. A "rule of thumb" estimate of the federal and state taxes and Social Security to be deducted would be 30 percent of your gross pay. If you project that you will have a surplus of income (discretionary net income), you are in good shape. If you have a deficit—more expenses than income—either your income must go up or your monthly expenses must be reduced, which may mean you should be creative now and identify ways to reduce loan indebtedness. Refinancing your education loans with a consolidation loan may also be an option. Now you have an informed projection of your borrowing limits as it relates to your goals and lifestyle.

Remember, for each calculation, choice and perception, there are transitions, which occur over time and thus require a recalculation of debt threshold at different points in time.

Financial Planning and Debt Management Reminders

  • Establish a conservative budget for your living expenses and make every effort to live within that budget. However, a budget is not written in stone; it is dynamic but be aware of the consequences of requiring increased amounts of loan dollars.
  • Eliminate luxury items from your budget, thereby limiting your lifestyle for as long as necessary rather than running the risk of getting behind on the payments for your educational loans and possible default. See the Consequences of Loan Default, found in this compendium, for a discussion of the consequences of being delinquent in your loan payments.
  • Share living accommodations with one or more persons rather than living alone. This step can significantly reduce the cost of rent and utilities.
  • Realize that even if you have to have an automobile, you do not have to have a new one. A car is not an investment; it is a liability. Having a used car that is in good condition and is, relatively speaking, not costly to operate can make a big difference in the amount of car payments, insurance and operational costs. But be sure that an automobile is absolutely necessary because it represents a major expense. One of the major causes of student loan default is the purchase of a new car.
  • Keep entertainment expenses as a modest part of your budget for as many years as necessary.
  • Suggestions for Repayment Planning
  • Early payments on principal will reduce the total interest costs over the life of the loan.
  • Take advantage of the grace period to save money for your future loan payments.
  • Pay on time—interest is compounded daily.
  • Think carefully before making big purchases soon after graduation.
  • Live with your new income and budget for a least a year before making any major purchases.
  • Take advantage of financial planning programs such as your local Consumer Credit Counseling Service.

How Much Debt Is Too Much?

  • Excessive debt is that which alters perceptions of opportunity.
  • Any debt that influences a student's actions or choices.
  • When the amount of debt is a surprise.
  • Any debt that results in early year cash flow crisis.
  • When the amount of debt forces you to change your goals.
  • For undergraduates, excessive debt is that which unnecessarily uses up allocations of subsidized loans.
  • When monthly student loan payments exceed 8 percent to 10 percent of gross monthly income.
  • When educational borrowing exceeds the gross salary of the first job after graduation.
  • When students overestimate their income and thus overestimate what they will be able to realistically afford in monthly payment once they graduate.
  • Any debt that comes as a surprise at the time required repayment begins.

For an individual student, at a specific school, with specific occupational and earnings outlooks, there most likely is a threshold beyond which debt is not manageable and is hence unreasonable. There is general agreement that as debt exceeds 15 percent of gross income, it becomes more difficult to manage. The key to determining the exact threshold of debt manageability for a specific person is the borrower's prospect of achieving his/her/goals while assuming loan repayment.

Calculate How Much You Can Afford to Repay

If you manage your money carefully while you're in school, you'll be better prepared for the challenges you will face after graduation.

EDWISE™, the online financial planning guide at (, can help you take much of the guesswork out of managing money. By plugging in projected loan amounts, estimated expenses and earnings for a future career, you can estimate how much you can afford to repay. EDWISE™ also offers clear, concise planning information to help you calculate efficient ways to manage your finances, along with a printout of your financial plan.

Sample Budget (Spending for Success) Worksheets

Deferment is the period when a borrower, who meets certain criteria, may suspend loan payments. Borrowers must apply for deferments on an annual basis. Medical school graduates may qualify for economic hardship deferments during residency. As the chart below indicates, deferments are both “loan specific” and “borrower specific.” Interest is subsidized during deferment for subsidized loans (i.e., there is no cost to the borrower) and is not subsidized during deferment of unsubsidized loans (i.e., interest continues to accrue and must eventually be paid by the borrower).

Deferment Eligibility Chart

*Also covers Supplemental Loans for Students (SLS), which are no longer offered.

1. New Borrower 7-1-87 to 6-30-93: A borrower who, on the date the borrower signed the promissory note, has no outstanding balance on (1) a Stafford, SLS or PLUS loan first disbursed before July 1, 1987, for a period of enrollment beginning before July 1, 1987; or (2) a Federal consolidation loan that repaid a loan first disbursed before July 1, 1987.

2. New Borrower 7-1-93: A borrower who received a FFEL loan with a first disbursement on or after July 1, 1993. The borrower has no outstanding principal or interest balance on a FFEL loan as of July 1, 1993, or on the date the borrower obtains a loan on or after July 1, 1993. This includes a borrower who obtains a Federal consolidation loan on or after July 1, 1993, if the borrower has no other outstanding FFEL loan when the Federal consolidation loan was made.

3. A Federal consolidation loan made from an application received on or after 1-1-93 and before 8-10-93 is eligible for interest benefits during deferment. A Federal consolidation loan made from an application received on or after 8-10-93 is eligible for interest benefits only if the Federal consolidation loan includes only subsidized Stafford loans.

4. Periods during which the parent-borrower meets the deferment eligibility requirements or a dependent student for whom the parent obtained a PLUS loan meets the deferment eligibility requirements.

5. Period during which the parent-borrower meets the deferment eligibility requirements.

6. Periods during which the borrower obtains a Stafford or SLS Loan for the period of enrollment for which the deferment is requested.

7. Periods during which: (1) the parent-borrower enrolls on at least a half-time basis and obtains a Stafford or SLS Loan for that period of enrollment; or (2) a dependent student for whom the parent-borrower obtains a PLUS loan enrolls on at least a half-time basis and obtains a Stafford or SLS loan for that period of enrollment.

8. Borrowers are eligible for a combined maximum of three years of deferment for service in NOAA, PHS and Armed Forces.

9. A deferment may be granted during periods when the borrower is temporarily totally disabled or during which the borrower is unable to secure employment because the borrower is caring for a dependent (including the borrower’s spouse) who is temporarily totally disabled.

10. A parental leave deferment may be granted to a borrower in periods of no more than six months each time the borrower qualifies.

Forbearance is a temporary adjustment to the loan repayment schedule for cases of financial hardship. Interest will accrue and may be capitalized on all loans, including both subsidized and unsubsidized during forbearance. Borrowers must apply for forbearance. Medical students may receive mandatory forbearance throughout residency. Forbearance is designed to help borrowers who are facing documental financial difficulties to avoid delinquency and default. Forbearance does not reflect adversely on the credit report.

Consolidation combines existing student loans to make repaying them more manageable. With loan consolidation, student loans are combined into a single new loan with just one monthly payment, a fixed interest rate and an extended repayment term of up to 30 years, depending on the total student-loan debt. Married borrowers may consolidate their individual loans under a single payment schedule.

The fixed interest rate is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest eighth of a percentage point, but can be no higher than 8.25 percent.

The benefits of consolidation differ for each borrower. Generally, the monthly payments will be less, making it easier to meet monthly payment obligations, but more interest is paid over the life of the new loan.

It is important to get all the facts before opting for a consolidation loan. The borrower’s signature on the consolidation application and promissory note obligates him/her to the terms of the new loan. All student loans do not have to be consolidated, but any loans listed on the application will be consolidated. To learn more, review the Education Resource Center section on Learning the Language and Understanding the System—Consolidation Loans. You may also consult with your lender.

Grace Period is the specified period of time after graduation or leaving school during which loan payments do not need to be made. Grace periods are ‘loan specific’ and vary from six months to several years depending on the loan. You do not have to apply for a grace period during which the interest is subsidized during grace periods for subsidized loans (i.e., there is no cost to the borrower) and is not subsidized during grace periods for unsubsidized loans (i.e., interest continues to accrue and must eventually be paid by the borrower).