People who borrow too much money for college may struggle to repay their student loans in a reasonable amount of time. They are more likely to be late with their student loan payments, or even go into default. Missing loan payments ruins their credit, affecting access to credit cards, auto loans and home mortgages. Borrowing too much money can also cause delays in major life-cycle events that are part of the American dream.

How Much Student Loan Debt Is Too Much?

It is important to keep student loan debt in sync with income after graduation.

  • If student loan debt at graduation is less than the student’s annual income, the student should be able to repay their student loans in ten years or less. That is a reasonable and affordable amount of debt.
  • If student loan debt at graduation exceeds the student’s annual income, it will be difficult to repay the student loans on a standard 10-year repayment term. That is an excessive amount of debt.

When a borrower is overextended, with a debt-to-income ratio greater than 1.0, the student loan debt will be more than the borrower can afford to repay in a reasonable amount of time. Ideally, the monthly student loan payments should be less than 10% of income, with a stretch limit of 15%.

Consequences of Too Much Student Loan Debt

Student loan payments may divert funds that could be used to achieve other major financial goals, such as buying a nice car, getting married, having children, buying a home and saving for retirement. Borrowers say that student loan debt causes them to delay achieving these goals.

In a more extreme situation, student loan debt puts a lot of pressure on the borrower’s finances. Some borrowers might not be able to afford to repay their student loans and also pay for basic necessities, such as food, housing and medical care.

Borrowers who have a high debt-to-income ratio may miss student loan payments and have to pay late fees. Late payments will ruin the borrower’s credit score.

In a worst-case situation, borrowers who experience severe financial distress will miss enough student loan payments that they are forced to default on their student loans. This makes a bad situation much, much worse. When a borrower defaults on their student loans, the debt becomes due in full immediately, the borrower’s credit is ruined, and the government can garnish the borrower’s wages, intercept federal and state income tax refunds and offset Social Security benefits.

How to Deal with Too Much Student Loan Debt

The best way to deal with excessive student loan debt is to avoid it in the first place.

  • Save for college with a 529 college savings plan. It is cheaper to save than to borrow. Every dollar saved is a dollar less borrowed. Every dollar you borrow will cost two dollars by the time you repay the debt. 529 plans also provide significant federal and state tax benefits.
  • Enroll in a less expensive college. An in-state public college is usually a quarter to a third the cost of a private college. You will get just as good a college education at a much lower cost.
  • Focus on free money first. Search and apply for scholarships. Every dollar you win is a dollar less you’ll have to borrow. Apply for need-based financial aid by filing the FAFSA.

If you are still in college, you can return excess loan funds to the lender. Borrow as little as you need, not as much as you can. Contact the financial aid office to ask about returning the money to the lender. It is best to request a return of unused loan funds in writing after speaking with a financial aid administrator by phone.

If you return federal loans within 120 days of disbursement, you will not owe interest on the amount returned. You can still return loans after 120 days, without a prepayment penalty, but you may owe interest. However, the interest will generally be a negligible amount due to the short time period. For example, if you borrow $1,000 at 5% interest, the interest is $16.44 per 120-day period. It is better to return the money now, than have to repay the debt after graduation, where the total interest over a 10-year repayment term is $272.66.

Another option for dealing with too much student loan debt is to change the repayment plan. Alternate repayment plans, such as extended repayment and income-driven repayment, reduce the monthly loan payment by stretching out the repaying term to 20, 25 or even 30 years. Not only does this mean you’ll be in debt 2-3 times as long, but it will also increase the total interest paid over the life of the loan.

Borrowers with a lot of federal student loan debt may wish to explore loan forgiveness options, such as Public Service Loan Forgiveness. By working for a qualifying public service employer and repaying the loans under an income-driven repayment plan, the remaining debt will be forgiven after 10 years in repayment. For borrowers with a really excessive amount of debt, this may be one of the most viable repayment options.