Responsible Borrrowing
Student loans exist to assist with the cost of education - including the indirect, or non-billable costs that students have in order to make attending college possible. Apartment rent, books, academic supplies, transportation costs all qualify as “educational expenses.”.
What is “Responsible Borrowing?”
Definition: taking on debt (in the form of a loan) for only what is truly needed rather than borrowing the maximum amount possible. It also involves thoroughly reading and understanding the terms of the loan: its interest, and how your loan repayment will work in the future.
A good test is this: would this expense appear in a college's estimated cost of attendance? If yes, it has a legitimate claim on loan funds. If not, you're financing it with debt you'll carry past graduation.
The Ten-Year Test
Before spending loan money on something discretionary, ask "Am I comfortable making payments on this for the next ten years?" If the answer is no, that's the answer.
Understanding Key Terms
Interest Rate
Percentage of a loan amount charged by the lender to you, the borrower, for the use of money taken out in the loan. It represents the “cost of debt” of the principal loan amount and interest gained.
Lower interest rates make borrowing cheaper, which can make repayment easier on the borrower, leading to less time overall in repayment of a loan.
Higher interest rates make borrowing more expensive, which can slow down the repayment process.
Principal
The original amount of money borrowed on a loan. When you make regular payments on your loan, a portion of your payment goes toward the principal and a portion goes toward the interest gained.
Interest is calculated based on the remaining principal balance of the loan. As the principal is paid off, the amount of interest gained on the loan decreases. This means that more of your monthly payments go toward paying off the principal balance rather than the interest gained, meaning that it will take less time to pay off the loan.
Repayment
A repayment plan is a structured agreement between a borrower and a lender that describes how an outstanding loan will be paid back. It outlines the frequency of payments made, overall timeline, and how much of the payments go toward principal and interest on the loan.
Payments are fixed, meaning you pay the same amount each month until the loan is fully paid off (including interest).
Loan Servicer
The company responsible for the administration, and repayment of the loan.
Lender - institution that evaluated your credit, approved your loan application, and funded your loan
Federal loan servicer information can be found at Federal Student Aid using your FSA ID and password, and accessing the “My Dashboard” section.
Fees
Origination fees: a one-time charge made by a lender for processing and funding a new loan. This is usually calculated as a percentage of the total loan amount.
Late fees: a financial penalty charged to the borrower when they fail to make the minimum required payment by the agreed-upon due date per the terms of the borrower’s repayment plan.
Credit Score
Why is Responsible Borrowing Important?
Responsible borrowing helps the borrower maintain good credit and a good credit score over time, especially as they enter repayment of their loan.
It prevents excessive debt by only taking what is needed.
Creates lower financial stress while in college as well as out of college and makes money more manageable, allowing for long-term financial stability and less time in repayment.
Does the Payment Fit?
Common benchmarks from financial experts suggest that student loan balances should not exceed starting salary after graduation, nor should payments exceed 10% of your gross monthly income. For example, if your salary typically starts at $45,000 per year, that's about $3,750 per month gross — meaning a comfortable loan payment would be around $375 or less per month.
You can check your actual projected payment at StudentAid.gov using the loan simulator tool. It shows you what different borrowing amounts look like across different repayment plan options.
If the projected payment is uncomfortable relative to expected income, you should budget accordingly, borrow less, or understand which income-driven repayment options might apply to your situation.
Repayment
Typically repayment begins after a student graduates. Some loan lenders will offer a grace period after a student’s last date of attendance before monthly payments are required.
Information about your loan servicer can be found at StudentAid.gov. This is the company that manages your federal loans and collects your payments. Create an account before repayment starts.
Know if there is a grace period before loan payments are required. For most federal loans, you have six months after graduation before payments are required. Interest may still accrue during this window. Be sure you are ready for repayment when your due date arrives.
When it comes time to enter repayment, set regular reminders or use autopay to remain on track with your payments.
If using autopay, you should still log-in to your account with your loan lender to ensure loan payments are being made and processed sufficiently.
Late payments can increase total cost due to late fees and penalties. They can also cause damage to your credit score. If you can't make a payment, call before you miss it. Federal loans have deferment, forbearance, and income-driven repayment options that can help before it’s too late.
Missing a payment isn't just a late fee. It's a credit event. A single missed payment can stay on your credit report for seven years and affect your ability to rent an apartment, finance a car, or qualify for a mortgage.
Important Considerations
Explore low-interest loans first (typically federal student loans or credit unions). A lower interest rate loan may make repayment more manageable.
Before accepting a private loan, compare lenders, interest rates, and grace periods.
Borrow only what is needed for educational expenses in a given school year. Use refunds wisely.
Be aware of the average salary and job placement in your chosen field of study before entering repayment.
Consider making extra payments while you are still enrolled to reduce building interest on the loan.
Build an emergency fund to avoid unnecessary or high borrowing.