It can be hard to know how much of the net college costs (e.g., the family contribution) should be paid from income and assets (or a short-term payment plan), and how much you should borrow through education loans to help pay the bill. Credible also offers a calculator tool to help estimate the costs of a student loan.
Clearly, you could always borrow the full amount using the PLUS loan or private student loans. But it is always better to minimize your debt, and pay as much as possible from current income along the way. Keep in mind that even if you can afford the loan’s monthly payments (assuming that the interest isn’t subsidized or capitalized and the repayment obligation isn’t deferred) for the first year’s loans, you need to preserve the ability to borrow more money during subsequent years.
If your uncommitted cash flow or available assets exceeds the college bills, you can avoid borrowing. But this is rarely the case. Plus, even if you can afford to pay the bill in full, you may want to borrow a little to preserve some funds for contingencies.
For most families, the amount borrowed will fall between these two extremes. A good rule of thumb is to borrow about 125% of the difference between your net college costs and the amount of income and savings you can devote to paying those costs, rounded up to the nearest $1,000.
For example, if college costs are $10,000 and you have only $6,000 available to pay those costs, this rule of thumb would suggest borrowing $5,000, leaving $1,000 to cover loan payments. (If you wanted to allow an extra buffer for contingencies, you’d subtract the contingency funds from the uncommitted cash flow before applying the rule of thumb.) Since the loan payments total $744 a year (at 8.5% interest on a ten-year loan), during the next year you’d have about $5,250 available to pay for college costs. You’d then borrow $6,000, leaving $1,250 available to cover the loan payments of $893 a year on the new loan.