With over a trillion dollars of student debt in the United States, there is not shortage of student loan nightmares.  Yet, each semester more students borrow more money.  In many cases, the money borrowed is essential, and it proves to be a good investment.  Unfortunately, many borrowers get student loans that end up being a huge mistake.  So how does a student know when the borrowing is a good idea and when is it a mistake?

Figuring it out…

While the borrowing analysis may seem complicated, it is actually fairly simple.  It just comes down to answering a few questions and doing some math.

Step One: Figure out what you already owe.  This goes beyond merely looking at your total loan balance.  The important number is to know what your monthly payments will be.  Federal loans have a ton of flexibility here because they can be based upon your income.  That means the debt will never be so high you cannot afford the monthly bill.  Private loans are where you need to be very careful.  Call your lender and ask what your monthly payments will be.  Be sure to factor in the fact that you are still in school and the balance is still growing.  Each month there is more interest to be added to the balance.

Step Two: Panic, but just a little.  This is the moment you realize how much you will be paying for what seems like the rest of your life.  Student debt is ugly that way.  A little bit of panic is a good thing because it ensures you will be careful with your borrowing.

Step Three: Look at what the future holds.  If you have a crystal ball, now is the time to consult it.  Otherwise, you will have to do a little research into what your job prospects look like after school.  How many students find jobs?  What are the range of possible salaries?  What does your life look like if you can find a job?

Step Four: Can you handle any more debt?  Now is the time to look at all the pieces of the puzzle.  Do you want kids?  Is a mortgage in your future?  What about marriage?  These milestones cost money and student debt can get in the way.  How does the new debt you are considering affect your goals for the future?

Don’t Forget Sunk Cost

In economics, we have the concept of sunk cost.  This is money already spent that you cannot get back.  Treat your existing student debt this way.  You cannot unspent the money you already spent.

With this in mind, your analysis should always consider how far along you are on your way to a degree.  If you realize you have borrowed way too much, it sucks, but don’t let your previous bad decisions force you into another mistake.  If you are just one semester away from graduating, now might not be the time to cut your loses.

Bottom Line

Borrowing student loans should not be a decision that is taken lightly.  Before you make the decision, careful analysis of what you have already spent combined with an analysis of what you will be able to pay is essential.