Overborrowing is a common regret among student loan recipients. Nearly half of undergrad student loan borrowers — 48% — say they could have borrowed less and still paid for college, according to a recent survey conducted by Harris Poll on behalf of NerdWallet.
And borrowing more than you need can be costly. Undergrad borrowers who felt they overborrowed for undergraduate study said they took, on average, $11,597 more than they needed. That’s the equivalent of overborrowing nearly $3,000 per year if you were to graduate in four years.
According to our analysis, overborrowing could add $119 to a typical monthly payment on federal student loans. Here’s how.
To determine how overborrowing affects monthly loan payments, we started with a total of $31,000, which is the maximum aggregate federal loan amount a dependent undergraduate student can borrow. (This figure is also right around the $30,100 average owed per borrower for the class of 2015, reported by The Institute for College Access and Success.)
We then subtracted $11,597 — the average that undergrad borrowers said they overborrowed in our survey — to get $19,403. We used that figure as a typical amount that could be needed for college costs, including tuition, room and board, and we compared the costs for a loan of that amount with the costs for borrowing the maximum.
For the purposes of this analysis, we assumed all debt was federal and that the APR was 4.29%, the federal interest rate for loans originated between July 1, 2015, and June 30, 2016, including fees.
In this sample case, the overborrower will pay $119 more per month than someone who takes only what is needed. Now let’s look at the cost of this over the typical 10-year life of a loan.
The true cost of overborrowing is clear when looking at interest accrued over the life of the loan. Overborrowers in this scenario pay $2,685 more in interest than those who borrow only what they need to pay for tuition, room and board.
Over the life of the loan, overborrowers in this scenario will pay $14,282 more than those who borrowed only what was needed. That includes repaying the extra $11,597 borrowed, plus $2,685 in interest. Now imagine how much a student could have set aside if he or she had instead paid that $119 a month into a retirement or savings plan and let it compound.
How to tackle overborrowing
Understanding the cost of college is the first step in determining how much to borrow. Colleges that offer federal student aid are required to have a net price calculator on their websites to help students determine total out-of-pocket costs, including student loans. Total costs include tuition as well as room and board, fees and books. Some students may additionally borrow to cover indirect costs, such as transportation, groceries, toiletries, medical or other personal supplies.
Whether you borrowed just enough to pay for your education or more than you needed, you have options for lowering your student loan payments. Consider one of four income-driven repayment options available for federal loans. With these plans you pay a monthly amount equal to a percentage commensurate with your income.
Or, if you meet income and credit qualifications, you may want to pursue student loan refinancing, which can lower your interest rate and your monthly payment. Refinancing may not be the best option for you if you only have federal loans, since you’ll lose income-driven repayment options, deferment and loan forgiveness programs. Weigh all repayment options carefully according to your own situation.
Read more about NerdWallet’s student loan borrowing survey.
Anna Helhoski is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @AnnaHelhoski. Victoria Simons is a data associate at NerdWallet. Email: email@example.com.
The survey on which this analysis is based was conducted online within the United States by Harris Poll on behalf of NerdWallet from Nov. 18 to 22, 2016, among 2,049 U.S. adults ages 18 and older, among whom 1,485 had pursued a degree beyond high school, among whom 522 borrowed money in student loans for their undergraduate education. For the purposes of the survey and this analysis, undergrad borrower is defined as Americans who pursued a degree beyond high school and borrowed money in student loans for undergraduate education. The online survey is not based on a probability sample, and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables, please contact Megan Katz. Email: firstname.lastname@example.org