can you actually run out of borrowing power?

<p>in a lot of threads i’ve been reading about how much debt is too much, people mention running out of borrowing power for student loans beyond undergrad (such as: med school). is this true? if you have high debt from undergrad, does it actually become impossible for someone to borrow enough money to get through med school? forget about the cost of the payments, etc, however ridiculous they may be… i just want to know if you can actually run out of money. and if so, some actual evidence would be very appreciated.</p>

<p>That’s not quite the point. While it might be harder, you’ll be able to get enough loan money to get you through med school just fine, unless you managed to build up an incredibly horrible credit history during undergrad somehow. The problem is, if you have 100k in debt from your bachelor’s degree, you cannot AFFORD to borrow yet more for med school. If you have to spend 20 years paying off your loans, you’ll be comfortably middle aged by the time you’re done. Nobody wants that.</p>

<p>They are talking about Stafford student loan limits/Grad Plus limits…yes, these are actual numerical ceilings on federal student loan debt. Borrowing above those limits will require you to have a credit history and employment or a credit worthy cosigner. You can find the current limits on the finaid.org site or at the federal student aid site.</p>

<p>There is an upper limit to how much federal student loans you can borrow. For graduate students, you can’t borrow more than $138,500 maximum aggregate upon graduation from your program. This is bumped up to about $200k for certain health programs for obvious reasons (expense of medical school). </p>

<p>The reason why this is important is because if you manage to tear through this limit, you might have to go through private loans in the future. These are troublesome because you have to get a cosigner since you probably don’t have a job (or a good one; your part-time at McDonald’s won’t get you $100,000, even from the dumbest, greediest banker on Wall Street).</p>

<p>i just want to know if you can actually run out of money.</p>

<p>Of course not. Don’t you see that there’s no such thing as qualifying for loans…banks will always loan you as much as you want…I think I’ll take out a mortgage to buy Bill Gates’ home…NOT.</p>

<p>Of course you can run out of borrowing power. As soon as you’re at the “Stafford Max” for the combination of undergrad + med school = $224k, or combination of undergrad + law/grad school = $138k, you’d have to find some bank who’s going to loan you more money when they already see that you have huge debt (and minimal or no income). What bank wants to sign up for that?</p>

<p>Not to mention that if someone does “use up” all available federal loan money that amount is now debt and when you go into the banks and private institutions that debt is part of your personal record and will be considered relative to income and assets to determine whether or not an additional loan will be given (for a home, for more education, for car purchases, etc.)</p>

<p>Some bank would probably be willing to give him a loan, considering how incredibly hard it is to ever have student loans discharged. But then again, I don’t want to imagine what kind of interest rate would be demanded for a loan to someone over 200k in debt and no current income.</p>

<p>^^^</p>

<p>There is a high school student here on CC whose parents are both doctors. When they ran out of their Stafford limits because they borrowed too much for undergrad, they took the private loan route (when it was actually easier to do so).</p>

<p>But guess what…here they are …many, many years later and they’re still deeply in debt, so much so that they can’t afford to pay for their child’s college. What? Two doctors can’t afford to pay for their child’s college? Yes, that happens when you’ve borrowed too much, then gone to private loans, and stretched out the payments to 20 or more years. </p>

<p>But let’s look at this for ONE person who stretches his payment out to 20 years… </p>

<p>Say you’ve borrowed $460K…$200k for undergrad and $260 for med school, and the avg percentage rate is about 9.8%, and you’ve had the loan changed to a 20 year term…</p>

<p>Loan Calculator</p>

<pre><code>Loan Balance: $460,000.00
Adjusted Loan Balance: $460,000.00
Loan Interest Rate: 9.80%
Loan Fees: 0.00%
Loan Term: 20 years
Minimum Payment: $0.00
</code></pre>

<p>**
Monthly Loan Payment: $4,378.32**
Number of Payments: 240</p>

<pre><code>Cumulative Payments: $1,050,795.62
Total Interest Paid: $590,795.62
</code></pre>

<p>Note: The monthly loan payment was calculated at 239 payments of $4,378.32 plus a final payment of $4,377.14.</p>

<p>It is estimated that you will need an annual salary of at least $525,398.40 to be able to afford to repay this loan.</p>

<p>Oh wow. I was thinking that you would just have to get really lucky and land a high paying surgeon job to afford to repay it. That’s just… damn.</p>

<p>Yeah, don’t think that your doctor’s salary will let you repay an indefinite amount of loan debt.</p>

<p>

</p>

<p>The corollary to that, of course, is to not let some pathological fear of borrowing money destroy the promise of your future happiness either!</p>

<p>Beduoin, no one here ever tells a student not to borrow a reasonable amount of money for their education. On the other hand, you seem to feel that any amount of debt is acceptable…no matter how large! I suggest you head over to Project on Student Debt and read the stories of actual people who have had their lives ruined when they over-borrowed. Then reflect on whether it might not be more responsible to encourage young people to borrow wisely and understand what debt level is appropriate for their individual circumstances. Kids who post that their parents will not or cannot provide a cent toward their college education are in a different category from those who are lucky enough to have significant support or family resources. Likewise, those who wish to pursue a low paying/low demand field should not be looking to bury themselves in the same debt as an aspiring engineer or pharmacist. It isn’t a “one size fits all” problem and no single solution, whether it’s not to borrow anything or okay to borrow $40K a year, is the right answer for everyone. Often there are many other factors and alternatives and the wise souls who post frequently on this board generally try to elicit that before giving their honest opinions on the appropriateness of debt for a particular situation.</p>

<p>Sk8rmom - excellent post. Bedouin, I think your heart is in the right place - encouraging young people to follow their dreams and all, but your optimism doesn’t match up with everyone’s reality. Nobody wants that dream to become an inescapable nightmare - and unfortunately, for the most vulnerable, that transition is easier than you might think.</p>

<p>Interesting story in NY Times earlier this year about an economically disadvantaged man who worked his way up from community college through law school. Took him 4 tries to pass the bar - appellate judge refused admission to bar on the basis that his debt (now over 400K due to fines/fees incurred while he was recovering from accident that nearly severed his leg) proved him too irresponsible to practice law. He is 47 years old and living with his mother at the time the article was published. I’m pretty sure this isn’t the dream life he had in mind.</p>

<p>mom2collegekids, </p>

<p>Most doctors can afford to pay off their loans! One of my closest relatives graduated college with no debt (lived at home and attended a top school on her parents very hard-earned savings) but her parents had no money saved for med school. Her dad, and sole wage earner, died months into her freshman year at one of the country’s top med schools. She paid for all of med school with loans because she had no other choice. She ended up doing two residencies and then two master’s. She paid off all her loans before she was done with her master’s and she’s in one of the lowest-paid specialties. Yes, she was single but she supported her mom and they lived frugally. (They rented, not owned, a house. They shared one car and bought it used. They shopped at discount stores.) But, yes, it can be done. </p>

<p>I don’t advocate needless loans but if my kid got into a top med school, I would encourage them to go ahead. The problem is that people raise their standard of living to unrealistic levels instead of paying down debt first. </p>

<p>For example, in the case you provided, you wrote that one would need a salary of over half a million dollars to make a monthly payment of under $4,400. Why? You need $4,400 <em>after</em> taxes so that’s probably about $8,500 before taxes ($102K/yr), plus living expenses. Depending on where you live, that could be anywhere from $60K-$80K so a person earning $200K could pay off that loan. </p>

<p>Now, I’m not advocating taking out almost half a million in loans. That’s insane. I think people should try to get through undergrad as debt-free as possible and try to clear any debt before beginning grad school/ professional school unless the grad school is free or being paid by an employer. However, I have real issues with the math that is being thrown around here.</p>

<p>I believe the math formula presented by mom2collegekids comes from the finaid website - which uses a 10% of income formula to calculated needed salary - obviously as income increases beyond the needed minimums this projected need is less realistic. You can live on 50K a year and repay 50K in loans - but would you want to? The math must be analyzed beyond the formula for a particular situation. </p>

<p>Even among the frugal, there are professionals out there still paying off their education loans and now looking at paying for their kids undergraduate education. I have friends in this situation. I have friends who teach at professional schools and know that some of their students will never be out of debt given their age/expected income/level of debt.</p>

<p>*mom2collegekids,</p>

<p>Most doctors can afford to pay off their loans!*</p>

<p>Of course they can. :slight_smile: I didn’t say that they couldn’t. Most med students don’t graduate with $400k+ in debt. :slight_smile: (Thankfully!!)</p>

<p>*you wrote that one would need a salary of over half a million dollars to make a monthly payment of under $4,400. Why? *</p>

<p>I didn’t come up with that number, the online FA calculator came up with it. I copied the printout of what was “spit out.” :)</p>

<p>I think it’s probably figuring that for people to comfortably pay off large loans for very long periods, they the amount to be a certain percent of income. When people have to dedicate too large of a percent of their income (especially over a period of time), it interferes with their ability to pay for their other living expenses, etc.</p>

<p>If a student borrows the Max Stafford for undergrad and med school, then this is what their scenario looks like… (I copy/pasted more so you can see more of an explanation. :slight_smile: )</p>

<p>Loan Calculator</p>

<pre><code>Loan Balance: $224,000.00
Adjusted Loan Balance: $224,000.00
Loan Interest Rate: 6.80%
Loan Fees: 0.00%
Loan Term: 10 years
Minimum Payment: $50.00
</code></pre>

<p>**
Monthly Loan Payment: $2,577.80**
Number of Payments: 120</p>

<pre><code>Cumulative Payments: $309,335.90
Total Interest Paid: $85,335.90
</code></pre>

<p>Note: The monthly loan payment was calculated at 119 payments of $2,577.80 plus a final payment of $2,577.70.</p>

<p>It is estimated that you will need an annual salary of at least $309,336.00 to be able to afford to repay this loan. This estimate assumes that 10% of your gross monthly income will be devoted to repaying your student loans. This corresponds to a debt-to-income ratio of 0.7. **If you use 15% of your gross monthly **income to repay the loan, **you will need an annual salary of only $206,224.00, but you may experience some financial difficulty.
**</p>

<p>*Why? You need $4,400 <em>after</em> taxes so that’s probably about $8,500 before taxes ($102K/yr), plus living expenses. Depending on where you live, that could be anywhere from $60K-$80K so a person earning $200K could pay off that loan. *</p>

<p>It sounds that simple doesn’t it. :)</p>

<p>In actuality, people have difficulties paying off big payments when those payments represent such a huge chuck of their take home pay - when it’s over a long period of time. </p>

<p>I think the thinking is that people are sometimes paying 30-50% on housing alone, so if 10% is dedicated for student loan repayment, that leaves a reasonable amount for all the other living expenses and all the “life emergencies” that will happen over a 10 year period. :)</p>

<p>wonderdoodle - I have known people very much in danger of running our of borrowing power for senior year of undergrad. If your financing each year depends on private loans to fill the gap and things go wrong you can find yourself looking for a financially able/willing relative to co-sign a loan to finish undergrad.</p>

<p>There are two issues here:</p>

<p>1) Who will provide you such large loans without collateral. If you are already $200,000 in debt, lenders are going to look at another $240,000 loan pretty hard. Not that people cannot get those loans, but in this climate, unless you have guarantors with resources, I imagine it is going to be very difficult. If you want to be a surgeon or a wall street lawyer, possibly, for others may not be.</p>

<p>2) Even if can make the payments, it can crimp your living style for 10 years. Let us say you want to buy a house. Lenders want home loan payments not to be more than 20 -25% of your salary and your total debt payments to be not more than 30-35% of your salary. Today, the ratios are at the lower side, 4 years back you could blow through these ratios and no one would care. Remember the total loan payments include house, car(s), student loans, other loans, credit cards etc. So if you have 15% of your salary going into pay for student loans, your ability to borrow for house, car etc. are severely limited as pointed out by mom2collegekids. In this economy, your interest rates will be very high if you are heavily indebted. So even though someone may give you a loan, paying high rates of interest for home loans etc. is not advisable.</p>

<p>"In actuality, people have difficulties paying off big payments when those payments represent such a huge chuck of their take home pay - when it’s over a long period of time. </p>

<p>I think the thinking is that people are sometimes paying 30-50% on housing alone, so if 10% is dedicated for student loan repayment, that leaves a reasonable amount for all the other living expenses and all the “life emergencies” that will happen over a 10 year period. "</p>

<p>Again, it’s a matter of priorities. I don’t advocate taking out loans for undergrad but I think some of the advice here is misplaced for med students. Yes, the loan amounts are horrendous-- but people <em>can</em> live frugally and pay it off. Like I said, my relative paid it off years ahead of schedule and while living in a townhouse-- not a hut and not a bad neighborhood-- and with a decent car (a Jeep) that was bought used. I would advise people of what the sacrifices are and they may not be for everyone (for example, someone who already has several children may not be in a position to go back to school) but grad school indebtedness is not the same as undergrad indebtedness.</p>