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What Does The Eight Percent Rule Mean For Student Loans

Nov 28, 2007
The definition of the 8 percent rule for student loans is explained as the following statement. The maximum amount that any student can borrow is adjusted from time to time as federal policies change.

A study published in the winter 1996 edition of the Journal Of Student Financial Aid, "How Much Student Loan Debt Is Too Much?" explains this concept. It suggests that the monthly student debt payment should not exceed 8 percent of total monthly income after graduation

Some financial aid advisers have referred to this as "the 8 Percent Rule." Circumstances vary for individuals, so the 8 percent level is an indicator, not a rule set in stone. It's a financial aid to graduation.

The program was developed at Brigham Young University nearly ten years ago where it takes a need-based approach to asking questions to determine, where will my current action take me? Will I be able to afford this situation?

This process requires a student to evaluate their individual path to determine if it will lead them to a firm footing at graduation or owing more than they can afford. Here is how the 8 percent rule program works.

The program has a budget worksheet to help plan future income and expenses after graduation. It can determine: 1. How much interest would be capitalized on unsubsidized Stafford loans if you do not pay the interest while in school or during the grace period.

Next is, 2. How much your monthly payment amounts would be after adding in capitalized interest. And last 3. What percent of your income is taken up in student loan payments? Your results are presented on a graph, which represents the percent of student loans to projected earnings.

As our income increases, student loans represent a lower percentage. When the loan is paid off, the percent is zero. You choose the information to be placed on the graph to determine the end result. The following are your choices:

You choose your career from over 20 occupational categories in a dropdown box. Entry-level salaries are displayed with each career. You enter each loan you plan to borrow by academic year and grade level. The chart has loan limits to assist you.

You then need to estimate the dates you plan to begin college and graduate. You may change the interest rate, loan term and minimum monthly payments that are already entered. You can see how much you can save on interest if you shorten the loan term or raise the payments.

Obviously this is a guideline only. Yet it allows a student at any stage of their education to take stock on where they are.
About the Author
Court is an author and expert on private student loans and unsecured personal loans.
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