Skip to main content

What high schoolers need to know about how student loans work

Amy Fontinelle

Posted on January 17, 2023

Amy Fontinelle is a personal finance writer focusing on budgeting, credit cards, mortgages, real estate, investing, and other topics.
Very happy mother and daughter at a table, hugging and looking at some papers
Magnifying Glass Icon 
This article will...

Explain why it makes sense to limit student loan debt at graduation to less than your expected starting salary.

Describe how student loan debt can delay other financial milestones, like buying a house or starting a family. 

Put the importance of establishing smart borrowing habits into perspective. 

Much has been written about how college graduates can tackle their mountains of student loan debt. But what may be more effective is to warn and prevent high school students seeking a college education from taking on unaffordable school debt in the first place.

Defaulting on student loans can have serious consequences . The government can keep any tax refund owed to the borrower and require the borrower’s employer to withhold money from his or her paycheck and send it to the government to repay the loans. Default can also cause the entire loan balance to become immediately due and payable; increase the amount owed by adding late fees, collection fees, and court fees to the loan balance; and damage one’s credit score for years, making it difficult to borrow to buy a car or a house and to rent an apartment or get a credit card.

Here's what high schoolers need to know before they commit to any student loans so they do not one day find themselves in default and so they do not limit their future opportunities by crushing themselves with student loan debt.

How do student loans work? 

“Borrow as little as you need, not as much as you can,” Mark Kantrowitz, publisher of college and scholarship search website, has repeatedly advised students. He recommends limiting total student loan debt at graduation to less than what students expect their annual starting salary to be so they can afford to repay their loans in 10 years or less using 10 percent of their gross income. He uses gross income rather than net income because net income depends on where the borrower lives; state income taxes vary a lot.

Students who take on too much debt may be forced to turn to extended repayment or income-driven repayment plans to make the monthly payments manageable, Kantrowitz said. But by stretching out the loan term over 20 or even 30 years, graduates will still be paying off their own loans when their children enroll in college. They will also be spending a lot more on interest.

For example, $40,000 of student loan debt paid off at a 4 percent rate of interest over a 10-year period would require a monthly payment of $404.98 and total $48,597.68, Kantrowitz pointed out.

Extending that loan over 20 years would lower the monthly payment to $242.39, but bring the total up to $58,174.3 — almost $10,000 more in interest.

And 30 years? The monthly payment drops to $190.97, but the total rises to $68,746.51 — more than $20,000 in added interest.

Kantrowitz emphasized that compared with repaying the loan over 10 years, repaying the loan over 20 years more than doubles the total interest, and repaying the loan over 30 years more than triples the total interest.

“Income-driven repayment plans are intended to be safety nets, not a default choice,” he said.

What to know about student loans: Choosing the right type

Students can choose from many types of loans to pay for college, but some are considerably more costly than others. (Learn more: A college financial aid primer)

“The only loan that students should take out is a subsidized Stafford loan,” suggested college admissions consultant Scott White of Montclair, New Jersey. “This is interest free while the student is in college and about 4 percent after that. Nonsubsidized Stafford loans and private student loans, as well as parent PLUS loans, have interest rates way above market rate and cannot be discharged in bankruptcy.”

For parents who are considering borrowing to help their children pay for school, he recommends home equity loans or pension loans over the options mentioned above.

But Kristen Moon, an independent college counselor and the founder of, thinks the maximum students should borrow is the maximum offered by Stafford.

Just Because Someone Will Give You a Loan Does Not Mean You Should Take It

Moon said it is very easy to be approved for a student loan because the debt cannot be discharged in bankruptcy.

“In fact, if a parent cosigns for a loan and the student dies, the parent is still on the line for the debt,” she said in an interview. (Related: What happens to your student loans when you die?)

While there is an undue hardship exception that, in theory, makes it possible to discharge a student loan in bankruptcy, Moon said that in practice, it is nearly impossible to get student loans discharged.

And Kantrowitz pointed out in his student aid policy paper on excessive student loan debt at graduation that while colleges say that student loans make college more affordable, all they really do is delay the payment obligation; they do not reduce or eliminate it.

Do not let student loan debt limit your future

In his paper, Kantrowitz analyzed data from the 2012 Baccalaureate and Beyond Longitudinal Study and found that the consequences of graduating with excessive debt included delaying buying a home, delaying getting married, delaying having children, taking a job instead of pursuing additional education, taking a job outside one’s field of study, working more than desired, and working more than one job.

For high school seniors, it can be hard to imagine that any of these things might one day feel more important than attending the college of their dreams next year. But Kantrowitz found that even a year after college graduation, students who graduate with too much debt are more likely to feel that their education was not worth the money than students who graduate with a manageable amount of debt.

The world is full of opportunities at age 17 or 18. Why limit those opportunities for the next three decades? By keeping student loan debt at a minimum, graduates will still be able to travel the world, continue their education with an advanced degree, start a business, or pursue lower-paying but potentially life-changing opportunities such as volunteering with the Peace Corps or teaching. (Related: Is student debt worth it?)

White, the college counselor, explained how he breaks it down for his clients.

"So, you’re planning on being a teacher. You’ll earn, if you’re lucky, $50,000 in your first year. $20,000 will come out of your paycheck for taxes, pension dues, health care, etc., leaving you with $2,500 a month, maybe.”

He then explains that if his client borrows the $120,000 required by a particular school’s financial aid package, he or she will be making debt payments of more than $1,300 a month after graduation, leaving just $1,200 a month for everything else.

“Bottom line: you’ll be living in your parents’ basement for at least the next 10 years if you take out this amount of debt,” White said.

Student loan debt is the student’s responsibility

Dozens of plans for student loan debt reform have been proposed to the federal government in recent years in light of the increasingly burdensome amounts of debt students are graduating with and struggling to repay.

Most recently, the White House announced plans in 2022 for a new debt forgiveness program that would cancel $10,000 of federal student loan debt for borrowers earning less than $125,000 ($250,000 for married couples who file taxes jointly). Pell Grant recipients would be eligible for up to $20,000 in loan forgiveness. Under the proposed plan, borrowers can potentially qualify for the debt relief program based on their income in either tax year 2021 or 2020. But the future of the program remains unclear amid pending litigation. 

High school students making college plans should not assume that any of these plans will rescue them, nor should they blame the system and assume they have no choice but to take on massive debt in order to get a college degree.

“Young adults are drowning in student loan debt. The media constantly blames the universities for charging such an exorbitant price, but I blame the students and their parents,” Moon said. “The reality is that students need to attend a university they can afford, plain and simple. Parents need to educate their children on what it means to take on large amounts of debt and not bank on debt reform being the solution.”

Moon said that between federal aid, state aid, and reduced in-state tuition, it is feasible for all students to attend college with minimal student loans. The problem arises when the student decides to attend the private university that offers no aid and costs $65,000 a year instead of the less expensive state university. (Calculator: How much do I need to save for college?)

“Would you buy an expensive luxury car you could not afford?” Moon asked. “No, that would be crazy!”

Students must not insist on attending universities they cannot afford and parents must not support the idea that it is OK for their children to take on six-figure student loan debt, he said.

“One of the best life lessons that parents can teach their children is how to responsibly manage money,” Moon said. “Guiding a student to attend a college they can afford and be responsible when it comes to borrowing money is a valuable life lesson for the student — perhaps even more valuable than attending a prestigious, expensive university.”

Discover more from MassMutual….

On the hunt for the most generous colleges

College shopping: Big fish or big pond?

Need financial advice? Contact us

This article was originally published in November, 2016. It has been updated.


The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.