Borrowing Too Much For College

(MoneyWatch)  When I give examples of mediocre financial aid packages, I tend to use New York University as Exhibit A.

NYU belongs to a small cadre of elite schools that possess endowments of more than $1 billion, but the university's average financial aid package is underwhelming. By the school's own admission, NYU graduates leave with an average debt of more than $33,600, which is 60% greater than the typical college student. And that doesn't include the parents' debt.

NYU was recently meeting about 72% of a student's financial need, but a good chunk of that assistance is simply loans. In comparison, schools like Columbia and Princeton meet 100% of need and they only award grants, which don't have to be repaid.

Despite the skimpy aid packages and its current price tag of $54,00, NYU is a wildly popular dream school for many smart high schoolers. Frankly, I think this reality illustrates that familiies, which need considerable financial help, aren't doing their due diligence when evaluating whether a school is an academic and financial match. If students are bright enough to get into NYU, they would do themselves a favor by also applying to schools with more generous financial aid policies.

To it's credit, NYU recently began warning some prospective students that the institution might be too pricey for them. According to The Chronicle of Higher Education, NYU called the families of 1,822 admitted students in April and suggested that they might want to do some soul searching about whether the price, even after any financial aid, was beyond their means.

How much debt is excessive? A good rule of thumb is that student loans shouldn't exceed more than 15% of a borrower's income. Here's another realistic yardstick: Student shouldn't borrow more than what they expect to earn in the first year after graduating from college.