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When deciding how much money to borrow for college, evaluate your expenses and then figure out to reduce them. The first step is to set up a budget that maps out your expenses. It's a good idea to invest in financial software (such as Quicken or Microsoft Money) or to manually track your expenditures for a couple of months so that you can get to know your spending habits. After you map out a budget, look for areas to reduce expenses.

Another way to lower the amount you have to borrow is to take advantage of private scholarships and awards. Some of these are given based on your grades or community participation; some are given to members of churches, ethnic groups, or organizations.

You can also take a part-time job to help meet some of your expenses. You can find a job either on your own or, if you qualify, through the Federal Work-Study Program. In this financial aid program, government funds pay for a portion of your salary. Some colleges also offer cooperative work programs in which, as a student, you attend classes and work full-time in alternate terms.

And, of course, you should re-evaluate how much you and your family can contribute toward your college education. If your parents can give you a little more (or borrow themselves), you'll have to borrow less.

How will you repay loans?

After you reduce the amount you have to borrow, the next thing to do is to determine your ability to repay your loans. If you borrow more than you can repay, it could mean trouble later on — when you need more money either for graduate school, a car, or a house — so you should determine your appropriate level of debt. Without knowing how much you'll earn after graduation, you can have difficulty determining how you'll repay a loan. However, there are guidelines and estimates you can use, such as the debt-to-income ratio, which can determine if the amount you owe will cause you financial hardship.

Before lending money, most private lenders calculate the borrower's debt-to-income ratio, which is the percentage of an applicant's monthly income that will have to go toward paying off the loan. If the ratio is too high, bankers know from experience that the borrower will have a tough time meeting expenses and therefore may not be able to repay the loan. By estimating the debt-to-income ratio you will have after you graduate, you can determine how much debt will be appropriate for you.

One unknown factor when calculating your debt-to-income ratio is your monthly gross income after graduation. For an estimate, you can search for a list of starting salaries for recent graduates of college and graduate/professional programs. Once you know your debt-to-income ratio, you can use the same guidelines that lenders use to judge if a borrower is able to repay a loan.

Using lender guidelines

Lenders often require that a borrower's total monthly payments for housing needs (mortgage, home equity loans, and/or rent) be no more than 28 percent of her anticipated gross monthly income. Gross monthly income includes all income received, including wages, interest on savings accounts, stock dividends, and any financial aid you or your spouse would receive if you continued your education. As an example, if your estimated future annual salary is $30,000 (your gross monthly salary is therefore $2,500), no more than $700 should go toward your housing each month.

Lenders also recommend that the total payments for all loans, including student loans, credit card payments, and other installment loans, should not exceed another 10 percent of your gross monthly income. Continuing the example in which the gross monthly income is $2,500, no more than $250 per month should go toward paying your loans and credit card balances. That amount ($250 per month) is about the amount you would have to pay per month if you borrowed $20,000 at 8.25 percent annual interest with 10 years to pay it off.

Your credit history

Another critical factor in determining whether a financial institution will lend you money is whether it thinks you intend to repay the loan. To make that decision, a lender will check to see if you have a history of repaying or not repaying moneys owed. If you have repaid any loans in the past or are current with outstanding debts, a lender can make a reasonable determination that you will repay this loan. If you have no credit history, federal programs will permit you to borrow, but many private programs may not, unless you can find someone with a credit history who will cosign for the loan and be responsible if you don't pay.

If you have been delinquent repaying any debts, many private lenders will balk at lending you more money. Furthermore, if you are in default of a federal loan, you will not be eligible for any federal aid. In preparing to pay for college, you and your family should be certain to maintain a good credit history.