When it comes to student loans, the studies are ominous: graduates have more debt than ever before, and the number keeps rising. As tuition costs continue to rise, it perhaps is not surprising that debt is rising along with it. But a recent survey revealed that students are using their loans for more than just their education, putting it towards everything from rent to car payments to restaurant meals. This trend is problematic, as it puts many students at risk of overwhelming debt when they graduate — and may increase their chances of defaulting on their student loans.
Closer Look at What Student Loans Are Spent On
Many parents may be surprised to know that their kids’ student loans are being spent in this way. But when student loans are disbursed, there is little to no oversight on how the money left over after tuition is paid is spent.
Students can freely spend their excess student loan money on clothes, alcohol, vacations, cell phone payments and more. Non-educational use of student loans is on the rise, with students in 2016 twice as likely to use their funds on something other than school expenses than those surveyed in 2015.
For some students, taking out extra student loans can be a way of keeping up with their fellow classmates whose parents may be funding not only their education but their living expenses as well. These students make take out loans over and above their needs so that they can wear the same clothes that their friends or wearing, or go out to bars and restaurants with their friends. They may also use the money to travel home to see their family — a trip that may otherwise be out of reach if their parents cannot help them — or to pay for basic living expenses like rent, food and utilities.
Even when student loans are readily available for amounts well beyond tuition, students should think twice about taking out too many loans. While it is sometimes necessary to use loans to pay for your daily living expenses, if you’re using your loans to live above your means, it could spell trouble in the future.
Racking up debt through student loans and credit cards can lead to significant challenges to future financial security. Once a student graduates, he or she will be required to start repaying their loans — whether or not they have a job. While deferment, forbearance and income-based repayment plans are still an option, they could increase the total amount owed — making it incredibly difficult to achieve their financial goals.
Student loan debt can cause grads to delay their life plans like buying a house, getting married and even having children. A high monthly payment can make it challenging to put aside money for savings or retirement — meaning that a few years of eating out and buying the latest clothes can have a lasting impact on your life.
How can students avoid taking on extra debt in college? The first step is to plan carefully. Research different colleges and universities, and see what their financial aid packages are. Choose a school based on a number of factors — including how much it will cost you to go there. Weigh this amount against your projected earnings, and decide if it makes financial sense to attend that particular school.
If you have your heart set on a school or are already enrolled, be smart about how you spend your money to minimize the amount of loans you need. Set a budget and stick to it, avoiding too many expensive nights out on the town, vacations that you cannot afford, and new clothes or the latest technology.
If possible, get a work study position or other job during the school year, and work every summer to save up for your living expenses during the year. The type of employment that you’re eligible for may not cover your costs in full, but it can help to reduce the total amount of loans you need — which will ease your financial stress in the future.
Once you have taken out loans, don’t ignore them just because you don’t have to pay them back yet. Learn as much as you can about your loans — ideally before you sign them — so that you have a good idea of how much you will be required to pay back when you graduate. Find out what the rates and terms are, and if there are any penalties for prepayment or options for alternative payments if you are struggling financially.
You don’t have to deprive yourself when you’re at school, but you should make smart choices. Being careful with your money and aware of your spending can make a huge difference in your freedom in coming years. When it comes down to it, most students would rather be financially independent shortly after graduation than to live it up in college. Avoid impulsive spending and short-sighted purchases, and think long-term. A little bit of planning and research can save you thousands of dollars and a huge financial headache down the road.
Author: Jeff Gitlen
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