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PFCollege: Use Student Loans for School Only!

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Personal Finance for College Students Series SealStudent loans come in all colors, flavors and sizes but they mean one thing for a ‘poor’ college kid – easy money. I was lucky enough to get out of college with only $25,000 or so in student loan debt but all of the $25k went towards tuition. I actually didn’t even have the opportunity to test my will power because the proceeds from the loan were directly deposited into my account at the university, so I can’t take credit for not spending it on a nice flat screen television or a new computer. That being said, it’s critically important that you not spend your student loan check on anything other than student related expenses. In fact, if you are getting more money than you need, return it.

Some would argue that the generally favorable terms of a student loan represents easy access to funding that you could use to invest in the stock market or in a business idea. Some would say that you should take it and enjoy your college years, you have the rest of your life to be responsible. I say: resist the urge, return the money. This all goes back to the idea of keeping the financial hole you’re in as shallow as possible while you don’t have any appreciable income. When you graduate, you will be entering the work force and the debt you’ve acquired in college will only hold you back.

After the grace period of the loan expires, if a grace period exists, you’ll have to start making monthly payments on the debt. Those payments are going to be a drain on your financial situation because if you have any significant amount of debt, you’ll be paying it off for a very long time (at minimum amounts). If you’ve taken on the debt in order to get a degree, then it’s wholeheartedly worth it. If you took it on to “enjoy yourself” then you’ll be kicking yourself once you have more responsibility.

This article is part of a new series I’ve started called Personal Finance for College Students (hence, PF College).

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12 Responses to “PFCollege: Use Student Loans for School Only!”

  1. I agree in theory – even if I didn’t follow the guidelines. Good chunk of my student loans went to pay for my wife’s car and some investing. I’ve got $50k in student loans but its locked in at 2.82% plus i get another .25% taken off for electronic payments, plus another .25% after I make payments for a year. I have it stretched out over 25-30 years for repayment and even though i have been out of school for two years now they still think I am in school and I am still getting the grace period…so the loans that are subsidized the govt is still paying the interest on. Plus when I do pay on it the interest is tax deductable. :-)

    I agree though student loans rates are nowhere near the rates I was able to lock in at and while its better than CC – wasting the money on something like a car or flat screen tv is not a smart use of the money. It’s amazing how easy they make it for you take more though.

  2. Tom says:

    This is an issue that I’ve been considering lately. I’m a current student and my financial aid package is starting to exceed my needs. I thought that the smart thing was to pay off the loans (especially since some are unsubsidized and are already accruing interest). However lately I’ve been thinking about having money after graduation. I’m paranoid about building equity. I want to buy a cheap house the minute I have the work history necessary for a mortgage. Also I’m starting to think my 12 year old car won’t last forever. I’m thinking about putting the extra money I’m borrowing into a CD (at a net loss) where I can’t touch it. I did some estimates and deduced that the extra interest I have to pay may be offset by being able to start building equity sooner. I’ve come to the conclusion that I should just try to earn as much interest on the money as possible; then when I have a job I can create a budget and decide what to do with the money, and how fast to pay off the loans. What do you think?

  3. Rich Slick says:

    LOL! I’ve been considering going back to school JUST to get student loan money -it’s so cheap and you get to write off the interest on your taxes (if you qualify). While I agree you shouldn’t spend that money on big screen TV there are ALWAYS very good uses for cheap money. I have old loans locked in at 3% and it has been one of the best money decisions. Payments are like $50 on 15k at 3% interest! Most of that money is earning at least 5% now.

  4. jim says:

    What’s interesting is that while I wrote the article for your “average” college student, who doesn’t really care about finances and isn’t a “long term strategic thinker,” I think the average regular personal finance blog reader would do themselves harm by taking the advice because it’s a self-selecting group that cares about personal finance.

    I think if you have the discipline to take the cheap source of funding and put it towards something that isn’t frivolous (down payment on a house) then I’m all for it. I just think that the average student doesn’t have that level of fiscal discipline and would be better off returning it.

  5. Larry Kasoff says:

    But what you forget is that a borrower must certify — at least on public student loans and most private loans — that a student loan is for educational purposes. Although education purposes can include things like room (including mortgage payments if you are living in a home you own) and a new computer, it doesn’t a flat screen television, a business idea, money for investing (unless it is for money needed later in the semester), or even outrageosly IMHO state licensing and examination fees that you need to pay to actually benefit my your education.

    If you falsely certify the loan is for educational purposes when it isn’t, you could be required to pay back the loan at a much higher interest rate or worse go to jail for commiting fraud — remember the government may be paying the interest while you are in school.

  6. saving money says:

    Just wanted to say that I’m enjoying this personal finance for college students series. Definitely something that is needed.

  7. Jim I agree with your comments, just like the average person shouldn’t try the balance transfer game.

  8. September Education Finances Roundup

    This is my highly subjective recounting of the best posts dealing with student loans and other educational finance issues that I’ve read in the past month.

  9. Anonymous says:

    I’m interested in a student loan.

  10. franca says:

    pls, this term paper IDENTIFY AND DICUSS FINANCIAL DOCUMENT USED IN SCHOOL

  11. brenda says:

    I know of a 50 year old women who is getting student loans because of the push from Obama. I was told that she spent all of it on crack. She has also done it in the past and expects to get more money soon. What do I do to report this to someone and who do I report it to?

  12. sggraham says:

    I’m really needing to get an education that will enable me to make ends meet in todays society and in order to that I have to get another source of transportation, so I’m thinking of using some of my loan to obtain a used vehicle and insurance for it. I’m wondering if this is a good idea considering my credit is trashed and I can’t get a loan through the bank.
    What do you think?


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