Non-Educational Spending of Student Loan Funds Increasing
People have become increasingly aware that student loans have begun to reach a crisis point for many Americans. The amount of money borrowed is rising while the ability of students to repay loans has been decreasing over time. Now comes word that some students are using loans for non-educational spending.
Experts now recommend considering the return on investment before taking on student loans. For many students, combining scholarships and grants with federally backed and private student loans is a wise choice to help alleviate the initial amount needing to be borrowed. The greater the amount, the more difficult it is for students to achieve a good return on their educational investment.
A new infographic created by Student Loan Hero has been generating interest in the ways in which college students spend their student loan money. The data suggests students are more than two times as likely to use their loan money on non-educational spending as students from the class of 2016.
How student aid is supposed to be spent
The Federal Student Aid Handbook discusses what federal student aid money can be spent on. The requirements are similar for private student loans. Expenses for full-time students include the following:
- Tuition and fees
- Books and supplies
- Miscellaneous personal expenses
- Room and board
- Dependent care for students with dependents
- Professional certification or licensure
- Study-abroad programs
- Disability expenses for students with a disability
- Costs associated with employment for students in a work program
The problem: Miscellaneous personal expenses are not clearly defined and can be construed as covering a broad range of expenses. Students are not required to itemize their expenses or report them to the lending authority.
Certified financial planner James Matthews explains one of the driving factors behind increased non-educational spending: “Student loan funds are readily available and easy to obtain and there are seemingly few obstacles that discourage this type of behavior.”
He further explains students are given the money with very little guidance about how it should be handled. Students typically have little to no personal experience with money management and do not understand the concepts of deferred interest. They perceive the money to be free in the moment and are not conscious of how they will eventually pay far more when interest is added over the life of the loan.
Some of the miscellaneous personal expenses students reported spending their loan money on as part of the Student Loan Hero survey included the following:
- Monthly bills other than education related (cellphones, etc.)
- Car payments, insurance
- Clothing and accessories
- Alcohol and drugs
Long-term consequences of non-educational spending
One of the reasons students have a difficult time grasping the potential consequences of their non-educational spending is the complexity of student loans. There are private loans and federal loans as well as grants and scholarships. Some students are paying for their education with a combination of financial aid, which makes the process even more confusing.
David Levy, editor for Edvisors, made the long-term consequences apparent by saying: “Before using student loan money to buy anything, students should ask whether the purchase would be worthwhile at twice the price. Every dollar of spending with student loan money will cost about two dollars by the time the debt is repaid.”
This means a single $10 pizza per week habit over the course of a four-year degree would cost about $2,000. By the time the loan is repaid, the cost can be as much as $4,000 because of interest. The amount could be even higher for students who get behind in making their student loan payments for an extended period or who make income based payments over a longer period.
Part of the reason the occasional pizza as well as educational expenses end up costing more is the unrealistic student loan repayment timetable. Most loans have a term of 10 years with extensions possible for a variety of reasons.
A survey by the One Wisconsin Institute found the average amount of time needed to repay a loan for a bachelor’s degree was about 21 years. Those who had loans to pay for an advanced degree required even more time. Taking longer to repay the loan means more interest will be charged over the life of the loan.
Limit non-education spending
One of the best ways to limit non-educational spending is to make a budget and faithfully itemize all expenses. This can easily be done with free financial tracking apps or websites such as Mint.com. Budgeting and tracking make it easy to spot where money is being spent unwisely and allows students to self-correct their behavior.
Many students believe they should spend the money since it is there, but this is a flawed belief. Experts recommend not treating a student loan limit as a target to be reached. While it is possible to use all available funds, doing so will result in higher loan payments and a greater amount of interest paid over the life of the loan. It will reduce the amount of money students have available to invest in real estate and retirement and may force them to delay starting a family.
Student loan costs have been steadily increasing over the past several decades and students must carefully consider how much debt is too much. Taking the time to do this may make it easier for students to limit the total amount they spend on items that do not further their educational goals.