Survey Reveals Surprising Other Uses for Student Loan Money
Posted By Terri Williams on November 14, 2016 at 8:00 am
As the cost of higher ed becomes more expensive, student loans have become a necessity for many college students. But paying for school isn’t the only use for these loans. A recent Student Loan Hero survey reveals other uses for student loan money, and some of the uses are surprising.
Survey participants were asked, “In addition to tuition and educational costs, what are you using student loans to pay for (select all that apply).” The responses were as follows:
|41.30%||Other monthly bills (cell phone, etc.)|
|18.80%||Car payments, car insurance, etc.|
|14.90%||Clothing and accessories|
|2.50%||Alcohol and drugs|
Those numbers fly in the face of other research. One affordability study found, for example, that college is now so expensive that most full-time students can’t afford to work their way through school.
David Almonte, CPA, CGMA and a member of the AICPA’s National Financial Literacy Commission, tells GoodCall that the results aren’t all bad. “To start with an optimistic point of view, this means that 59% of respondents are using student loans for appropriate reasons, like paying for their college education – so that is good,” Almonte says.
Does fear of missing out fuel other uses for student loan money?
Almonte says that when he was in college, students used their loan money to pay other bills, but he warns that it was a bad practice then and it’s a bad practice now. “Many times, people think taking out a student loan is much like a credit card – free money,” Almonte says. “Although it may be true that in the short term there is a cash inflow without much thought to paying the money back, students have to remember that all this debt must be paid back, which isn’t free and includes the amount you took out plus interest.”
Taking out larger loans than needed for school expenses can cause problems later. Some students have accrued so much debt that they are living at home with their parents and postponing major life decisions like getting married and purchasing a house.
But there’s another factor to consider. Are some students diverting student loan funds because they’re struggling with their basic expenses? Student Loan Hero’s CEO Andrew Josuweit tells GoodCall that the answer to that question varies on a case-by-case basis. “Most students have the money they need to survive, but everyone chooses to allocate and budget on different items,” Josuweit says. “One student might value food, while another puts a premium on makeup, or even alcohol.”
While he believes most students know they will have to start paying back those student loans one day, Josuweit thinks that they don’t want to miss out on “the college experience.” His comments are consistent with a recent Sallie Mae study revealing that college students must learn how to handle their money
Josuweit believes that many students try to justify their actions by focusing on future income expectations. After graduation, they believe that they will land a job that pays well. However, a recent report reveals that job wages and job quality are declining for many college grads as they’re being forced to compete with experienced workers for jobs that don’t require a degree.
Other uses for student loan money: The danger zone
Age and inexperience are two factors frequently used to describe students applying for loans. Critics complain that many college students are not financially literate and may be too young to fully understand the implications of their actions. “It is important to note that student loan debt is one of the only debts that does not go away or cannot be forgiven in bankruptcy cases, whereas credit card debt and other debt can potentially be settled in bankruptcy court,” Almonte warns. However, he says that he is not suggesting that students acquire credit card debt instead.
The bad decisions that students make today by finding other uses for student loan money can haunt them for years. Jake Serfas, lead financial strategist with O’Dell, Winkfield, Roseman and Shipp, tells GoodCall that this is a financial blunder that can result in deep debt trouble. “Buying items with money they haven’t yet earned to pay for things they can’t afford can be costly.” Just like other bad habits that can become addictive over time, Serfas says spending money that they don’t have can become dangerous for students.
Jared Bryson, owner of The Bryson Group in McKinney, TX, provides an example to put this situation in perspective:
- The average student leaving college has $30,000 in loans at a 4% interest rate.
- The payment on a 10-year repayment schedule is $304/month.
- The total amount of interest paid over that time is $6,448.
However, Bryson warns that some borrowers could end up making payments for 25 years when they find other uses for student loan money. “That is a steep price to pay for clothing, cell phone service, food and other monthly expenses,” Bryson says. “Is it really worth paying 20+ years for that vehicle, new pants or night out?”
Some practical advice
The experts advise students to make a budget and to separate wants from needs when considering other uses for student loan money. “I would advise students – active and prospective – prior to taking on any form of debt, to create a budget and check out www.360finlit.org for great budget templates,” says Almonte.
And he brings up an interesting point. “While your car may be a need to get you to work, perform a cost benefit analysis to make sure that you are bringing in more money (income) vs. the dollars it costs you to get to work (expenses) – for those working part-time during college this may not be beneficial.”
Serfas suggests that students save money to purchase a car, clothes, or eat out rather than employ other uses of student loan money. “Leave student loan money alone,” Seraf says. “Only spend what you need and save the rest.”