It’s merely weeks until college football season begins! While we may be more than excited for tailgating to begin, the back-to-school season reminds us of the many students who are borrowing money for the first time to pay for school. Student loans are often one of the first major financial commitments that young adults make. We believe it is extremely important to develop an understanding of how to manage personal finances, establish financial goals, and plan to borrow responsibly.
Around 85% of four-year college students receive some form of financial aid with 34% of them taking loans to pay for their education. However, nearly half of those borrowers also felt they could have borrowed less and still paid for college. A Harris Poll conducted on behalf of NerdWallet showed undergrads borrowed, on average, $11,597 more than they needed.
Unfortunately, the trend seems to be that students are overborrowing to cover lifestyle costs beyond tuition and education expenses. In a separate survey from Student Loan Hero, 41.3% of respondents said they spent their student loan money on monthly bills; 14.9% used funds for clothing, and 12.8% used the money for restaurants and eating out. The good news is that only 2.5% reported spending their loan funds on drugs and alcohol.
Because student loans are generally taken out by financially inexperienced young adults, many do not realize the damage that has been done until too late. Young adults will often opt for the coolest apartments with the finest facilities to try to keep up appearances. The practice of “keeping up with the Joneses” starts young. Furthermore, that pizza and beer paid for with education loans can put a strain on your repayment plan. NerdWallet estimates that overborrowing costs students $14,282 over the life of the loan, typically 10 years, or approximately an extra $119 a month.
All this said, borrowing for education is still a good deal. Parents who must choose between their own retirement savings and college savings for their children should always choose to save for their own retirement. There are no loans for retirement. The key is to temper the ease and availability of education loans with borrowing responsibly. Both students and parents should look at the student’s career prospects. Sometimes a larger amount of debt is reasonable if you can make a return on that investment. You need to consider if upon graduation you’ll earn a high enough income to pay off a larger-than-average student loan balance relatively quickly.
The question still remains, “How much is too much to borrow?” The cumulative loan limits for dependent undergraduate students is $31,000 while independent undergraduate students can borrow up to $57,500. Ideally, a student should borrow less than his or her anticipated annual starting salary. Much like a home mortgage, just because you’re approved to borrow a large amount, it doesn’t mean you should.
If you have questions regarding your budget for college including savings and student loans, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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