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Updated on Tuesday, March 15, 2016
The first two years I was in grad school, back in 2007-2008, I used to buy a panini in the food court every single weekday for lunch, for about $8. By late afternoon I was often hungry again, so I’d buy a snack and a coffee, for another $3, or maybe $6. I got a fancy bagel sandwich at the bagel place on campus at least once every weekend ($7), went out for freshly-scooped ice cream at the local dairy bar a couple times a week ($4 for a medium cone), and grabbed drinks on the weekends with my fellow grad students ($5 per beer). While I didn’t use a budget or track my purchases back then, I would estimate that I was spending $15-$20 per day, or $450-$600 per month, on food and drink purchases.
This type of spending may not sound extreme. However, it was far more than I could afford as a grad student on a teaching fellowship who was taking home no more than $800 a month after taxes. So how was I able to finance these paninis and coffees and beers?
Through my student loans.
Student loans are, of course, meant to fund your education. But education is a complex expense, and loan providers typically allow students to borrow money not just for tuition but also for living expenses while they’re in school.
This seems perfectly logical – after all, you have to pay rent and buy food while you’re a student. However, the term “living expenses” is extremely vague. It can be interpreted to mean “the bare minimum I need to survive,” or it can be interpreted to mean “everything I need in order to maintain my current lifestyle.” In short, it could mean just about anything.
Taking out loans for living expenses is not necessarily a bad thing. In my case, for example, it would have been extremely difficult to make ends meet on my take-home pay of around $800 a month, especially in an expensive college town where rents were unusually high. Borrowing some money to supplement my fellowship so I could buy groceries and put gas in my car made sense.
But eight years and two graduate degrees later, I’m still making payments on those loans, and I can’t help but acknowledge that I could have taken out far less. If I had understood what buying all those paninis and coffees and would have meant for my financial situation in the long term, I would have made sandwiches and coffee at home for a fraction of the cost. Single purchases may not seem to make much of a difference, but eight or thirteen or twenty dollars a day adds up over time.
If you are considering taking out loans for living expenses, it’s important to examine this decision carefully beforehand. Here are a few things you may want to consider.
1. Figure out how much you actually need to borrow
Loan providers will tell you the maximum amount that you may borrow for living expenses, but this does not mean you should automatically borrow that amount. Instead, try this:
Several months in advance of starting school, take stock of your current expenses. I recommend opening up a spreadsheet, keeping all of your receipts, and tracking your spending down to the exact penny for an entire month. Label each purchase with a category (e.g. “rent”, “groceries”, “eating out”, “clothes”, “entertainment”) and total up the categories at the end of the month.
Next, figure out how your expenses would change if you became a student. Would you need to move to a different city? If so, find out how much you would likely need to pay in rent. Would you need to buy books? How much would they cost?
Then decide what additional cuts in your spending you could realistically make. Could you limit your eating out budget to $20 a month? Could you stop eating out entirely? Could you commit to not buying any new clothes while you’re in school? If possible, practice living this new lifestyle for a few months before you’re in school, to make sure you can do it.
Finally, based on this information, determine the amount you actually need to take out in student loans, and take out only that amount – no more. Make sure you have an emergency fund built up before you start school in case unexpected expenses arise.
2. Decide: federal or private?
Based on the amount you calculated, look into the different types of loans that are available to you. Different types of loans may have different consequences down the road.
Loans can generally be divided into federal (government-funded) and private. There are a few advantages to taking out federal loans. To begin with, federal loans often have lower interest rates. That being said, the interest rates can vary, so be sure to find out what the interest rate is for someone in your situation. Additionally, federal loans offer various programs that may be able to help you if you are struggling with making payments in the future, such as income-driven repayment, deferment, and forbearance, as well as loan forgiveness. However, these programs may or may not apply to your particular situation, and so you should always assume that you will have to make substantial regular payments until the full amount is paid back.
Private loans are different from federal loans in several ways. To begin with, private lenders typically do not offer government-based programs like loan forgiveness or income-driven repayment. Private loans may also have variable interest rates, whereas federal loans have fixed rates that do not change over time. You should know whether your not you’re signing up for variable interest before signing the dotted line. It’s a better idea to go with fixed interest rates. Finally, private lenders might require your parents to co-sign for the loans, which could make them responsible for repayment in the event of your death (whereas federal loans disappear when the borrower dies).
3. Calculate how much you’ll eventually have to pay back
It’s also a good idea to spend some time playing around with an interest rate calculator to figure out how much a “living expense” will actually cost you in the long run when interest accrued over years of repayment is taken into account.
For example, let’s say I could have spent $250 on food in a given month but opted to eat out frequently and ended up spending an extra $350 in student loan money. If my interest rate is 5.84% (the current interest rate for new Federal Direct Unsubsidized Loans for grad students) and it takes me ten years to pay off my loans, then I’ll have to pay back a total of $463 for that original $350—that’s an extra $113. Or let’s say I decide to take a trip to New Orleans with some friends, and the trip costs me $750 of my student loan money. In that situation, I’ll eventually have to pay back $992 for the cost of the trip – or $242 extra. Think carefully: are those extra costs really worth it?
4. Remember that the future is unknown
When you’re a student, it can be incredibly easy to think, sure, I’m taking out some loans now, but they will pale in comparison to the income I’ll be making once I get this degree. And that may be true in some cases. But don’t count your chickens before they’re hatched: things might go as planned, but they also might not. You may not be able to find a job immediately upon graduation, or a job that pays as much as you expect. You may decide that you don’t like your field and want to try something new. Or you may have other expenses down the road that you didn’t expect. So with this in mind, don’t take out more loans for living expenses than you absolutely need to.
5. Remember that debt is debt
A lot of students, including me, heard the common saying that “education debt is good debt” and took it to heart. But while education debt may be preferable to credit card debt in some respects, it is still debt, and you still have to pay it back. When considering making a purchase using your student loans, it may be helpful to ask yourself, “Would I use a credit card to make this same purchase if I didn’t have the funds to pay it off right away?” If the answer is no, then you may want to reconsider the purchase.