college education

First Student Loan? Use This Money Wisely

August 6, 2018 By Tamila McDonald Leave a Comment

student loan uses

Currently, there are approximately 20 million students enrolled at colleges in the US. And, when they graduate, around 70 percent of them will owe money on at least one student loan. In fact, the average student loan debt owed by a single graduate is over $37,000, based on statistics from 2016.

Most students view student loans as a necessary evil. Without the funds, they can’t afford college, leaving them with little recourse.

However, many students, especially incoming freshman, struggle to use the money wisely. But failing to act responsibly can come with significant consequences, ranging from failing to cover school expenses to increasing debt loads. Since approved student loan uses can vary depending on the kind of loan, knowing the right approach to managing this money is a must.

If you have your first student loan and aren’t sure how to handle the money wisely, here are some tips.

Educational Expenses

The primary purpose of student loans is to cover educational expenses. Federal student loans have strict requirements regarding how you can spend the money. Typically, funds from federal student loans are sent to the school first. This ensures the college receives payment for your primary expenses, including:

Tuition
Room and Board
Fees

After meeting these expenses, you can get a student loan refund from the school. Usually, this is a check that you can deposit in your bank account. Then, you can use the money for other qualifying costs, including:

Books
Supplies
Equipment
Personal Computers
Dependent Child Care
Transportation (Not Including a New Car)

By design, the federal student loan program almost forces you to use the money wisely. You cannot spend the funds on anything that does not qualify. If you receive an amount that exceeds your need, then an adjustment to your student loan may occur, or you have to use the excess to make a payment on your student loan.

Private student loans are different. They aren’t always as restrictive in regards to student loan uses the bank views as appropriate. However, the exact terms vary by lender. You’ll need to read your loan documents to find out how you can use the money.

Additionally, the funds might not go to the school first, though they usually do. In cases where the money doesn’t go to the school, it is sent directly to you. After receiving the cash, you are fully responsible for paying your educational expenses.

While you aren’t under the same restrictions, it’s smart to use the federal student loan guidelines to help you spend the money in the right places. You always want to cover your educational costs first, beginning with your primary expenses and then your other qualifying costs.

After covering those, you do end up with some choices.

Additional Student Loan Uses

Once you handle your educational expenses and school-related costs, you have some decisions to make. However, if you want to use the money wisely, certain options are better than others.

For example, you can send the excess money back to the lender to pay down your student loans. This can help you lower your balance and avoid some interest, ensuring your debt remains as small as possible.

If you have a federal student loan and have an entire disbursement you don’t need, the easiest thing to do is cancel that loan. You have 120 days after the disbursement to handle the process but may need to work with your school’s financial aid office to handle it properly.

For private loans, you just send the money back as a payment. Usually, you can handle this online through your loan account portal.

What About Fun Money?

When you have student loan money that doesn’t have to be spent on educational expenses, it can be tempting to spend it anyway. The idea of a dinner out or a nice vacation during spring break may be enticing, or getting a new wardrobe may leave you invigorated.

The thought of spending the money usually relates to having a little fun, something that can be important in college. After all, earning a degree can be hard, so it’s easy to assume the mindset that you deserve a reward.

But, it’s important to remember that those examples above aren’t smart ways to spend your money.

Student loans are debt. This means you will pay interest on the amount you borrow. Furthermore, the size of your loans impact your creditworthiness, and large debts make it harder to finance other things you may want in the future, like a house or a car.

Plus, the higher your debt, the higher your payment. For example, if you borrow the average amount of $37,000 with a 6 percent interest rate, on a 10-year repayment plan, you’ll be paying around $411 per month. Over the life of the loan, that comes out to approximately $49,300, $12,300 of that being interest.

However, if you don’t use $4,000 of that money (just $1,000 per year) and send it back to your lender immediately, you’ll owe $33,000. The monthly payment then is about $366. You’ll pay a total of just under $44,000 (about $11,000 in interest), resulting in a pure interest savings of $1,300, not including the $4,000 in principal you don’t have to repay.

If you double the amount you send back, making it $8,000, you’ll get a bigger benefit. Then, you’ll borrow $29,000 and have a $322 monthly payment. You’ll repay around $38,600 over 10 years, with $9,600 being interest. That creates a total interest savings, in comparison to the first scenario, to $2,700. When you add in the principal you don’t have to worry about, you avoid $10,700 in student loan debt payments.

There are numerous repayment programs out there and there are even times your loans can be discharged, but don’t use this information to make poor choices, use it to gain more knowledge of paying loans back when the time comes.

Ultimately, limiting your student loan debt is always a smart move. It helps your creditworthiness, lowers your payments, lets you avoid some interest, and can even provide peace of mind.

If you want to be wise with your student loans, only use the money for important educational expenses. Then, if you have any left over, send it back to the lender. Your future self will appreciate your smart thinking and your wallet will too.

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

Save Money: It Doesn’t Matter Where You Go To College

November 29, 2012 By Guest Writer 2 Comments

By Mitchell Pauly

The notion that going to a “good” college is a ticket to a brighter future should be taken on a case by case basis, but this isn’t what American society would have you believe. I want you to think about this example, which is all too common: an extremely high academically performing high school senior goes to talk to a guidance counselor, who promptly trumpets that the Ivy League is the only place for her. Her history suggests nothing less than extraordinary achievement; will not going to an Ivy League school change this trend? The question is not if she will fail by not going to an Ivy League, but whether her trend of success will come to an end. Probably not, but if she listens to the counselor (who is flattering her, so it’s probable she will want to eat what she is being fed) she will come to believe meeting her potential hinges on attending an Ivy League. The disservice here is that the high school counselor based her opinions on two forms of selection bias: non-marginal comparisons and conclusions drawn from data that is unrelated.

Marginal Comparisons

Marginal comparisons allow us to compare things apples to apples, not apples to steak tips. In the case of our talented student, the counselor failed to make a marginal comparison because she framed the Ivy League question in an all or nothing manner. That is, in framing her opinion to our student she compared getting an Ivy League education to getting no higher education at all. What would our student do if she chose not to attend an Ivy League? In the counselors world she would be hooking on the street, but in reality she would probably attend a non-Ivy league college. So by not comparing an Ivy League education to that of a non-Ivy League education, the counselor failed to make a marginal comparison. This is probably the largest error people make throughout the college process, and not just in regards to the Ivy League. When I was applying to college I was convinced that if I didn’t attend a brand-name school I would end up sharing a van down by the river with Matt Foley.

Selection Bias

Selection bias, for those unacquainted with statistics, is an inherent error or lack of focus in the data used for a statistical analysis, thus calling into question the conclusions drawn from the analysis. Selection bias is common because it’s in many cases hard to avoid completely. This in and of itself is not the problem, it’s more of a fact of statistics; it’s when faulty conclusions start being championed as absolute fact that selection bias becomes a real issue.

For example, a study composed only of white teenaged girls will not be a statistically valid study on the popularity of Jack Johnson. Since the data that is widely available and published on higher education is rife with selection bias, we cannot completely blame the high school counselor for framing his Ivy League opinion in the way he did. To see this more clearly, let’s think for a moment about the typical information available for colleges, in publication like the U.S News and World Report College Rankings:

Acceptance Rate: This tells you the percent of students accepted out of the application pool. The bias within this is that this measure doesn’t really tell you anything about the quality of education at this institution, but rather shows more about how popular the school is in the application process. One might be tempted to draw the conclusion that this shows how competitive it is to be accepted into a school, but this too is a stretch. I could get every crack addict in New York to apply to Quincy College, they would all be rejected, and suddenly Quincy College will seem a more selective institution.

SAT/ACT Scores: This chunk of data tells you a lot about the abilities of its students, and not very much about the quality of education at the college. The fact that this is used in a weighted measure that ranks colleges against one another blows my mind. I guess the implication is that students who attain higher SAT/ACT scores can handle more intense classes, which is probably true, but this tells you nothing about whether there are in fact intense classes to be found, and if there are if prospective students will be able to take them.

Percentage of Faculty Who are Full Time: This is a metric meant to infer how much attention a professor will pay to their students, in that the full-time professor devotes more attention to their students. This metric is as easy to manipulate as a gullible third-grader. A school can simply hire a lot of full-time professors, put them to work on managing their departments, gaining notoriety within their area of expertise through speaking engagements and paper publishing, and have grad school students teach as many classes as possible. This is why the students of the universities that rank highest in this metric still report feelings of neglect towards their professors.

I could go on, but the purpose of this article is not to point out the inherent stupidity and meaningless nature of the U.S News and World Report College Rankings. I am making a larger point: since rankings such as these are the basis of much of society’s college related opinions, and the data is rife with selection bias, then the majority of the opinions we hear are as useful as Paris Hilton on trivia night.

Alan Krueger’s Bias Free Study

One study on college that did manage to completely eliminate selection bias from the equation was the one conducted by Alan Krueger, a Princeton economics professor. To control for the selection bias present in the varying academic abilities between students at prestigious institutions and their lesser counterparts, he looked at high performing students that were accepted into both highly exclusive schools and ones less so. Some went to the Harvard’s of the world while others attended state schools or the middle of the pack private schools. The results showed that regardless of the student’s choice, they all tended to earn about the same salary twenty years into their careers. If that doesn’t blow up the U.S News and World Report College Rankings I don’t know what does.

The college admission process is stressful enough to begin with without adding to the mix meaningless, biased data and opinions. From the lack of marginal comparisons by those we trust most to guide us through the process to the application of unrelated data to conclusions society bases its opinions on, the deck can at times feel stacked against us. Not so. Tune out the cacophony of biased opinions, the “rankings”, and other drivel and focus on history: if you have a track record of success, you will likely continue to have one. With that in mind, please, ignore your high school guidance counselor.

Mitchell Pauly writes funny and informative personal finance articles at Snark Finance. You can also join his Facbook Page or follow him on twitter at @Snarkfinance

(Photo courtesy of j.o.h.n. walker)

Why Parents Shouldn’t Pay Entirely For College

April 29, 2009 By David G. Mitchell 21 Comments

One of the most enduring images that I recall from college was a video clip of an obviously drunk student at a football game and holding up a sign which read, “I don’t care. Daddy’s paying.” At the time, although my parents had paid for my tuition, I was working about 20 hours per work to cover my costs of school attendance – roughly $15,000 per year, as compared to the approximately $8,000 per year that my parents paid for my tuition.

I worked hard to pay for my car (a used car), car insurance, gasoline, food, clothing, books, entertainment – everything that I wanted or needed that was not included in the price of tuition. I also worked hard to do well in school. For four years, it was a lot of work, but I never once felt that my parents should be paying more. Indeed, I always regretted that I could not pay my own way to college, and found it much more satisfying when I did pay all of my costs in graduate school – including rent and the $15,000 per year in tuition.

But back to the “Daddy’s paying” sign. Did the parents of the young woman who held up that sign really do her any favors by paying for her four year’s of binge drinking? I think not. So many people I have known have failed to invest sufficient effort in their college educations because they have not had a stake in it. You probably also know people who have felt that they could have achieved so much more in life if they had just tried harder in college – partied less, and studied more.

At some point, parents need to force their kids to stand on their own two feet. Of course, the process needs to happen gradually. I have known young adults who have been required to cover all of their costs through college, others who have covered some costs, and still others who have received a free ride courtesy of the their parents. In just about every case, the people who have had a personal financial stake in their college educations have also performed far more effectively in the class room and have enjoyed much greater success upon graduating from college.

I have also known parents who do not want to see their children saddled with tremendous debt upon graduating from college, so they have over-contributed to their kids college costs, without even realizing that the money intended for food and books has been spent on beer and concert tickets. The parents’ objectives were well-intended, but they failed to prepare the child-beneficiaries to face life in which we all have to work hard to pay bills – not just to play.

Whether they are attending Averett University or a junior college, I do not believe that kids should feel entitled to the college education that they want. Rather, parents should make sure that a child who works hard through high school will have the opportunity to attend a good college. My wife and I prepaid the tuition in the Florida public university system 9 years ago (for a total cost of about $13,000). Our kids can attend any Florida school that they want, as long as they are accepted, and their tuition will be covered. They will have to pay all of their other costs, and they have known that for a long time. One has been saving for the past five years. The other has nothing put away (despite my urging) and may have to work for a year before he goes off to college. That is his choice.

Parents can also help their kids look for scholarships and other sources of “free money” – a process that should begin when a child is a freshman in high school. In addition, parents should start their kids in an attainable savings program so that kids learn to put money away for when it is needed.

Parents should not, however, feel that it is their responsibility to cover every cost that a child faces in college. Parents need to make sure that their kids have some “skin in the game” or they will run the risk of seeing their children holding up “Daddy’s paying” signs at a football game, too!

What do you think? Are parents obligated to pay for their kids’ college educations? Should college students be required to pay some of their own costs? Does a parental “free ride” give students an advantage or a disadvantage?

Dave Ramsey Falters in a Crummy Economy

December 3, 2008 By Guest Writer 47 Comments

By Maggie Ellis, guest writer

I know many people who are followers of Dave Ramsey’s financial advice. Since the economy has tanked, it seems like I’m seeing even more people joining the Dave bandwagon, looking for a way out of the financial messes that they have gotten themselves into. His “Total Money Makeover” and the associated baby steps can be a decent starting point for those who have no idea where to start or who have never tackled financial topics before. It’s simple and fairly easy to follow advice. It may be a bit too simplistic and “one size fits all,” but it’s not a bad starting point, generally speaking.

However, lately I’ve found myself questioning whether or not his advice is still valid given the current economic climate. In a down economy, most of us want protection and preservation. We play defense to save what we have. Dave’s advice is more offense-oriented, requiring you to aggressively pay down debt as fast as possible and get on to wealth building. Not a bad idea when jobs are plentiful and salaries keep growing. When money is everywhere, it’s easy to dedicate a lot of it to debt repayment and investing. But when the economy is bad and the threat of job losses and declining investments make us want to hole up and hide, other approaches might be saner.

Does the current economic situation require a reordering or rethinking of Dave’s advice? With so many people looking to clean up their financial houses, is Dave still the best place to start? Let me take a look at each of his baby steps and see if his advice still holds in a down economy.

Save up $1,000 to start an emergency fund

I have a couple of problems with this bit of advice. First of all, for most emergencies, $1,000 isn’t nearly enough, in good times or in bad. It won’t pay for a new roof or a new heating system. It will only pay for a bare bones appliance replacement. If something big goes wrong with your car, $1,000 won’t cover it. $1,000 will barely scratch the surface of most emergency needs. You need a much bigger emergency fund than this and in a bad economy with prices rising daily, you need it sooner rather than later.

That brings me to my second problem with this bit of advice. Dave advocates saving up the bigger nest egg in Step 3, after all your debt is paid off. However, in a bad economy, you’d better be saving all you can as fast as you can. If you get laid off or put on a reduced schedule, that $1,000 will be gone in a very short time and you’ll be back to living on credit. In a good economy when jobs are secure, you might be able to get by on that $1,000 emergency fund until the debt is paid off. If you want to be secure in a down economy you’d better have that larger emergency fund (or be actively building it) against the day that your job is eliminated.

Pay off all debt using the snowball method

Paying off debt is good. I won’t disagree with this. And I don’t disapprove of the snowball method (in which you pay off the smallest debt first and then add that payment to the payment you’re making on the next largest debt and so on until all debt is paid). However, in a down economy you need to evaluate whether aggressively paying down debt this early in the plan is the best thing for you. (Obviously, you don’t want to be incurring any new debt in a down economy if you can avoid it.) If you are facing the prospect of a job loss or pay cut, you might be better served by continuing to pay the minimums on your debt and funneling all your extra cash to your emergency fund. Being debt free is nice, but not if it means that you have no money in the event of a lay off. If that happens, you’ll be racking that debt back up in no time. If you still have debt but have plenty of cash on hand, you can at least keep the debt load from growing while you’re unemployed. When things turn better and your job situation is more secure you can turn your attention to this step and pay down your debt. But in the meantime, stash all the cash you can in order to protect yourself.

Save up 3 to 6 months of living expenses

In a down economy, I don’t think this should be Step 3 on Dave’s plan. It should be step one. As I noted before, you need to have cash on hand in a down economy to protect you in the event of a layoff. Three to six months is probably too little. Jobs take longer to find in a bad economy because many people are competing for a small number of positions. I’d aim for six to eight months of living expenses. The more you can get, the better. Start saving this larger nest egg as soon as possible and keep adding to it until you have enough to cover six to eight months of living expenses. This should be your priority in a bad economy.

Invest 15% of household income into Roth IRAs and pre-tax retirement accounts

Bad economy or good, I would advise that you contribute at least something to your retirement portfolio at all times. The good news is that in a down market, every bit that you can plow into a 401K or mutual fund IRA is buying you more shares at a deeply discounted rate. You may not reap the benefits immediately but when the market rallies, you’re primed to take advantage. If you wait until all debt is paid off (which for some could be a long time) and you can contribute Dave’s full 15%, you miss out on the fire sale and all that compound interest you could earn over time. You also miss out on any free money that your employer might match with yours. You might be drawing on your retirement money for as long as thirty years. You need all the time you can get to save up enough to cover you if you live a long life. If you wait until all the debt is paid off, you are cutting into your prime savings time and missing out on some bargains.

If money is tight and you can’t do two things at once, save up your larger emergency fund first to take care of any immediate crises and then divide any extra between a retirement plan and your debt repayment. Once your emergency fund is big enough, the debt is paid, the economy is better and you are in a secure financial place, up your contributions until you get to 15%.

Save for your kid’s college educations

In a down economy, I would eliminate this step entirely unless you are very well off and don’t have any other needs for the money. It’s great to be able to help your kids pay for school, but not if it comes at the expense of your own needs. I would continue to add to the emergency funds and retirement accounts and pay off my home before setting aside money for college. Your kids can get scholarships and aid for school (and some might not even go at all), but you have to protect yourself first.

Pay off your home early

A noble goal and one that will free you from a mortgage payment. I would take care of this step before saving for the kid’s college educations. Without a mortgage payment, you’ll be able to save for college that much faster and your own interests will be protected. In a down economy, being free of a mortgage is a great thing and one that frees you to take lesser paying jobs or work less in the event of a layoff.

Invest in mutual funds and real estate to build wealth and give

The mutual funds part I agree with, although you need to know what you’re doing or have a trusted financial advisor to help you pick some good ones. You don’t want to invest in junk. Even in this economy there are some good mutual funds out there, but you’ll probably need direction to find them. If you get into some good funds and have a substantial amount invested, you can live off of the interest, let the principal continue to build wealth for you, and reduce the amount you need to work.

Real estate, however? Correct me if I’m wrong, but isn’t over-speculation in real estate part of what got us into this economic mess in the first place? Isn’t that, at least in part, what drove prices sky high and then caused the bubble to explode? I don’t deny that owning some real estate can be a decent investment and right now it is a buyer’s market. However, you have to know what you’re doing. Simply “investing in real estate” won’t cut it. Are you going to rent the property? Can you handle the landlord aspects? Can you comfortably carry the mortgage(s) until the rental pays for itself? Are you going to sell it? (Good luck in this market.) Do you understand pricing enough to know when you’re paying too much or when something is a deal? Are you going to be a “flipper?” (I hope not because a lot of those people got burned in the recent bubble bust.) Dave says to invest in real estate on the theory that real estate always goes up in value, but we’ve now learned that this isn’t always true. You can lose your shirt in real estate, particularly if you don’t know what you’re doing (and even if you do). I would seriously question this piece of advice before deciding to put much of my nest egg into real estate.

The giving part of this step is a good one for those who have reached this point and have the means. In a down economy many people stop giving in order to protect their own finances. However you got your wealth, whether it was by following Dave or hitting it lucky in the lottery, please do give to help others.

The idea that you should do one step at a time and not do things in conjunction with one another is where I think Dave falters most in a down economy. We’re trying to deal with a lot of things at once and some multi-tasking is required in order to make the most of our money and time. Particularly if you’re working against a ticking clock where a job loss is imminent, you may need to allocate your money to several steps at once to prepare for unemployment rather than plodding along through one step at a time. I would reorder/restate Dave’s steps this way in a down economy:

1. Save up six to eight months of living expenses: Combine Dave’s steps one and three together and save up as much cash as you can to cover yourself in the event of a job loss or cutback.

2. Invest at least something into your retirement plan at all times to take advantage of compound interest and time: Instead of waiting until all debt is paid off, go ahead and work on your retirement portfolio. You’ll need all the time you can get to save enough so start now. Make sure to contribute enough to get any employer matching funds.

3. Work on debt repayment, but only when your immediate security is taken care of: Pay only the minimums until your emergency fund is large enough to see you through a long layoff. When you reach that point, divide the extra money between your debt and your retirement, paying as much on the debt as you can while still building that retirement plan.

4. When the debt is gone, up your retirement contributions to the full 15%.

5. Pay off your home early: If you have your emergency fund, no other debt, and are fully funding your retirement, go ahead and work on paying off your home. At least if you get the house paid off it will be one less thing to worry about the next time the economy tanks. You won’t have that mortgage payment to deal with.

6. Invest in mutual funds (or another investment vehicle that you are comfortable with) to build wealth and give: Your goal is to create the kind of wealth that can sustain you on the interest alone. With the rest you can give, save, or move on to step seven and provide for your kid’s education.

7. Save for your kids’ college educations: This would be my last step, once all of my needs are taken care of and my future is provided for. Once you’ve created wealth in step six, you’ll be well able to provide for your kid’s educations. But if you don’t reach this step or are still working on it come college time, your kids can find ways to provide for their own educations. Your needs have to come first.

While some of Dave’s advice remains valid in a down economy, some of it bears closer inspection before you jump headlong into his program. If you go into his plan thinking it will save you and that there can be nothing wrong with his advice, you may end up surprised. A lot of the old rules don’t apply right now and you have to figure out what is valid for your situation and what is not. You may need to tackle several steps at once or reorder them to get the best results and protect yourself from a topsy turvy economy.

The bottom line is that, while some advice may remain valid no matter the economic circumstances, you should always evaluate your own circumstances and needs in the current economic context and not do something just because a financial guru (be it Dave, me, or anyone else) tells you to.

Finally, if you don’t want to dig through a zillion webpages to learn what Dave Ramsey has to say, think about getting a copy of Dave Ramsey’s The Total Money Makeover. The book is an educational handbook, inspirational coaching guide and self study manual. It has sold something like 5 million copies – so it is probably worth your time.

Are Children Entitled to a College Degree?

October 25, 2008 By Joe Morgan 18 Comments

It seems like every personal finance magazine I read reinforces the idea that our children are entitled to a college education. Beyond that – it’s the parent’s sole financial responsibility to provide a college education free and clear for their children. Don’t get me wrong, every parent would like their child to have a college education, but at what cost?

Where was it written that we as parents need to gift a college education to our children?

Those with a college degree still fair better financially than those without, but consider this: The average college graduate leaves school with $20,000 in debt. Is that really putting your child on the road to financial success?

Maybe, maybe not.

If your child is going to change the world and earn enough money to pay off that debt within 5 years, it’s probably worth it. But if your child is looking at a profession with a starting salary of $35,000, it’s going to take a long time to dig out from that degree.

Any responsible parent would feel at least a little like a failure if they saddled their child with $20,000 of debt before they even joined the workforce. So it’s not surprising that many parents are paying the bill themselves. But this is putting in place an even riskier situation down the road. Parents who tap into their retirement savings, or skip saving for retirement altogether for the purpose of paying for their children’s college costs are going to end up much worse than the student with $20,000 in debt.

Remember this: they have student loans for college costs, there’s no such thing as a retirement loan.

With social security on the fast track to bankruptcy, and their retirement savings flushed down the university drain, the wreckage caused by a generation of retirees who spent their savings on their children’s education might make the recent credit crisis, resulting bailout and deficit increase look like a bank overdraft fee.

A better choice for those in this situation is to start at a 2 year school, subsidized loans, grants, scholarships, and a part time job.

I got a Bachelor’s Degree, but I did the first 2 years of classes at a community college where the tuition was a fraction of a state University. I paid for the whole thing with minimal cash from my parents, and a part time job. I got the basic classes out of the way and did it without going into debt.

After that, I went to a state University for the final 2 years to focus on core classes that related to my degree. I still graduated with student loan debt, but far less than I would have had I gone straight to a 4 year school out of high school. And my various part time jobs taught me the value of money and having to work to afford the things I wanted. A win-win for me and my parents.