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Big mistake: Student loans as lifestyle support

What surprised me was that students could easily take out a much larger stipend than they could ever possibly need.

By Karen Datko Jul 22, 2010 10:06AM

This post comes from Trent Hamm at partner blog The Simple Dollar.

 

Along my financial journey in life, I've made a great number of mistakes. In a 10-part series, I’m focusing on my worst mistakes and the difficulties and successes I’ve had in overcoming them. This is Mistake No. 1:

 

I financed an unnecesary lifestyle in college with extra student loans.

 

My first few years in college were supported by a collection of scholarships that covered my tuition, room and board. However, it was up to me to come up with the means of supporting myself over my final two years in school. As is the case for a lot of college students, that meant student loans.

 

Up to the start of that first "loan year," I was very conservative with my money in college (for the most part). I lived in the dorms and also spent a year living in an apartment with several other people, which reduced the rent for each of us to a pittance.

 

So, when it came time to take out student loans for that first year, I took the advice of my financial aid adviser and did the calculations to see how much money I would need to live for that coming year. The number I came up with was pleasantly small, and I felt confident I would be able to survive on the tiny living stipend I expected from my loan.

What surprised me was that I could easily take out a much larger stipend than I could ever possibly need. The financial aid office allowed me to apply for a loan that gave me a living stipend about five times what I actually needed to live on, which escalated the total of my student loan for that year by more than $10,000.

I thought about all the stuff I had done without over my years in college. I'd lived in some awful places. I'd held back on buying a lot of things I wanted. And here, I thought, the college was practically giving me a bunch of money to do with what I pleased. I could have that stuff. I didn't need to live hand-to-mouth anymore.

So I took it all. I took out the maximum possible loan both years, adding about $25,000 to my total student loan bill.

 

The consequences of that were painful. My repayment period was 10 years and the interest rate on the debt was about 7%, so the extra money alone cost me an extra $300 a month every single month for the next 10 years.

 

When you're fresh out of college with your first post-college job (meaning that it's a fairly low salary) and considering marriage, an extra $300 per month out of your monthly cash flow hurts.

 

The long-term effects of this debt were painful. I was left with a choice of living a fairly lean life or making another  financial mistake that would compound this one -- taking on  more debt to continue an expensive lifestyle.

 

I really was offered two great solutions to fix this problem -- and I failed to take on either of them.

  • I could have kept my spending within what I was used to in college. I could have taken out a much smaller living stipend and gotten by doing all my shopping at Goodwill and Fareway. This would have worked just fine, as it took care of all of my actual needs as a college student.
  • I could have kept my post-graduation spending in check and paid down that student loan debt.

In both cases, I chose to spend money with reckless abandon, which eventually brought me to the brink of financial ruin.

 

What can you do to avoid this trap?

 

If you're a student, borrow the minimum amount you'll possibly need. Don't be afraid to shop for clothes at Goodwill or buy your groceries at the low-end grocery store. Get your entertainment fix by participating in on-campus or community events. Focus on the relationships you build, not the specific things you do or the stuff you accumulate.

 

If you're out of school, focus on debt freedom. Having a big monthly debt payment just clogs up opportunities. Pay it down as quickly as you can, even if it means delaying some of your goals. Your ability to easily achieve those goals will be amped up incredibly high through freedom from debt.

 

More from The Simple Dollar and MSN Money:

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