Most college students use their financial help to pay for their education, as that is its intended purpose. But we’ve discovered that periodically hearing a college grad confess to using their loan money to buy a car, pay for a treatment, or go on a once-in-a-lifetime vacation is not at all unusual (that happened to have nothing to do with school).
Is this terrible money management? bad financial habits Or is this what happens when you give an 18-year-old more money than they have ever seen in their lives in their bank account?
We were curious as to whether former students who had borrowed money to pay for things other than their education knew what they were doing. So, we spoke with a number of professionals and financial bloggers who admitted to formerly having done just that. We questioned them specifically about what they bought with their student loan money, why they did it, and whether it was worthwhile.
Then, we decided to do the math on our own to determine how much these costs would cost overall with interest if the borrower took the entire loan period to repay them.
The real price of paying for stuff we can’t afford in college is this.
Trips for Spring Break and Bar Bills
When financial counselor to pilots Dan Kellermeyer thinks back on how he used student loans to pay for college, he remembers the extra money he spent for things like bar tabs, Spring Break trips, and other things he assumed were just a regular part of the “college experience.”
“I used the additional student loans for spending money after paying for tuition, books, rent, and food. Building up my flying hours was somewhat educational since I was in flight school, but I would utilize student funds to rent an airplane outside of my regular flight time to go on some sightseeing trips with my buddies.
Dan knew that money was limited at home and didn’t want to stress his parents by asking them to buy him things that weren’t necessary for school.
Dan viewed his school loans as a method to maintain his independence, which is a frequent response among young adults who have taken on debt to pay for lifestyle expenses.
“I didn’t use these loans for any significant purchases, but in a way, it was like ‘death by a thousand papercuts. My bank account would suddenly be empty and it would be time for another loan after a few $5 here and $20 there.
The Real Price of Spring Break and Drinking
$3,300 is the estimated total expenditure (2 spring break trips at $650 and weekly bar tabs of $40 for 50 weeks).
Interest on Personal Loans: 8.75%
If he makes the minimal payment for the duration of the loan, the monthly payment will be $26.84 for the following 26 years.
$8,375.62 is the total amount paid after 26 years.
$5,000+ as an additional fee for financing college fun
As a financial planner, Dan is now aware of how his past choices may affect his ability to provide for his wife and himself in the future. He has more student loans than the sum shown above, and he intends to make as much of a difference on his outstanding debt as he can.
While he acknowledges that it will be at least a few more years before all of his debts are paid off, doing it this way spares him from having to pay as much in interest and make payments throughout the full period of 26 years.
Was it worthwhile? “It’s difficult to regret the college experiences I had, but I detest the repercussions. I wish I hadn’t placed myself in this situation because I often consider what I could accomplish or how much money I could save with the money I use to pay off my college loans each month. I could have gotten these loans very easily. I just filled out the form, and a week or two later, I received money in my account. Even better, I didn’t need a co-signer! It resembled addiction in many ways. Having that money in my account felt wonderful.
Expensive medical expenditures because of poor health insurance
When Emilie Burke developed kidney and gall stones twice in college, she used her student loans to pay the associated medical expenditures. She borrowed money to pay both payments.
“I believed it made more sense to take on a little bit extra debt that was in deferment while I was still in school rather than letting the loans go into collectors,” the borrower said. Looking back, I see that it was preferable than ruining my credit when I was 20.
Credit reporting for medical debt has undergone recent adjustments since the beginning of 2015. Before the debt is publicized, people currently have about six months to pay their medical bills or be reimbursed by their insurance.
The decision to use student loans to pay for her medical expenditures rather than struggling and maybe failing to pay her bills was one that Emilie thought through carefully and strategically.
“I did consider it carefully. Although I did have health insurance, the plan wasn’t great. Unfortunately, what was remained there was too much for my family and I.
How Much Medical Bills Really Cost
$2000 is the total loan amount.
Interest on individual loans is 5%.
If she makes the minimal payment for the duration of the loan, her monthly payment will be $13.20 for the following 20 years.
After 20 Years, the total amount paid was $3,167.79.
Finance Fee for Medical Bills: Upcharge of $1,000+
Emilie continues to work off her debt while keeping a personal blog at BukeDoes.com. Emilie intends to be debt-free by the end of 2017, but if she hadn’t planned on being so aggressive with her debt-repayment, she might find herself owing an additional $1,000 in interest over the course of the following 20 years to pay for her college-related medical expenses. She will only be required to pay a small portion of the interest increase because of her aspirations to pay off debt.
Was it worthwhile? “I still believe that it was the ideal choice. I would perform the action repeatedly.
The pursuit of flawless teeth
In order to afford braces when she was a student, Money After Graduation’s Bridget Eastgaard used student loans.
When I was a child, my parents couldn’t afford braces, but I was determined to straighten my teeth. I spent $6,000 for braces at my dentist’s clinic when my student loans arrived. In hindsight, that was foolish because I plainly needed that money to pay my rent and for food during the semester, but at the time, I didn’t care—all I wanted was straight teeth.
The majority of the people we spoke with acknowledged that it was challenging to distinguish between the funds in their bank accounts that came from student loans and were intended to cover costs associated with attending school and those that were theirs to spend whatever they wished.
“I didn’t even consider the repercussions. As far as I was aware, my braces cost $6,000 and I had $6,000 in cash in my account from student loans. It didn’t even occur to me that it was “debt.” I thought I could totally afford it in my naiveté.
The Real Price of Braces
Cost in total: $6,000.
Interest on individual loans is 3%.
If she makes the minimal payment for the duration of the loan, the monthly payment will be $33.28 for the following 20 years.
After 20 years, the total amount paid was $7,986.21.
Upcharge for Braces Financing: $2,000
Within eight months of graduating, Bridget paid off her student loans. Her braces would have cost her a little bit more than she had anticipated if she hadn’t paid the bill off so soon. Now that Bridget has paid off all of her debt, she teaches people how to create budgets, make investments, and quickly pay off their own debt.
Was it worthwhile? Although my teeth are flawless, I’m pleased I did it because it was quite stressful. For the upcoming six months, I was struggling to pay my rent. Having said that, I am happy I chose to pay for a “medical” expense rather than a vacation, shopping spree, or simply dining out. I can appreciate having straight teeth every day, whereas I wouldn’t have been as delighted if I had spent the money on something that would have been consumed or enjoyed quickly. Even if being in debt was unpleasant, at least I had something to show for it! Would certainly repeat it.
It’s simple to become engrossed in the college experience, pursue independence, and make independent choices with the more funds in your bank account.
Nobody should be expected to repent the past purchases they bought with student loans because dwelling on their past financial mistakes won’t help them in the future.
However, we do know that these borrowers have changed as a result of their mistakes and have a strategy in place to repay their student loans as quickly as possible, which will ultimately lower the “real cost” of their non-educational spending.
Even if the Millennials we spoke to opted to spend their money on things unrelated to their studies, they nevertheless graduated with significant debts that were dragging them down. Look at the interactive map from Credit Sesame to see the top 10 cities where graduates have student loan debt that exceeds their median income and the top 10 cities where graduates have debt that is less than their median income. Does the list include your city?