This is the third in a series this week about financial decisions during the student years. Yesterday’s post focused on student loans. Today we’ll take a look at one factor that affects how much students end up borrowing.
As mentioned yesterday, one of the best things you can do to minimize the pain of paying back your student loans is to borrow as little as possible. When planning for college expenses, many students logically focus on room and board, tuition, and books. It’s important to also plan for another group of expenses I’ll call “discretionary spending.” As the name indicates, these are expenses that the student can choose, but are not essential to their education. This category includes clothes and non-essential transportation, but probably the biggest components are food and fun — from spring break, to a fraternity dance, to ordering Chinese food, and more.
Note: food (whether eating out or ordering in) is often a big component of a typical student’s budget — even students who have a meal plan. Ordering pizza to share with roommates doesn’t seem like a big deal. Not surprisingly, though, expenses that on their own “aren’t a big deal” can become a big deal when they happen frequently. Paying for 1/3 of a pizza one time is only a few dollars; if pizza night is twice a week for the whole school year, that can really add up.
Many students separate their discretionary spending from their school spending – I’ve heard students explain that the only money they spend for fun is the money they earn at their job. They believe their fun spending is completely separate from their student loans. In most cases, however, the truth is that every dollar they spend increases the amount they borrow. If they spend $50 (of their wages) on weekend fun, that means that in the long run they end up borrowing $50 more than they would have otherwise. If they hadn’t spent that money, they could have borrowed $50 less.
I am definitely not suggesting that students shouldn’t have fun. It is perfectly okay – even important – to spend some money on fun activities with friends – that’s a wonderful part of the college experience. I do suggest, however, that students who decide on a limit for their discretionary spending (and stick within that limit) will benefit in two ways:
- They will accumulate less total college debt; and
- They will learn valuable “adulting” skills: planning ahead, deciding on priorities, and recognizing trade-offs (e.g. if I spend this money today, then I won’t have it for homecoming next weekend).
How much should students’ discretionary spending be? I can’t answer that. Parents can’t (and shouldn’t try to) answer that. At the beginning, even the student may not know what to plan for. I’d encourage students to keep track of their spending for the first several weeks, then look that over. Based on that information, they can make an informed decision about how much they will allow for discretionary spending. Deciding on a limit also helps us resist peer pressure. Many students spend more than they want to spend, simply because they are pulled into their friends’ or roommates’ plans. Those activities are fun, but if there are no limits, the financial toll is substantial.
Realistic projection of discretionary spending will give more realistic projections when you use the Your Financial Path to Graduation tool from the Consumer Financial Protection Bureau. Tomorrow, we’ll share an example of how discretionary spending plays out over time. For today, I leave you with these reflections that relate not only to college life but to all phases of life:
- Having fun and having a healthy social life is a very important part of life. It is not, however, necessary to spend a lot of money to enjoy social activities.
- Friends who push you to spend more than you feel comfortable with may not be the ideal friends.
- You may find that if you stick to a limit on your discretionary spending, your friends will be grateful too!
This is the third in a series on planning for financial decision-making in college or trade school. Tomorrow – an example. Friday – a quick look at three other important topics.