College Students and Money: Discretionary spending adds up

This is the fourth in a series this week about financial issues faced by students in college and trade schools. Yesterday’s post discussed discretionary spending. Today we share an example that can help students as they consider how much they will spend on discretionary items.

Suppose Student A and Student B are financially identical, except Student A spends $450 a month on discretionary spending and Student B spends $150 a month. Student A spends $300/month more on discretionary expenses through four years of college (I’m including summers too, since most students continue having discretionary spending through the summer). When four years are over, suppose Student B has total student loan balance of $20,000. Since they were identical except for discretionary spending, that means Student A’s total student loan debt will be $34,400, or $14,400 more than Student B.

The current interest rate on federal student loans is 3.73% per year. Let’s suppose they repay their loans using the standard 10-year repayment plan, although there are other plans available with longer repayment terms and lower monthly payments. On the 10-year plan, Student B will pay $200/month. Student A, on the other hand, will pay $345/month. 

As fresh college graduates, will Student A be ready to deal with a monthly loan payment of $345, instead of a payment of $200? That extra $145 student loan payment is the consequence of their extra college spending; extra spending during college limits their options in the future. Understanding the consequences of their actions helps students make informed decisions they can live with in the long run.

What’s the “right” decision on discretionary spending? Only the student can decide. I have heard of college juniors and seniors who look back on their spending in their first one or two years of school and regret it. Of course there may be others who look back at how little they spent and wish they had let themselves have a little more fun.

When considering how much total educational debt you are willing to accumulate, consider two rules:

  • Borrow as little as you can. This is in bold, because I think of this as the “golden rule” about student debt. This rule applies in virtually every situation, and is above any other rules.
  • Avoid borrowing more (total) than your expected first year’s salary. This is a commonly accepted “rule of thumb.” Example: if you hope to start out as a civil engineer making $60,000, then $60,000 should be the MAXIMUM you are willing to borrow for your education.
    Notice: this doesn’t mean you should go ahead and spend extra because “you can afford” to borrow $60,000. The golden rule is above all other rules – no matter what, it is wise to borrow as little as you can.

Tomorrow – the last in our series “College Students and Money.” Do you think the subject of credit cards will come up?

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Be a “Student Loan Hero”

Repay Student DebtEhlers-guest bloggerBeing a ‘Student Loan Hero’ is a hot topic in the mainstream news. It’s also a hot topic around my family’s kitchen table these days, because 2015 was our son’s first repayment year on a private college loan and in 2016 our daughter finalizes her college finance decisions.

To sort the choices we looked at CFPB (Consumer Financial Protection Bureau) tools to understand student loans (federal or private) available and repayment options.

A new ‘income-driven’ repayment option for student debt is getting attention.  It’s called REPAYE (Revised Pay As You Earn), and it is based on a certain percentage of your income. The loan repayment details under all the income-based repayment plans were best described by Federal Student Aid (U.S. Department of Education).

Much has changed in the world of college finance during the five years between our son’s and daughter’s college entrance. Federal loans issued before July 1, 2010 were made through the Federal Family Education Loan (FFEL) program. If you’re unsure and need details about your personal federal loan you can find your information on the National Student Loan Data System database.

Whether you are a new college graduate or a soon-to-be college freshman, be a ‘Student Loan Hero’ by thoroughly researching all your borrowing and repayment options.

Carol Ehlers is a Family Finance specialist working to empower consumers to take control over their economic lives. 

 

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Comparing College Financial Aid Offers: Online tool sorts college options

Carol Ehlers

Today’s guest blogger is Carol Ehlers, an ISU Extension Family Finance specialist helping Northwest Iowans make the most of their money.

My college bound daughter began getting financial aid offers these past few weeks. Rather than crunching numbers from financial aid offers, we’re using a tool from the Consumer Financial Protection Bureau to help us make sense of it all.  It’s called  “Compare Financial Aid.

The tool allows students to compare costs from three schools at a time. By entering only the names of the universities, we could see the estimated price of each college, the graduation rate, the loan default rate and median borrowing. Based on your individual situation you can calculate the estimated debt burden and the estimated monthly student loan payments students might face after graduating.

The tool gets more interesting after we click the “enter financial aid” button. When we enter data from the schools’ financial award letters — including expected family contributions and military benefits, if applicable — the calculator provides students and parents with a more realistic view of our college options, financially speaking.

We took the tool on a test drive. By entering the names of three schools — we chose a public university in-state, a private college and a public university out-of-state — we found that the sticker prices of the three schools ranged from $18,600 to $37,000 for the first year.  By entering personal financial aid and scholarship information, we could build a personalized financial projection, which includes projected ‘Debt at Graduation’ and ‘Monthly Payments’ on college debt.  These  costs can be viewed next to graduation and retention rates.

For my family, as for all families with a college-bound student, balancing a realistic look at costs alongside a school’s track record of success is very helpful in making an informed choice about a college investment.compare financial aid-2

 

 

 

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Renter’s Insurance for College Students?

Like some of you, I’m sending my children off to college this week.  It’s amazing all the “stuff” they take — so much more quantity and more value than when I went to college.  What would happen if your child’s possessions were destroyed in a fire or tornado?  Would your insurance cover the cost of replacing all the electronics, furniture, books, and other supplies?

Whether your student is living in a residence hall or an apartment, be sure to talk with your insurance agent about this.  Ask what coverage you have for property that is “off premises” (in other words, located somewhere outside your home).  That will help you decide if your child needs to have his/her own renter’s insurance to cover their stuff in case of theft or other disaster.

If you decide you should have extra coverage for your child’s possessions while they’re away at school, use this opportunity to teach your child about renter’s insurance.  Take her/him with you to talk with the agent and pay for it.  Even though it is inexpensive, renter’s insurance is often neglected by young adults, and if your child learns its importance while in college, then he/she will be more likely to get coverage after college, as well. ~Barb

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

More Posts

    

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