Ten Big Mistakes #1: Student Loans as Lifestyle Support

Ten Big Mistakes #1: Student Loans as Lifestyle Support

Along my financial journey in life, I made a great number of mistakes. In this ten part series which runs from July 19 to July 30, I’m going to focus on ten of my worst mistakes and the difficulties and successes I’ve had in overcoming those mistakes.

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 had lived in the dorms most of the time and also spent a year living in an apartment with several other people, which reduced the rent for each of us down 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 so I felt confident that I would be able to survive on the tiny living stipend I expected from my loan.

What surprised me was that one 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 somewhere around 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 that 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 any more.

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

The consequences of that were painful. My repayment period was ten years and the interest rate on the debt was around 7%, so my extra money alone caused me to have an extra $300 month payment every single month for the next ten years.

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

The long-term effects of this debt were painful. That unnecessary $300 a month coming out of my take-home pay meant that I was trying to do all of the things I wanted to do with even less money to work with. I was left with a choice of living fairly lean or to make a financial mistake that would compound this one, take out more debt to continue an expensive lifestyle (and I’ll discuss this mistake later on).

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

First, I could have kept my spending within what I was used to in college. I could have taken out a much smaller living stipend when I was there and gotten by doing all of 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.

Later, I could have kept my post-graduation spending in check and paid down that student loan debt. Again, this would not have impacted taking care of my needs or even many of my wants – after all, I did have a good full-time job. I could have easily become more picky about my clothes and my food and bought many other things that clearly fall under “want” instead of “need.”

In both cases, I chose to spend that 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, take out the minimum amount you’ll possibly need on your student loans. 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 events and 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 as a very early goal in your life. Cash flow is so important with regards to achieving your goals and 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.