Having a lot of student loan funds may make you feel like you have extra cash available to spend, but every dollar borrowed must eventually be repaid, often with interest. Before you overborrow, or accept more loan funds than you absolutely need, you should understand how extra borrowing can affect your monthly budget, future goals and long-term financial health.
It can seem simple to accept a full loan offer without much thought, but it's important to know how much you actually need for educational expenses such as tuition, fees, housing and required supplies and make smart decisions.
You have to pay interest too.
Most students delay loan repayment until after college, meaning that interest builds up during school and increases the amount that must be paid back. If you use student loan money for unnecessary things, interest will accrue on that money too before you even start repayment.
Repayment can take longer.
If your monthly payment is more than you can afford after college, you may have to look at alternative repayment plans. These plans may reduce your monthly payment but extend over more months, which will lead to you paying more interest over time.
Missed payments will have consequences.
The more you borrow, the more you will have to pay back every month. If you are unable to pay your bills and miss payments, your credit history will be impacted negatively, which may lead to higher interest for future loans and credit of all types.
You may have to limit entertainment expenses.
The more money you have to pay back on your student loans each month, the less you will have for entertainment. Using loans for discretionary expenses during college might mean you will have to forego extras so you can afford your main priorities, like rent, transportation and savings.
You may need a second job.
To pay your student loans after college, you may have to find a second part- or full-time job. A second job may help with your bills, but it can impact your personal life, the attention you pay to your primary job and your overall health.
You might have to put off your biggest goals.
Numerous reports show that adults with high levels of student loan debt put off traditional adult milestones, such as home ownership, relocating for career opportunities, grad school or starting a business.
You may be unable to save for your future.
Saving for your future, especially your retirement years, will be essential once you start your career. But if you're unable to contribute money to a 401(k) or other retirement fund because you are repaying student loans, you may miss out on a decade's worth of saving and have to work longer than you would like during your lifetime.
Avoid Overborrowing
You might be overborrowing if you rely on loan funds for extras, like entertainment or discretionary purchases, or if you borrow the maximum offered every year. You can take steps to avoid overborrowing. Start by tracking your total student loan balance and understanding the amount you'll need to eventually repay. A detailed budget can help you track incoming funds against spending. Review your borrowing every year, and decline or return funds you don't really need. Continue to explore opportunities for scholarships, grants and earnings to pay college costs.
