We all make mistakes.
I know I’ve made my share of money mistakes, from running up credit card debt to forgetting about quarterly taxes.
One of the biggest mistakes I made as a college student was choosing to use student loans. Even though my student loan interest rate is low, I shouldn’t even have student loans in the first place. I had a full-tuition scholarship and a part-time job on campus. I had no college funding gap.
Choosing to take out unnecessary debt as an undergraduate tied up a portion of my cash flow, and it still occasionally impacts decisions related to my finances. Although I can afford my student loan payments today and I’m comfortable, that wasn’t always the case.
Choosing student loan debt for college funding
Back in the day, it was easy to get federal student loans. I was able to get enough in student loans to cover my tuition and living expenses (I lived on campus), but that didn’t matter so much because I already had the money. My full-tuition scholarship and on-campus job offered more than enough to take care of my needs.
So, how did I use that student loan money? It would be nice to say that I took the money and invested it in a way that would help me reach my future financial goals.
Unfortunately, at the age of 18, I didn’t think about retirement or my future. I rarely looked into the future beyond whether or not I would have the time off and the gas money for next week’s Vegas trip.
Like the two in five students who fund non-education bills with student loans, I used my money for things that I shouldn’t have. I went out to eat. I took weekend trips to Las Vegas. I bought an entirely new wardrobe — and did that with credit cards to boot. I paid bills and bought groceries.
Rather than taking advantage of my scholarship and job to keep me out of debt as an undergraduate, I borrowed to fund my lifestyle. Not only did I choose student loans, but I also used my debt-padded bank account as an excuse to take time off from work frequently. I could have made more money if I didn’t look for reasons to avoid work.
Not one penny went toward my retirement, an emergency fund, or anything remotely useful for my financial future.
How student loan debt set me back
Even though I’m not planning to repay my student loans early, I can still see how my debt set me back financially early on. Just because I’m comfortable with my payments now doesn’t mean I didn’t mess up big time before.
Having that unnecessary student loan debt put pressure on my cash flow. While I was in school, it didn’t matter. I didn’t have to make payments, so I didn’t. I just spent the money. Once I was done with school, though, it was time to pay up.
My new husband and I were poor at the end of my undergraduate experience. As a result, trying to pay my student loans created a cash flow crunch. First, we tried to make it work by using credit cards to cover the gap. That only made things worse.
Eventually, I turned to deferment. While that offered cash flow relief, it extended the time for my student loans and interest kept accruing.
Another consequence of my undergraduate student loans was my debt-to-income ratio. Once I started making a little money and tackling some of my credit card debt, I wanted to be able to do things like get a car loan. Sadly, my debt-to-income ratio made that expensive.
When I applied for a car loan, I barely qualified — and I had to pay a higher interest rate. My debt-to-income ratio looked sketchy. Plus, my credit was in rough shape due to a couple missed student loan payments before I applied for the deferral.
It was disappointing to know that I was paying extra each month in interest because of my student loan debt. Eventually, I refinanced that car loan, but the results of poor credit have haunted me ever since.
All of these issues related to my student loans and my credit also had the effect of delaying my retirement contributions. I felt unable to set money aside for the future while I still struggled with student loans. As a result, I missed out on about four years’ worth compound interest. That’s time my money could have been working on my behalf.
Bottom line
Before you take out student loans for college funding, consider how they could set you back. Surveys indicate that some millennials are putting off big purchases and life milestones because of student loan debt. I know that student loans set me back.
While student loans are increasingly needed to close the college funding gap, carefully consider before you take them out. Take out as little as possible so you don’t derail your future.
It’s hard to think about that when you’re young and someone’s telling you that you can have thousands of dollars. Remember that you have to pay it back.
Need a student loan?
Here are our top student loan lenders of 2020!| Lender | Variable APR | Eligibility | |
|---|---|---|---|
| * The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers. 1 Important Disclosures for College Ave. CollegeAve DisclosuresCollege Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply. (1)All rates shown include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation. (2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary. (3)As certified by your school and less any other financial aid you might receive. Minimum $1,000. Information advertised valid as of 11/4/2019. Variable interest rates may increase after consummation. 2 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply. 3 Important Disclosures for Discover. Discover Disclosures
4 Important Disclosures for CommonBond. CommonBond DisclosuresOffered terms are subject to change and state law restrictions. Loans are offered through CommonBond Lending, LLC (NMLS #1175900).
5 Important Disclosures for Citizens. Citizens DisclosuresUndergraduate Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of December 1, 2019, the one-month LIBOR rate is 1.70%. Variable interest rates range from 2.80% – 11.06% (2.80% – 10.91% APR) and will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. Fixed interest rates range from 4.72% – 12.19% (4.72% – 12.04% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown requires application with a co-signer, are for eligible applicants, require a 5-year repayment term, borrower making scheduled payments while in school and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of the loan. Please Note: International Students are not eligible for the multi-year approval feature. |
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 | 2.84% – 10.97%1 | Undergraduate, Graduate, and Parents | |
 | 2.87% – 10.75%*,2 | Undergraduate and Graduate | |
 | 2.80% – 11.37%3 | Undergraduate and Graduate | |
 | 3.52% – 9.50%4 | Undergraduate and Graduate | |
 | 2.80% – 11.06%5 | Undergraduate and Graduate | |
