The True Cost of Using Student Loans for Living Expenses

The first two years of graduate school may be tough for many students. It can be a stressful time for people who don’t have the financial means of living a comfortable life, especially if even an $8 lunch would mean fasting for the next couple of meals. On average, a graduate student living in the US in 2008 would spend roughly $20 daily, translating into $600 monthly, on food and beverage alone.

To some people, this might not sound very extreme, but for a student living off of freelance or part-time work and barely earning enough to save, it might be more than they could afford. However, one way of financing a comfortable living as a student is through student loans.

Student loans are specifically intended to finance your education, but honestly speaking, education can be tricky business. Loan providers generally allow students to make use of these funds not just for paying tuition but also for living costs during the duration of their studies.

It sounds fair since, in general, being a student means paying for boarding and transportation as well as buying food and drink, but the phrase “living expenses” could be interpreted in many different ways. One might argue that living expenses mean the bare minimum for survival, while others might define it as being able to maintain the lifestyle they usually live.

Using student loans to pay for living costs should not always be perceived negatively. For instance, imagine working your butt off to just to make ends meet with a take-home pay of about $800 per month. Imagine further that the city where you study is famous for their expensive tuitions. Taking out a loan to fund a fellowship, buy food, and fill your car’s tank only makes sense in this situation.

However, you might find yourself buried in debt on the loans you took out to keep your head above water. Of course, one thing you can do is limit how much you borrow so you won’t be paying through the nose for those past loans plus interest. With that in mind, never EVER use a loan to purchase prepared food and drink on a daily basis. A sandwich here or there might not leave a huge dent in your financial well-being in future, but if you make your visits to McDonald’s a daily event, then it’s not just cholesterol you have to worry about.

If you’re thinking about taking out a loan to finance your living costs, there are several points that you should consider thoroughly in advance.

1. Calculate how much you actually need

Loan providers will try to ensnare you in their webs of trickery by letting you know the maximum amount of credit you can take out. Don’t be fooled by that number since the more money you borrow, the more interest you’ll end up paying.

Before your first semester begins, calculate how much you spend on a daily and/or monthly basis. Use a spreadsheet to help with your calculations and be sure to never throw away receipts or other proofs of purchase. If at all possible, count everything down to the penny and label each expense for what they are (e.g. rent, groceries, entertainment, clothes, fast food). Tally it up and see how much you end up spending.

The next step involves thinking about what changes will occur when you enter your first semester. Perhaps you’re moving to another city or out of state. If you are, then find out how much you’ll eventually end up spending on rent, groceries, etc. Don’t forget to calculate the ridiculous cost of college books.

Next, determine where in your monthly budget you can make cuts. Remember to be rational and fair to yourself, but it might serve you better if you could reduce $20 to $40 from your Wendy’s expenses. Maybe you can survive without a new wardrobe every month. The most important thing is to commit to whatever changes you want to implement. Planning is one thing, but exercising that plan is another. You might want to throw in 2 to 3 percent extra to cover any unexpected costs or start saving up for a rainy day (or rainy month). The final number should determine that actual number to take out in student loans. Do not take out any more than you need.

2. Government-funded or private-funded loans?

After determining the amount of money you’ll need to take out, start researching the different kinds of loans available. Your experience with your loaner may vary depending on the source.

In general, there are two types of loans out there: government-funded (federal) loans and private. Government-funded loans tend to have lower interest rates, though it varies depending on the individual and their unique circumstances. In addition, government-funded loans can be extremely flexible to borrowers who are struggling to make payments. Programs such as income-driven repayment, forbearance, and loan forgiveness programs exist to keep their borrowers’ heads above a sea of debt, but you may be ineligible for such programs depending on your situation. It’s always safer to take a conservative viewpoint on the matter and assume that you are ineligible for any borrower-helping program.

Private loans have numerous differences from federal loans. First of all, private lenders generally don’t have any income-driven repayment and forgiveness program. Secondly, the interest rates at which they apply to the principal loan can change over time (variable interest), whereas a government-funded loan sticks to one interest percentage. Make certain you which type of interest you’re getting between variable and fixed since one or the other could help you down the road. It’s generally safer to go with a fixed interest percentage. Finally, your parents might need to co-sign for you to get the loan, making them the bearer of all responsibility in the unfortunate event of your death. Government-funded loans get buried with the borrower.

3. Calculate the total amount you have to pay back

There are numerous interest calculators you can use for free on the Internet to help you find out the total amount you have to return to the lender. This should give you a rough idea of how much your student loan will truly cost you compared to the principal loan.

To help you understand how much you’ll end up paying, imagine that you spend $250 on groceries every month, but you end up spending $350 on food because you wanted $100 worth of burgers. If the interest rate applied to your loan is 5.84% for 10 years, then the total you need to pay back is $463, or $113 extra on what you spent that month. Another example is using borrowed funds to fly to NYC to party with some roommates, costing you $750. In 10 years, you’ll have to pay the bank $992 for that party. Always ask yourself when dealing with borrowed funds, “Are the extra charges worth it?”

4. The future is a mystery

You might think to yourself, “The money I owe is chump change compared to what I’ll be earning with my degree in horticulture!” You might start making money as soon as you graduate, or you might spend several months looking for the right job. Whatever the case, you’ll need to start paying back on those loans when after obtaining your degree. The conservative approach would be to add to your total loan the amount of a couple month’s worth of expenses. That should give you few months to survive without stressing too much over paying your lender back in those moments of unemployment.