Several years ago, a fellow college grad mentioned how she was over $100,000 in debt from school. It surprised me because I didn’t recall tuition being that expensive at our in-state college at the time. “Well, I used the money for my living expenses, too,” she explained. Then I remembered the studio apartment she rented during senior year and her insistence on eating organic food. And it all made sense.
Looking back, this probably wasn’t the best use of the funds. Just because a lender (or a group of lenders) gives you a six-figure loan doesn’t mean you have to spend all of it.
In general, colleges first apply a student’s federal student loan towards tuition, room and board. Money left over gets sent to the borrower by check, cash or a direct deposit to a bank account. Private student loans typically get disbursed in a similar fashion, although in some cases, depending on the loan, borrowers may receive all the money up front in their bank account.
Suddenly, a college student who’s used to never having any money in her bank account, feels rich! My friend’s student loan deposits in her bank account may have given her an inflated sense of what she could “afford.”
But, as tempting as it may be to use some of that money to buy a new fall jacket or live off campus without roommates, be careful. Your graduated self, a few years down the road, will thank you for practicing some self-control and putting those student loan dollars to more responsible use.
Here’s some help on how to properly spend and manage your student loans to avoid regrets or remorse down the road.
Do Pay Tuition First. (Some) Food and (Some) Books Later.
Again, while colleges typically transfer your student loan funds over to the “necessities” like room and board first, there is a chance you may need to appropriate some or all of the money yourself to the various expenses on your plate. My advice is to ration the funds starting with the obvious biggies that are more or less non-negotiable such as tuition, on-campus housing, your meal plan and required fees.
After that, I’d say pay for the cost of books and other course materials, but to an extent. Don’t buy everything on each professor’s recommended list on the first day of school. Instead, visit class, talk to former students and learn what is essential and what you can skip. Keep in mind, too, that some textbooks can be purchased used or found online for a fraction of the price. Another thing to keep in mind is that school libraries sometimes keep one or two copies of each required textbook on hand.
If you choose to live off campus or don’t want to go with a school meal plan, try to live below your “student loan” means. In other words, don’t just look at what’s left in your account after paying for tuition and spend up to that amount. Want to stock your fridge with all-organic produce? Maybe try earning some money on the side to supplement your lifestyle.
Do Return the Extra Funds
If, after applying your student loans to the various qualifying expenses you have some funds left over, consider sending it back to the lender to help reduce your final bill.
I know this can painful in the moment, but your future self will thank you. Your student loan, after all, is a form of debt that may very well be accumulating interest as you sit in Chemistry 201. Do you really want to finance your groceries? Leverage your sorority dues?
Using personal savings may be a smarter way to afford those extra expenses that are natural to occur in college. Don’t have savings? Consider a side hustle to bring in extra cash (if it doesn’t compromise your studies).
Don’t Call it “Income”
Finally, while some or all of your student loan funds may end up in your bank account, remember that it’s not really yours. It’s not really cash. It’s debt you need to repay one day. And it’s certainly not “income.”
I say this as cautionary advice because it’s been reported that some student loan borrowers state their loans as “income” when applying for credit cards. The new credit card rules which took effect in 2009 state that if you are under the age of 21 you are not eligible for a credit card unless you have either 1) qualifying income or 2) a qualified co-signer. A student loan is not qualifying income. It’s debt. And if you’re in debt with no job, you probably shouldn’t be applying for a credit card that could land you into further debt.
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Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.