How Not to Handle Your Student Loans
Posted on April 19, 2012 4 Comments
Last week the Chicago Tribune posted an article on the ticking time bomb that is student loan debt. They called it the next “economic doomsday scenario” and then they profiled a 2007 grad who is having trouble paying her student loans and keeping her financial commitments.
Congrats! You graduated!
For those of you graduating this year, I want to first say CONGRATULATIONS. You have worked hard to earn your diploma, and I hope you get some time to celebrate and enjoy the accomplishment. Go to dinner with your friends or family, get a cake from a local bakery, and relish your well-deserved achievement.
Note, I did not say buy a plane ticket to Vegas or Europe, or splurge on bling (are we still calling it that?), or adopt a pet, or rent a yacht. While you might feel like you deserve this level of celebration, and lots of your friends will be doing things like this, the reality is that graduation, for most US graduates, also means that you owe somebody a lot of money, more than you can imagine.
I remember sitting in an auditorium learning about the terms of my loan. I remember hearing that I would be paying $200 a month for 10 years, and calculating that with my starting intern salary, which was $10 an hour (and no benefits). This was 10 years ago, and debt hadn’t ballooned as out of control as it is today, with some undergrads paying up to $800 per month towards loans. Still, the thought of owing $25,000 was terrifying. It was the biggest debt I had ever taken on, and to this day remains the biggest debt I’ve ever taken on.
But despite that overwhelming initial terror, I got over it, made due and ended up paying off my loan without going broke – ahead of schedule by a few months, even.
And so, when I read about the woman in the Tribune article who took on nearly $40,000 for student loans and now can’t pay it back because of financial mismanagement, I saw a good opportunity to share what not to do when you graduate with a lot of debt in a bad economy. The truth is this: you can pay back your loans. It will take a lot of work, but with smart choices and some good planning, you can do it.
What not to do as you start your new life with a college degree and lot of bills:
- Unless you are relying on income from your parents to support your lifestyle, what you make is what you can spend. No more than that. Do not put a ton of new clothes, furniture, rent payments, vacations, or anything else on a credit card until you can afford it. Within “what you make,” even if it’s $10 an hour, you must fit in: your rent, your loan payments, any other credit card debt you incurred in college, your living expenses like heat, groceries, and transportation. If you write this down on paper and you can’t cover everything with your new salary, you either need to cut some expenses or bring in new income (ie. take on a second job). You cannot spend more in one month than you make. This will be your mantra.
- If you don’t have a job, you can’t take on rent. Live with your parents until you figure out how to make money. In this economy, it’s not wise to rent a place with only a few hundred dollars saved up and hope you can grind it out until you find something. If you have the luxury of staying at home (I did for two years after college), do it. Yes, it will be miserable. But not as miserable as being even more in debt. Trust me on this.
- If, like the woman featured in the Tribune story, you have $100,000 in student loan debt, please do not plan to take on a mortgage of any kind until your income can handle both your student loan AND your mortgage.
- Same goes for a car. I waited until I paid off my student loans completely to buy my car. I never had one before that. If you really need a car, save up for a used one and buy it cheap. Not on your credit card and not with a loan if you can’t make the monthly payments.
- If you can’t make your monthly payments, also don’t take on pets that require lots of vet care. I can attest that they can be very costly. Maybe try a plant first, or a goldfish? The woman in the article took on $4,000 in vet bills. I understand she felt she needed to. But if you’re in debt, don’t let it get to that point. Animals are expensive, that’s why there are so many of them in shelters right now, abandoned by owners who couldn’t afford them. Wait a few years for your pet, until you at least know you can give them a safe, healthy, and secure home for life.
In summary, the recipe for paying off your mega student loan bill goes like this: don’t spend money you don’t have. Don’t go further into debt for anything, except perhaps your health.
I promise, promise, promise you, this does not mean you can’t have fun. There are free things to do everywhere, interest groups to be joined, clubs to be formed, and more. You might find that you end up loving your completely broke lifestyle. And most importantly, if you stick with the plan, you’ll be less stressed about your finances and a happier person overall.
Good luck to you and let me know how it’s going. I know you can handle this!
Category: Money
Tags: student loans
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4 Responses to “How Not to Handle Your Student Loans”
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April 19th, 2012 @ 10:12 am
Great tips! I just picked up an article from the wall street journal about couples putting off marriage and family due to the amt. of their loans.
April 19th, 2012 @ 10:18 am
Thanks! I would consider us to be one of those couples. My debt is fine, but man-friend has a big load of law school debt.
April 25th, 2012 @ 3:53 am
I’d say that if you can’t make your monthly payments don’t even think of getting a pet, no matter how small or cheap. Budget mismanagement starts from justifying small expenses even though you can’t afford them or don’t really need them. “Oh, it’s just a goldfish.” That goldfish will graduate on to more fish, then a big aquarium to accommodate your growing fish collection, then a nice playground for the fish, then lights, until much much later you find that you’ve spent several thousand dollars on your aquatic display and fishes.
One cup of Starbucks coffee can lead to a cup every Friday, then twice a week, then everyday. Get real – the money you spend won’t come back, so try to spend as little as possible.
April 25th, 2012 @ 2:55 pm
I stopped short of completely recommending against pets because some people struggling with feeling blue or feeling depressed benefit from having a pet around. Spend as little as possible might work for you, but isn’t *always* my take; my philosophy is live below your means. Slight difference there. As long as you can pay your bills without going into any debt and also accommodate for retirement savings (or other savings goals), I don’t care what small items you spend it on.