I paid for school out of my own pocket. My wife and I didn’t qualify for any of the number of Financial Aid products out there, and our choice was either to go with student loans or to pay out of pocket. Throughout the past few years, several of my friends went through the process of applying for Financial Aid, and many of them got student loans. In fact, students today are convinced by teachers, counselors, parents, and peers that they cannot go to school without student loans. I thought today would be a good time to discuss student loans and other financial aid products.
I’ve talked about the differences between the different products in a post last year called “Getting a Job FTW”. Spoiler alert: I believe that paying your own way through school is the best way if you can do it. This is coming up now because I have a family member who is considering getting some student loans to pay for some classes.
I like the idea of student loans if there is no other option. For most people, I think there are always other options. But once in a while, someone finds him or herself in a position where they need to take a few student loans to pay for tuition and books. I want to be clear here: I have little problem with student loans if used in this manner. Where I have a problem is this conversation that I have had with a few students that I have known.
“I’m going to get a student loan, pay for school and take the rest to fix my car.”
“Well, aren’t those loans for school?”
“It’s my money anyway, and I’m paying it back after I graduate.”
See, too often, young people can get trapped to use a student loan to finance their existence. This puts an interest rate on something that usually doesn’t have one. It is doubly stupid to use a student loan to pay something that is already borrowed, such as making a car payment. I have a friend that took their student loan check and paid some credit card payments and a car payment. Their belief was that they were saving money because they were able to pay their credit card with a loan that had a much lower interest rate. Sounds good, but it is utterly incorrect. Let’s look at what we are doing:
Student Loan: $5,000.00
Car payment: $300.00
Credit Card: $500.00
Semester of Classes and books: $5,100.00
Credit Card Advance: $900.00
So now you have made a payment at around 5% interest on your 18% credit card, but you have taken almost twice as much out of that same credit card for %20 or more. You still owe the entire $5,000.00 as well. What have you accomplished? You have increased your debt.
Is there a better way? Sure. Get a job and maybe slow down your education. Not only does this help you avoid debt, but there is one even more important benefit.
Speaking only of my own industry, education, our classrooms are filled with pinheads who have never spent a day outside of the classroom in their lives. They don’t have any idea how the real world works, and therefore give bad advice based on misinformation they have been fed throughout their sheltered lives. Students who ask these people for life advice (as students frequently do) are given cookie-cutter advice that rarely answers the initial question. They shun those who think as individuals, and praise those who follow the herd. In short, they do a disservice to the individuality that young people struggle to master.
You might be thinking that I am a little hard on my peers, calling them unexperienced pinheads, but too many of my peers blissfully walk through life with their eyes covered in an effort to avoid any of that real-world experience that is so crucial to the human experience.
All of them also have student loans.
So in short, if you are one of those few who have to get student loans, use the money wisely. Use the money on tuition, books, supplies, or other things that go directly to school. Ignore the idea that these loans are deferred until after you graduate, and make payments whenever possible. The only way to do this is to decrease the time spent in school and increase the time spent at work. Above all, avoid paying any bill that is not directly related to school, and never pay off something that carries its own interest rate with the proceeds from a student loan.