If you’re wondering, “Can I take out student loans for living expenses?” the answer is an unequivocal “Yes!”
The government lets you use part of your student loans to take care of necessities like keeping a roof over your head and food on your table while you’re in school, because having those expenses covered lets you spend more time studying and increases your chance of getting a degree.
The trick is not to get carried away in defining what’s a necessity. Rent, utilities, and groceries? By all means. Cable television, drinks at the bar, spring break trips? Probably not expenses that you want to pay for with grants or student loans — even if you are able to get away with bending the rules.
You can use student loans to pay for living expenses, but what does that actually mean?
When you take out government student loans, you agree that you’ll only use the money you borrow to pay for expenses that are included in the school’s cost of attendance. Private lenders typically impose similar requirements.
If you take a look at the relevant chapter of the latest edition of the Federal Student Aid Handbook for college financial aid administrators, which spells out how schools must calculate your cost of attendance, you’ll see that it’s OK to use your loans to pay for more than just tuition and fees.
Eligible expenses for your loan include:
- "Room and board" (so you can use student loans for housing and food)
- Books
- A personal computer you'll use for study
- Supplies
- Transportation
- Miscellaneous personal expenses
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What your loan pays for can depend on your personal circumstances.
Depending on your personal circumstances, your financial aid administrator may increase your cost of attendance to include other expenses like child care costs, or the cost of operating and maintaining a vehicle you use to get to and from school (but not the cost to buy a vehicle).
If you’re disabled, your cost of attendance may include expenses for special services you need, like personal assistance, transportation, equipment, and supplies.
When it comes to spending student loans on housing and food, your cost of university attendance will depend on whether you’re living at home with your parents, in campus housing, or in an off-campus apartment or house. If you’re living off campus, the school will estimate “reasonable expenses” for your room and board.
Be frugal when you estimate your costs and keep your borrowing to a minimum.
The government doesn’t tell you how nice of a place you can rent or how fancy your meals can be, but if you spend more money on housing and food than budgeted in your school’s official cost of attendance, you may come up short of funds needed to pay for other expenses, like books.
When tipped off, the government will investigate and prosecute fraudsters like a Denver couple who used 27 different identities to obtain hundreds of thousands of dollars in student loans they spent on personal expenses. But the main victim when you squander your own student loans on extravagances like lavish meals, trips or a night on the town is YOU. Remember, you’ll be paying the money you borrow back, with interest.
The reality is that too many borrowers are still paying off their student loans well into their forties and fifties. While you might think of student loans as easy money, taking out more student loans for living expenses (or other non-education related expenses) is not the answer unless you really can’t get by without them.
Here are some ways you can avoid getting into a tough financial position
(Unfortunately, being smart about not living off student loans doesn’t take care of your bills.)
1. Minimize your borrowing expenses
Taking out student loans for living expenses can create bad spending habits and set you on the path to a troublesome financial future. Your strategy as a borrower should always be to try and borrow as little money as possible.
Generally speaking, it’s best to try and pay for as much of your education as you can with personal funds, and to take advantage of any scholarships, grants or work study opportunities that you can get your hands on.
Your strategy as a borrower should always be to try and borrow as little money as possible.
If you still find yourself coming up short and need to borrow money, turn to federal student loans first. Federal loans can offer you a low, fixed interest rate, and if you qualify for need-based aid, won’t start accruing interest until after you’re done with school. Federal loans come in a variety of flavors though, so it’s best to do a little research on how they differ.
Many borrowers may not be aware that they should take advantage of federal loans before looking to private lenders.
According to a report by The Institute for College Access and Success (TICAS), the volume of private loans has been rising since 2010-2011. And 47 percent of borrowers who took out private student loans could have opted to instead borrow that money through federal loans.
Federal loans usually come with annual and lifetime limits on how much you can borrow. For some borrowers, these limits might mean that they still need some help paying for college.
This is often when borrowers turn to private loans as an alternative to federal PLUS loans.
With PLUS loans, you can borrow up to your school’s cost of attendance, minus any financial assistance you’ve already received. But there’s a catch: higher interest rates.
Before you opt for a PLUS loan, it might be a good idea to check out private student loans. Private loans can be competitively priced with PLUS loans, depending on the type of loan you’re interested in and your (or your cosigner’s) credit.
Unlike federal loans, interest rates on private student loans are based on your creditworthiness, which means that if you or your cosigner have a solid credit history, you could get a lower interest rate. You also have the option between fixed- and variable-rate loans, each of which has its own pros and cons.
A fixed interest rate can offer some stability, since the interest rate will not change during the lifetime of your loan. But pick a variable-rate loan, and you could start off with a much better interest rate and lower monthly payments than you might get on a fixed-rate loan.
Another difference between federal and private student loans is that private student loans don’t offer some of the benefits that federal loans do.
For instance, federal loans offer income-driven repayment (IDR) plans, and the opportunity to qualify for loan forgiveness after 10, 20, or 25 years of payments.
IDR plans cap your monthly payments at a percentage of your income, so you’ll never have to pay more than you’re able. But IDR plans work by stretching out the term of your loan, so even though you be able to pay less each month, you might end up paying more overall. Go here for more information the repayment options available to you if you choose a private student loan.
2. Budget, budget, budget
Budgeting doesn’t just mean making sure you have enough in your bank account to cover dinner and drinks with friends. Your budget should take into account any income you may have, as well as all your direct and indirect costs.
Primarily, you need ensure that you account for your all your fundamental expenses — your rent or mortgage, car payments, groceries, and monthly bills like paying for your cell phone — and prioritize everything else, eliminating any unnecessary expenses.
3. Organize your bills
Spreadsheets may sound boring, but they can be a simple and effective way to organize and manage your bills. Make a list of all your accounts and bills, along with their corresponding balances, sorting them by priority and due date.
Once you’ve listed everything you owe (you can even include formulas to ensure your balances auto-update each month), add them up to see how much you owe. It’s also helpful to set up reminders on your calendar so you never miss a payment deadline.
4. Prioritize payments
Organizing your bills is a great way to see where your money is going, and weed out any unnecessary expenses you might have. If you find that you’re having trouble keeping up with your bills every month, it might be a good time to prioritize.
This is also where your fundamental expenses come in — always pay off your essential bills, like rent, water, student loans, and utilities, first.
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