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Do’s and Don'ts of Student Loans

Young woman student smiling and holding notebook

At each stage of life, individuals have a variety of personal finance decisions to make, especially regarding taking on debt. Of course, as a student, student loans are the first thing you think of when you hear “debt,” but lurking in the background may be thoughts about purchasing a new car, buying a house, or getting your first credit card.

It’s important to look at as many sides as possible before taking on new debt so that you can make the best decision for yourself and your future. Let’s go over some tips for you to consider as a student.

Don’t Borrow More Than You Need

Each year, your school may offer you student loans as a form of financial aid in your award letter. The total amount offered is an estimate for how much they think you’ll need based on your financial situation (as well as your parents' financial situation in many instances). Realistically, if you don’t need the full amount offered, it may be wise to accept a smaller loan amount.

Because you'll have to pay everything you borrow back, you don’t want to frivolously take out more than you need, just to have to pay it all back (along with the interest) a few years later.

On a similar note, if you’re looking to finance a car while you’re in school, make sure that it’s a car that you can truly afford, and fits into your monthly budget. You don’t want to end up behind on payments, which can lead to your car being repossessed and/or dropping your credit score. 

When deciding what kind of debt to take on, think about your long-term goals and how borrowing will fit into them. 

Don’t Overestimate Your Potential Salary Out of School

It can be easy for students to overestimate their job worth out of school. You may want to make $100,000 after graduating from college, but is that a realistic salary for an entry-level position in your field? 

When factoring in how much debt you can take on, make sure that you are conservative when estimating your starting salary. You may even want to take the number you’re thinking of and decrease it by $5,000-$10,000 so that it’s more realistic. 

In fact, you should even be prepared that it might take you a while to find a job. Some experts estimate that it takes 4-6 months to find employment, and this can be especially true for new graduates who are job searching for the first time.

When considering future debt, be prepared for the possibility of being unemployed for a period of time or not making what you’d expect right out of school. This way of thinking can help you make sure that you don’t take on too much debt and have realistic expectations about how fast you can pay it off.

Don’t Use the Money For What You Want—Use It For What You Need

When you get your first credit card or land your first job, you might be thinking about all the things you can buy. College living is meager, but you don’t have to live that way anymore, right? Well, it’s a little more complicated than that. If you’re not careful, you might find yourself frivolously racking up credit card debt, which can jeopardize your future financial health.

It may seem like a great idea to charge purchases to a credit card and only make the minimum monthly payment; however it's important to realize that whatever you don’t pay off each month is subject to accruing interest. For example, if you don’t pay off $1,000, with 10% interest you’ll owe $1,100 next month without spending a dime! It’s not worth it to rack up debt on clothes that will make it more challenging later to buy a house or save for retirement.

Make sure that you use your money wisely and don’t unnecessarily spend money if you don’t have it. After all, it’s money you’ll have to pay back plus some more on top of that! 

Do Keep Track of Borrowing

This goes without saying, but you should know how much money you’ve borrowed while in school. It shouldn’t be a surprise when your first student loan bill comes 6 months after you graduate. You should know exactly how much debt you have, as well as how you’re planning to pay it off.

Unmonitored student loan debt is a recipe for disaster. If you haven’t kept track of your borrowing, you may have thought that you had taken out a $10,000 loan when in actuality it was a $20,000 loan. That’s going to be a pretty substantial difference to pay off. Plus, if you already have debt from an undergraduate degree, you’ll want to know that amount before you start thinking about taking out a loan for a graduate program. 

Do Prepare for the Couple of Months Before and After Graduating

You should also make sure that you are preparing financially for the transition out of school and into post-graduate life. You should factor in things like relocation costs for a job, industry certification fees, or special considerations for graduate school.

Depending on your situation, you may also be living on your own for the first time upon graduating, and that can come with some sticker shock. It’s important to be financially prepared for housing and job-hunting costs like traveling to interviews, particularly if you don’t have a job lined up immediately after you graduate. You may need to pay for rent/utilities for several months as you search for a job, and you’ll want to make sure that you have the resources to do that.

Do Consider The Type of Job You Want to Have After College

The amount of debt you take on in college can also impact your ability to pursue your dreams. If it has always been your dream to work for a certain organization or sector, it might be challenging to do so if you’re making a smaller salary and have a substantial amount of debt. You will want to consider ways to take out the minimum amount possible for your education so that you can pursue that dream career with limited financial worries.

In the end, taking on any debt, whether that be in the form of student loans, a credit card, or a car loan, should foster serious consideration. Make sure that the financial decisions you make in college benefit your future self—future you will thank you!

This article was originally published by our partners at iGrad. You can find the original article here.