5 Crazy Ways College Kids Spend Their Student Loan Money
The average college student who borrows for school leaves with more than $37,000 in debt, according to estimates from financial aid experts. Most students turn to loans to cover the ever-rising cost of tuition and basic expenses like room and board. But some use their student loan money to fund less academic pursuits, including vacations and shopping sprees, a recent Student Loan Hero survey found. Such reckless spending could haunt them for years to come, especially if their dreams of landing a high-paying job after graduation don’t pan out.
The problem isn’t that college students are clueless about money. Nearly 80% of survey respondents said the cost of tuition, room, and board affected which school they chose to attend. Half said they weren’t borrowing any money to attend college. Another 23% were only relying on loans to cover about half the total cost of college.
College kids also have an eye on the future. Two-thirds considered salary potential when they chose a major. Nearly three-quarters selected a field of study typically associated with higher earnings, such as STEM, business, or health and medicine.
But when it comes to day-to-day financial management, some college students are making big mistakes. Namely, they’re using student loan money for non-educational expenses. Some were relying on student loans to cover basic living expenses, like a monthly cell phone bill or car insurance. But others were using borrowed money to buy clothes, go on vacation, and buy beer.
When Student Loan Hero asked how people were using their student loan money, here’s what they discovered:
- 19% used student loans to pay for cars and insurance
- 13% used student loan money to eat at restaurants
- 15% used borrowed money to buy clothing
- 3% used student loan money to go on vacation
- 2.5% bought alcohol or drugs
The idea that students might be using their loan refund checks to fund their shopping habit or buy weed might sound shocking, but Andrew Josuweit, the CEO of Student Loan Hero, wasn’t taken aback by the survey’s findings. If anything, he expected the numbers to be worse.
“Of all the responses, I was surprised that only about 3% admitted to spending loan money on vacations as opposed to 40% to pay monthly bills,” Josuweit said. “I previously thought that spring break was one of the most popular uses for excess student loan funds, but that appears not to be the case.”
Students with few financial resources might have no choice but to use their student loan money to pay rent, cover heating bills, or pay for childcare. (Some schools have even opened food pantries to help cash-strapped students get enough to eat.) But other students may view loan money as there for the taking.
“The reality is that it’s pretty easy for students to just take student loan money and use it as they please,” Josuweit said. After loan money is disbursed to the school and tuition and fees are paid, the college may issue a refund check for whatever amount is left over. Students can use this money for out-of-pocket educational expenses, like books or supplies. But once they cash the check, there’s no one stopping them from also using the funds – which can amount to thousands of dollars per semester – on whatever they want.
Most students are undoubtedly aware the money they borrow must eventually be paid back. What they may not realize is how much of a burden those payments will be.
“There’s likely … a mentality of ‘I’ll worry about this later once I have a job to pay for this’ when it comes to spending student loans this way. Students often don’t understand how costly and difficult it can be to pay back the student loans later,” Josuweit said. Those with plans to enter a high-paying field may assume their future salary will easily cover debt payments, he added. “But it’s quite possible they’re underestimating how expensive student loan payments can be regardless of salary.”
College students might also have unrealistic expectations of their salary and job prospects. When Accenture surveyed 1,005 college students who graduated in 2016, 82% were confident they’d make at least $25,000 a year. But nearly 40% of their peers in the classes of 2014 and 2015 reported earning less than $25,000 annually, and only 65% had managed to find a job in their chosen field. Other data shows that many STEM majors (as half of the respondents to Student Loan Hero’s survey were) don’t actually work in engineering, science, or tech jobs after graduation.
College students who are counting on a hefty paycheck to bail them out of their student loan debt upon graduation could be setting themselves up for big financial struggles. An unpredictable job market and the possibility of disappointing salaries are reasons to be cautious when borrowing cash in college.
“Even if they’re eligible for more student loans than they need, they’re allowed to refuse or return this money,” Josuweit said. Those who borrow for non-educational expenses “are simply going to end up in more debt which will potentially take longer and more money to pay off,” he added.
Rather than using a student loan refund check to cover a trip to Puerto Vallarta, students should focus on living within their means, though Josuweit admits sometimes, “That’s easier said than done.” College is expensive, and some students really do struggle to make ends meet, even with the help of student loans. But if you’re using borrowed money for beer runs and trips to H&M, it’s time to quit. A part-time job can provide the spending money you need, as well as valuable work experience. For students who’ve already borrowed more than they intended, seeking out scholarships or work as a resident assistant in exchange for free housing can help cut costs in future semesters.
Ultimately, students need to follow the same common-sense financial advice as the rest of us. “It’s always better for college students to only spend money they actually have,” Josuweit said.