January 26, 2005

8:27 PM

FinanceFilter: I recently experienced the wonderful epiphany of 'college student = poor' as I finished paying bills and checking my bank accounts today. It seems that I've spent almost all of my summer job savings, and by February 1st I will have the grand total of approximately $12 to my name.

My basic question is: what should I know before taking out student loans? I'm looking for personal experiences, warnings, recommendations, etc. I want to make sure I do this right so a few years from now I won't be posting an AskMe question about trying to get out of my many-times-deferred loans. I'm not hardcore set on taking out student loans, but it's an option that seems favorable at first glance and has been recommended and pursued by many of my friends. [MI]
posted by ElfWord to (17 comments total)

My situation: I am 2nd-semester freshman majoring in Information Technology. I've already done a few web design jobs in the past, and plan on continuing to do more to rebuild my savings. Getting a steady job would be possible, but not preferable at the moment due to my 18 hours of classes + stage managing a play. Over the summer I'd be more willing to commit less time to classes and more time to a steady week-long job.

I'm in Georgia(U.S.A.) and have the HOPE scholarship, which pays for my tuition, and my mother is currently paying for my rent and other major bills. But she is insistent(rightly so) that I contribute to supporting myself by paying my car insurance, gas money, and providing my own spending money. I want to be able to do this, but at the same time I don't feel like I can do well in classes if I'm also having to add a full-time job on top of that. A student loan is a tempting option that would allow me to contribute while not having to pay for the contribution until I have time for a job.
posted by ElfWord at 8:28 PM on January 26, 2005

I took out student loans, but they were of the government-backed, subsidized variety that actually go to pay for tuition.

Whenever I hear about people joining the Army because they can't pay for college or going to community college because the four-year option is too expensive, I get annoyed that they don't know about student loans as an option to help with tuition.

HOWEVER, the idea of taking out student loans to pay for perks doesn't seem like a good idea, unless you know you can actually pay the loan off during the summer.

If you live within a mile or an easy bus ride from campus, I would seriously consider giving up the car before taking out loans.

If giving up the car is not an option, does your school offer work study programs? Most do. You should be able to get a regular schedule of four or five hours per week, which can at least bring in a little bit.

Getting a degree is important, and taking out loans to finance a degree puts you ahead of people who don't get a degree. But take it from me: debt is still an unnecessary burden that can really weigh a person down when s/he graduates.

Folks who graduate without student loan payments looming over their heads have a lot more freedom to experiment or take chances after graduation than the rest of us. They also have a much easier time paying off new car loans or affording swank apartments when they don't have another $200 per month payment already looming over their heads.
posted by croutonsupafreak at 8:40 PM on January 26, 2005

It doesn't sound like these will be large loans. Most people have some student loan payment. My only advice is to try to get a government loan, like Stafford, or Perkins, and then you can easily defer, and you don't pay any interest until after you graduate. Don't go into credit card debt, and try to program your heart out during the summer.

You should be fine. Get good grades and enjoy college.
posted by goneill at 8:52 PM on January 26, 2005

First thing: do not just go "I need a student loan" and try to take one out.

Go to your school's financial aid office. Talk to them, and figure out what your options are. Be sure to file a FAFSA for next year.

Car insurance, gas, spending money. That's gonna be under $3K/year, right? $12-20K is an entirely manageable student loan. It's just a car's worth of loan, but the payments will be lower.

Light work-study at your school is fine; hell, you can learn a lot doing that.

But... look, I teach at a region-of-the-state state university, with a lot of people facing similar choices. I see a lot of people very hard to do well at school and work full time, and I see almost all of them failing to do so. If you have the freedom to make the choice, it's probably smarter in the long run to take out the loans and spend that time you would've been working busting ass in school to excel, at least for loans as small as you're talking about.
posted by ROU_Xenophobe at 8:52 PM on January 26, 2005

They are the best unsecured loans you can get. But they will loan you an awful lot of money relative to your (projected) income. Not great if you don't NEED that money.
posted by smackfu at 9:04 PM on January 26, 2005

you've received some great advice already - let me add one more data point: if this is the first loan that you will ever have, it's an opportunity to use it to build up your credit rating later on in life.

take that loan (once you negotiate the amount and terms - see above advice from other mefites), then use it - and pay it back.

I see you are in Georgia. I did my studies at McGill in Canada, and my government student loans were issued through a bank (that's the way our system worked up here, back then, in Quebec). I later got a very good rate on a mortgage with the same bank, only because they already knew me from the student loans.

I also approached the student aid office at McGill, and they also provided some financial assistance while I was an undergrad. Check with your university - there are some bursaries available just for this purpose (small amounts - but that is what the grantor granted).

All the best in your studies.
posted by seawallrunner at 9:17 PM on January 26, 2005

Mind what ROU_X says about the FAFSA, which I believe you may have already filled out as part of the HOPE requirement, and take full advantage of your financial aid office -- apply for every scholarship you can. Inventory your personal history: every society, club, or business your family belongs to is a potential source of aid. It's worth the research.

I didn't have any money to go to school but my own savings and work/scholarship money, and it wasn't enough. So I took out some small loans that all went toward tuition and books (which you don't have to worry about, having the HOPE scholarship, so good for you).

How I got two degrees with minimal (under 4k) debt: I worked full-time for a while to earn enough income to qualify for the maximum grants. This was partly because while taking classes, I only worked part time, valuing study and a whole range of activities -- plays and music and a bit of calm private time -- more than anything else. While in school, I had roommates, no car, and a barebones, severely budgeted life, and I can't say that I didn't envy people who got their financial aid checks one day and had shiny speakers the next. Since I now know people who are in 10, 20, 30k or more in debt for my particular degrees, I am grateful to my younger self, a dumbass in so many other ways, for putting up with some sacrifices to avoid having that horror hanging over my head now. (Let me tell you what helped: working my alumni association pledge drive for people in my major -- was that an eye-opener. No one had a damn dime, but they were all incredibly nice about it. I talked more than one person out of sending money that they so obviously needed more than we did.)

You already sound like you're thinking about this intelligently, but I think the key lies in what others have said: reduce your expenses to the absolute minimum, and avoid taking out more debt than you need. If you find yourself with extra, sock it and take a smaller loan next time. You'll be glad you did when you are an older ElfWord.

One last thing: if you are not covered under your parents' medical insurance, investigate your options for the most reasonable catastrophic illness coverage you can get. I have yet other friends who are paying huge medical debt off on top of their loans thanks to unexpected accident or major illness, and it's an awful place to be.
posted by melissa may at 9:49 PM on January 26, 2005

Student loans were one of the best things that happened to me. The money is simply worth more to you now than it will be in the future.

Government loans tend to come with low interest rates and can be handled quite easily (you can tie your payback amount to your salary if you end up not so well off).

The interest is also tax deductable upon payback (unless you make massive bank, then you don't need the tax perks). I think only morgages come with such nice perks.

Don't take out more than you need of course, but if you're willing to make payments for the first ten years of working, it's worth it.
posted by Gucky at 10:58 PM on January 26, 2005

They typically disburse the money once per semester. Try to find something like a money market fund that will pay some interest yet still let you take a monthly draw into your checking account. You want high interest rates, low or no fees and check writing privileges. Usually they either limit the number of checks or specify a minimum amount but that fits perfectly with taking a monthly draw. This also helps in budgeting.
posted by caddis at 7:06 AM on January 27, 2005

Getting a degree is important, and taking out loans to finance a degree puts you ahead of people who don't get a degree.

I work for a college, and I have to strongly disagree with this statement. Of my close friends, family and colleagues, about half have advanced degrees (from some good colleges) and half don't have any degree. For the same career level, the half without degrees are consistently earning more than those with degrees. When you factor in 6+ years of student loans, the do-it-yourself-ers have far more financial freedom than those with school debt.

In my area, good tradesmen make more than your average non-corporate lawyer. Mechanics make more than office managers. For many employers, good programmers don't need a piece of paper to prove that fact. Degrees are sold as a license to print money, but you are paying a user fee to believe in a myth. Making money is about mindset and skillset, not education level. Having a degree can make good jobs easier to find, but I wouldn't take out a loan unless the additional salary you'll earn from your degree will pay off the loan within a couple years.
posted by McGuillicuddy at 9:26 AM on January 27, 2005

Whenever I hear about people joining the Army because they can't pay for college or going to community college because the four-year option is too expensive, I get annoyed that they don't know about student loans as an option to help with tuition.

Whenever I hear about people who think their $25,000 annual tuition is a better deal than community college, I get annoyed that they believe some additional wisdom will be imparted on them because of the price. Education is what you make of it, not what you pay for it.

If you have to take out a loan for education, there should be some guarantee of the value of your investment. Some risk is acceptable, blindly believing the college salesman admissions rep is not.
posted by McGuillicuddy at 9:41 AM on January 27, 2005

Whenever I hear about people who think their $25,000 annual tuition is a better deal than community college, I get annoyed that they believe some additional wisdom will be imparted on them because of the price

Whenever I hear people talking about $25,000 annual tuition, I get annoyed that people don't realize that only a few more-or-less rich people (have to) pay that. Almost all students at undergraduate schools charging $25K are paying far, far less than that -- quite often, less than if they went to their local Big State U.

There is the small matter that you can't get a BA from a community college, unless you mean something different from the normal use of the term.
posted by ROU_Xenophobe at 9:58 AM on January 27, 2005

Thanks for all of the advice so far everyone, and please keep it coming. To answer a couple of (possibly implied) questions:

1) Cutting out the vehicle isn't an option. I live a 15 minute drive away from campus, and need to have my vehicle also for my duties as stage manager of a play, and to get myself to meetings in a timely manner if/when I start doing web design work.

2) Army/military service isn't an option for me. Personal reasons.

3) Getting a degree is essential for me(and trust me, as someone who may become a web developer I spent many long nights questioning that) not just for my chances of employment, but also because after getting a Bachelor's degree I think I will want to pursue further higher education, possibly to the point of getting a PhD.

4) The kind of loan I'm looking for wouldn't need to be large. Probably around $3k/year as ROU_Xenophobe said.

5) I should be able to work on paying off this loan almost immediately after I receive it if I can manage to gain consistent employment as a freelance web designer for businesses in my area. Starting out charging only about $350, my profit from that would be $230.
posted by ElfWord at 12:27 PM on January 27, 2005

Caveat--the following was written by a debt-ridden snob:

As someone who spent a few semesters each at a community college and at a state university, and who ended up getting my degree from an Ivy, I feel especially qualified to say that you get what you pay (or borrow) for. Don't let fear of debt (especially the low-interest kind) make you change your education plans.

Citibank had a loan called Student Assist that had reasonable rates similar to the federal loans. It may still be available. Also Wells Fargo has an educational loan program. They used to offer the Apple Loan, but they may do traditional student loans as well.
posted by mds35 at 1:32 PM on January 27, 2005

Now that you've clarified a few things and I've thought about it some more, you have a pretty good situation, given that your rent and major living expenses aside from your car are covered. The only thing that makes me leery about you taking on debt is your freelance plans. Putting in a few years with a company would give you a guaranteed income stream to pay off your debt and get some more professional experience under your belt. In any profession, freelancing is very tough, and until you're out of school debt and have a nest egg built up you are risking insolvency (particulalry if you have unexpected medical or other catastrophic debt, as I mentioned above). Good luck to you, whatever you decide.
posted by melissa may at 2:07 PM on January 27, 2005

There's some really great advice here. The only thing I feel qualified to add, though, is; no matter what option you take, make sure you have a budget. And not just "a good idea what I spend money on". I'm talking write it down - on paper, in a Quicken-type program or (like me) in Excel. You must record it, track it and tweak it. And follow it.

This is something I learned the hard way. I like to refer to myself as a "financially born again". Good luck!
posted by ObscureReferenceMan at 2:14 PM on January 27, 2005

My personal experience - do not default on your loans. They will always give you extensions to pay, but don't default. It's not fun.
posted by efalk at 5:58 PM on January 27, 2005