It’s a new year and a new semester. Your college schedule is bringing a lot of new things to you – new classes, schedules, experiences, and more. That more includes options for spending the money you may or may not have, which could lead to new debt in your name. So let’s talk about debt as a college student. Instead of focusing on student loan debt, we will pay attention to other new debts you might incur as a college student and what you should consider before agreeing to carry them.
Most common types of debt among college students
Student loan debt is the most common type of debt among college students. Two-thirds of college students take on debt to earn a bachelor’s degree. Student college loan debt comes in the form of federal and private loans to pay for things like tuition, living expenses, and books.
However, college students take on other types of debt as well. A few of the most common non-student-loan debts are personal loans, car loans, and credit cards.
Personal loan debt is one of the most common debts among college students with 33.1% of students carrying personal loan debt. Personal loans are a type of non-revolving credit, which means it is a single transaction from the bank. You apply once and are approved for a loan amount that is disbursed to you all at once. For example, if you are approved for a $5000 personal loan, you would receive all the funds at once, minus any fees and account charges, and as you pay off the loan, your limit to spend does not increase, unlike credit cards.
Borrowers have greater access to personal loans that they may have considered out of reach. With the presence of apps to check your credit scores and peer investment companies, personal loans become an attractive funding source because of the offers that match lenders to borrowers. The apps take the homework out of finding a personal loan. Additionally, pre-qualification without a hard hit on your credit makes it easier to peek at personal loan opportunities.
Personal loans should not be used for tuition purposes. Lenders must go through a rigorous process and are held to a different standard to be considered an educational lender. In many cases, the federal regulations imposed are in place to protect the borrower. Personal loans are not subject to the same regulatory oversight. Furthermore, personal loans do not carry the flexibility and consumer protection that educational loans do. Personal loans are challenging for college students because of the uncertainty of current employment and limited credit history. For those who do obtain a personal loan, repayment begins immediately, rates are much higher, and the term is much shorter than that of educational loans.
Remember: when you use an app for free, someone is paying the bill. When it comes to credit score apps, the ones paying the bill are the companies that want your business.
Getting a car after graduating high school sounds exciting. Car and banking companies offer incentives for new graduates, low payment ads lure families to the dealerships, and a quick online search for “car loans for college students” reveals millions of results with ads and buying guides. Is it smart to finance a car when you are going to college?
The answer: it depends. You should under no circumstance use student loans to buy a car. Getting a car loan as a college student is possible, but you may have a harder time than most because of higher interest rates, limited credit history, and limited or unstable income.
Before you get a loan to buy a car, consider a few questions first:
- Can I afford this if I lose my job? What is the backup plan?
- Am I relying on someone else to make the payment if I cannot? Are they willing to pay the loan?
- Can I afford car insurance?
- Do I have a down payment?
- Can I have a car on campus? Does the campus offer ways for me to get around if necessary?
If you are unable to qualify or pay for a car, do not settle for high-interest rate loans just to get a new car, choose a used vehicle instead, or save up money for a down payment. Make sure you have a stable income before you decide to buy a car.
According to a College Finance survey, 64.8% of college students have credit card debt. Credit cards are viewed as easy money and are often used for dining, shopping, gas, and travel. Only 23% of students say they use a credit card for emergency purposes, but 44% of card carriers say their credit card debt causes worry and anxiety.
Credit cards are a form of revolving debt, which means you use them as you pay off the balance. This is useful if you carry a low balance or no balance at all because you pay the bill every month. When credit cards are used for non-emergency purposes, they become problematic for college students, especially for those who do not have a steady income or make only the minimum payment. Early on, the credit card becomes a tool, but just as quickly, the card becomes a monthly bill with no practical use or available funds. You work to pay the principal and the interest only.
A credit card should not be used to over spend a smart monthly budget. If you don’t have the money to pay cash, the credit card just becomes another form of debt you have to find a way to pay back.
Plan for a smart financial future
If a student encounters financial trouble while attending college, they should speak with the campus financial aid office before seeking alternative funding sources on their own or through an app. SUNY’s Smart Track resources provide high school students, current students, and prospective students with resources and financial literacy tools to plan for everything from paying for college to budgeting and investing over their lifetime.