How to Use Student Loans Wisely

I recently read an article on using student loans wisely where the author posited that there was a pervasive “epidemic” among college students because they were using their loans to pay for things such as beer, clothing and flat screen TVs. Whether this is truly an “epidemic” or not, I could not say. His description certainly does not match my college experience, but I am sure there are some students who do use their loans this way. While I do not agree with the author’s blanket characterization of college students, I do agree that there is a large misunderstanding around loans and how they can be used wisely. I think that some of the blame for this misunderstanding should fall on the shoulders of the students, some on their parents and some on educational institutions. As my primary audience is students, here is what I think that a student should know about using his/her loans wisely:

  • Don’t Forget Your Loans Are NOT Free Money: When you get a loan disbursement, it is easy to trick yourself into thinking that you are receiving a free gift. The money seems to come in with no strings attached, when in reality this money has massive strings, called interest. Check out a loan calculator to see how much paying back this loan will really cost you over time.
  • Borrow Only What You Need: Make sure to return the loans that you do not need. Even if it is just an extra $100-200, that is extra money that you do not have to pay back later. Most people who hold on to money “just in case” are likely to spend it because it is available. Even if you put it into a savings account, remember that you are likely earning less interest in that account then the loans are accruing in interest so don’t take out more than you need.
  • Create A Budget: Make sure that you know exactly what your expenses will be before you accept your loans. The best way to do this is by creating a budget. Join the fall budget challenge for more information. Resist the urge to just estimate. Take the time to stare your income, expenses and lifestyle in the face.
  • Reduce Your Expenses: Ask yourself if you can reduce your expenses. Can you cut down on how often you eat out or go shopping? Could you try to take the bus a few times per week? Try to find a healthy, frugal balance between funding your needs and wants.
  • Supplement Your Income: Ask yourself if you can increase your income. Can you work while you are in school? How many hours can you work without sacrificing your school work, social life or peace of mind? Can you find other scholarships or grants? Check out for additional scholarship opportunities. Every dollar you earn will save you a lot on what you have to pay back later.
  • Pay Yourself in Installments: One of the smartest things that I did with my loans was pay myself every month. I kept the loan money in my savings account and “paid myself” my loan money in monthly installments to my checking account so the only money available was what I would need for that month. This allowed me to pace myself with my loans and kept me from thinking that I had more money than I really had.
  • Fund Your Education First: Remember that these are “student” loans. Use your loans to pay for your tuition and books first. Then pay your bills and groceries. Lastly, you can consider other lifestyle related purchases such as dining out, entertainment and travel.
  • Emergency Fund: Make sure that you do have some money available for emergencies during school that you do not touch unless absolutely needed. You may not need this if you have savings or a friend/relative who is willing to help you out if you have car trouble or health emergency.
  • Cover Large Expenses: In some cases, loan money can be used wisely to cover large expenses. For instance, if you need a computer, car or another large item while you are in school it is possible to use student loans wisely to purchase it. But, I encourage you to consider these questions: is this purchase a need or want? Is it necessary to my education? I am ok paying it back plus interest for years to come? If yes, go for it! If not, you may want to consider another way to make the purchase.

Contrary to some popular belief, student loans can be used wisely to pay for your education and support you while in school. With some careful forethought and planning, student loans can help you live frugally and maybe even teach you a little about finances along the way!



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