The $4 Beer That Costs $7.72 On A JD Loan
Most people consider themselves discerning consumers who make informed decisions about important purchases. I certainly think this about myself. But when it came to spending my student loan money in graduate school, I fell into a common trap.
When I was picking a bar prep course after law school (a significant expense), I went with the most expensive one without really thinking about it. “I’ve spent so much already on law school, what’s another extra thousand or so?”
I may have ultimately made the same decision, but what I regret was allowing myself to be pulled into that kind of faulty logic. You can hear it around universities and graduate schools everywhere
“What’s another $80 at the bar tonight/$100 for a textbook I could otherwise borrow/$3,000 for a spring break trip because grad school is hard and I just need to get out of here.”
I also wasn’t immune to this sort of thing in my less consequential purchases. But “just this once…” can quickly turn into just those 20 times you made poor spending decisions and will result in a significantly larger monthly payment on your student loans.
I’m not just saying that you should spend less in school so you’ll have less debt. After all, being young and in school offers some unique opportunities for travel and living.
What I am suggesting is to avoid going into student-loans-are-free-money autopilot. To do so, I suggest considering two factors:
1. The Cost of Your Expenses Over Time
Take, for example, a $4 beer. That beer costs four dollars right? Nope, not if you’re paying with student loan money. Let’s just say, for example, you’re buying that beer with money from a subsidized Stafford loan from the Federal Government. So your beer fund carries a 6.8% interest rate that started accruing before you bought a drop. You’ll pay that loan over 10 years. Assuming that “$4 beer” was funded by such a loan, it actually cost you around $7.72 of your future earnings. I’ll let you do the math on the spring break trip you absolutely needed.
If you’re a student, this probably isn’t the first time you’ve heard something like this. When I was in grad school, I was certainly aware of the fact that I was paying interest on all of my expense. But, because the money kept flowing in at the beginning of every semester, it became more and more difficult to connect the reality of repayment to my reimbursement check. I’d fall into spending habits right after receiving those funds that, if I’d stopped and really thought about it, didn’t make much sense.
I’d often think, “Oh, I’ll make a salary eventually and it won’t matter.” But that line of thinking is flawed. It still just delays inevitable repayment at a higher price. Because there’s no “free” money. It has a cost: a chunk of your future paycheck.
This brings me to my next point. Because if I’d allowed the true cost of my expenses to sink in, then I might have been more certain I wanted what I was paying for.
2. Want What You Pay For
Now that my loans have entered repayment, it figures that I’d say I could have been more careful spending while in school. But it’s different when you’re actually at the decision point. Exciting opportunities for fun and life experience arise while you’re in grad school. I’m by no means saying that you shouldn’t take them just because student loan interest exists. I’m saying you should truly want what you’re paying for.
A good example recently came up during a conversation in our office. Our CEO David Klein was telling us about a trip he took to Antarctica while in business school. He was on the fence because the trip carried a price tag of $6,900 and he was in school with student loans. But he ultimately decided to go when he thought about what it would add to his monthly loan balance.
“I thought to myself: Would I spend $86 a month over the life of my loan to experience Antarctica?” And when I framed it that way, the answer was an unequivocal yes.”
See? I told you this wasn’t just another “DON’T SPEND MONEY IN SCHOOL” article. David made a well-considered decision that took into account 1) the actual price and 2) whether the trip was worth that price.
It’s easy to take a step back when you’re considering a trip to Antarctica, but not so easy to allow this to permeate your day-to-day decisions. But take it from me, I put this kind of thought into my daily expenses now pretty much because I didn’t while I was in school.
I recognize that you’re going to spend that student loan money on things other than tuition, books, and meals. I did and almost everyone does. But I hope that when you do spend it, you think about how much you’re truly paying and you actually want what you’re paying for.
Nathan Howard is Corporate Counsel at CommonBond, a student lending platform that provides a better student loan experience through lower rates and a commitment to community