Advice for Students and College Graduates
Tuition, room and board, and textbooks are smart ways to spend your student loan money.
Eating out, buying CDs, clothes, going on spring break, or otherwise bankrolling your social life, are not.
Owning a home is almost every American's dream, but millions of college graduates are struggling under such a burden of student loans and credit card debt that the dream of home ownership seems totally out of reach. Advance planning, careful spending, and earning as much money as possible while in school can help limit the burden of student loan repayments.
Even if you don't directly use your student loan money for eating out, partying, spring break trips, clothes, jewelry, expensive haircuts and coloring, electronic gadgets, CDs, etc., you'll have to borrow more student loan money eventually if you indulge in these things. Every dollar you save (as in don't spend) is a dollar less, plus interest, that you don't have to borrow.
Keep this important fact in mind: Student loan money is for financing your education, not your lifestyle.
You'll be paying student loans off over a period of ten to 20 years, with interest, so keep them to a minimum. Students today accept student loans as a fact of life, but they don't always have to be. Financial aid, summer jobs, part-time jobs during the school year, and careful budgeting and spending can greatly reduce, and for some people, eliminate, the need for student loans.
Lenders warn that student loan payments that exceed 8% of your income are considered unmanageable. Most students don't even calculate what their monthly payments are likely to be when they're borrowing student loan money, and are shocked when they have to begin repayment.
Keeping your payments to 8% may seem doable, but 8% should be the total of ALL your non-mortgage debt in order for you to comfortably afford your payments. For someone making $40,000 a year, this would be about $275 a month (for student loan payments, car loan payments, and credit card payments combined), at today's low rates. As interest rates continue to rise, so will your future monthly student loan payment.
Rising interest rates will also make qualifying for mortgages more difficult for many people, but could really put the squeeze on those with student loans, who may have trouble qualifying even at lower interest rates.
Strategies To Prepare Financially for Home Ownership
There are things you can do to make qualifying for a mortgage after college less difficult. Here are a few:
- If you have $10,000 or more in student loans, you may be able to consolidate at a lower rate to lower your payments and use the savings to put away for a downpayment on a house.
- Set financial goals.
Avoid credit card debt. Have one or two major credit cards and pay the balances off every month. If you must carry credit card balances, transfer them to cards with lower rates whenever possible.
- Establish a record of paying your bills on time so you don't damage your credit score, which is key in getting the best interest rates on mortgages, car loans, and other loans.
- Check your credit report annually for any inaccuracies and resolve them if there are any. If you're planning to buy a home, start reviewing your FICO score at least six months before you start house hunting, and take steps to improve your score.
- Avoid taking out any new loans or applying for any new credit cards in the months before you start looking for a house.
- Pay off as much debt as you can before starting to house hunt, to help you qualify for the mortgage.
- Prepare a realistic budget and make sure you can really handle the mortgage payments on top of your other debt.
Save all "found" money: income tax refunds, bonuses, overtime pay, and cash gifts, to go towards your down payment or closing costs.
- Consider a less expensive car and apply the difference in payments to paying down credit card debt or saving for your downpayment.