What Do Student Loans Cover?

You’re thinking about taking out a student loan and you wonder, what will those funds cover? Or, more appropriately, what are they allowed to cover? Student loans cover the “Cost of Attendance” (COA). Cost of attendance is the sticker price for any given higher education institution and it encompasses: tuition, room and board and miscellaneous expenses (accounting for approximately $2,000 to $3,000 of the COA), such as books, travel and personal expenses (as in spending money for the necessities while you are at college). When you take out a student loan, those funds can be used for ANY PORTION of the cost of attendance.

What Student Loans Cover If You Live Off Campus

You may have the question, what happens if I live off campus and/or don’t participate in one of the structured meal plans that my college offers? Well, you are in luck. Your student loan will cover your off campus housing as well as meals, even if they are not part of a structured meal plan provided through the college you attend.

Borrow Only What You Need and Will Be Able to Afford to Pay Back

The above may alleviate some of your concerns about having enough funds to cover all of your college expenses, meaning that if you take out a student loan you will be covered for any and all of the costs associated with your college experience, as long as they fall into the 3 buckets, tuition, room and board and miscellaneous expenses. I caution you to take note of the total amount you are borrowing since, remember, you will need to pay it back. Yes, that is what a loan is all about. It may not be for four years down the road, but your day of reckoning will arrive. And not only will it arrive, but it will be greater than what you actually borrowed since interest will have accrued while you were in college. See example below:

$20,000 Amount Borrowed
4% Annual Percentage Interest Rate
10 Years Repayment Period
$202.49 Monthly Payment
$24,298 Total Amount You Will Need To Repay
$4,298 Amount of Interest That You Will Pay Up and Above The Loan Amount

Multiple the above by 2 or 4 to get you through college. Increase that interest rate to 8 or 10%, since 4% is a highly desired rate to obtain, and not likely if you are taking out a private student loan. The numbers are staggering. $800+ per month to pay back in loans over 10 years. Think about how you will possibly be able to afford that.

In addition to the above, let’s talk about what kind of annual salary you should be making in order to pay back, let’s say, a $40,000 student loan. $60,000. Yes, $60K. How many college graduates do you know that make $60K coming right out of college? Not many. Debt / Salary Wizard is an invaluable interactive calculator that can help you as you embark on making this decision on which college you will attend and how much it will cost you, in loans, over time, and after you graduate. I use this program with many of my families and students so they can see a clear and realistic picture of what life will look like after college, depending on the amount they will borrow. Going through this process is sobering and eye-opening, but better to do so now rather than later, after you have already indulged in taking out student loans.

So, why do I outline this for you? I am a believer, and coach all of my families and students, in not borrowing more than you can afford. It is alluring to take out a loan since it will cover your college expenses and, after all, paying back this loan is SO far down the line. Not focusing on the end game, what effects this will have on you after you graduate from college, or worse, yet, when you leave college without a degree, is a grave mistake you can make. One that you cannot get out of. Once you take out a loan, it is with you forever, until you are lucky enough to pay it off. And will you be lucky enough that it will only take you 10 years? Maybe, but maybe not.

Bottom line. Be proactive. Understand what amount in loans it will take to get you through your four years, or more likely five to six years, to graduate from college. Take that total and find out what monthly payment you will be required to pay for what length of time and know what salary you will need to earn in order to pay this, and live at the same time.

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