By Blake Hollingsworth | Reporter
Managing personal finances, including the repayment of loans, can be an overwhelming task for many college students. The Ohio State University 2014 National Student Financial Wellness Study found that over 70% of college students are stressed about personal finances and nearly 60% fear they won’t have enough money to pay for school.
David Dicks, associate professor in the business school, explained why loan repayment can be daunting for students, highlighting the potential consequences for those who mismanage their repayments.
“You’ve got to be careful with using student loans to pay for expenses, especially if they’re not necessities,” Dicks said. “It’s also very easy to overestimate how much money you’re going to make when you graduate and to underestimate your expenses, because even if you get that wonderful job you’ve been dreaming of, people forget the progressive tax system means you’ll have less take-home than you would expect.”
Creating and adhering to a budget is crucial for financial management — budgeting requires students to carefully plan monthly expenses, identify essential costs and minimize credit card usage to avoid high-interest debt, according to Dicks.
Isabella Tole, a senior coach at Baylor’s Student Financial Wellness program, explained that budgeting plans should not be “cookie-cutter,” but rather tailored to each individual.
“Instead of fitting yourself to a budget, we like to help students tailor a budget to them,” Tole said. “We teach [students] ‘budget, track, budget.’ Essentially, you are creating a budget forecasting for the next month … Then, we give students this worksheet where they track — during that month — all their spending habits and at the end of the month, we compare the two to truly learn, ‘Do I have a good understanding of my spending habits?’”
Interest on federal subsidized loans is paid for by the government, whereas unsubsidized loans accrue over time. According to Dicks, students should be cautious when using income-driven repayment plans, as they can lead to negative amortization, where payments are insufficient to cover interest, causing the principal balance to increase.
“If you take one of these income-driven repayment plans that the government offers, the amount you pay is not driven by how much your loan is, how much you owe, but rather by how much money you make,” Dicks explained. “If the plan says you need to pay $200 a month, but the interest on your loan is $500 a month, your balance is going up, not down.”
Additionally, Dicks emphasized the importance of understanding the tax implications of loan forgiveness when pursuing such options. He said that in many cases, forgiven loans are treated as taxable income, meaning they’ll still have to be partially paid for indirectly.
One benefit some companies offer to counteract student loan payments is matching them as if they were retirement contributions, according to Dicks.
“If you made $75,000 a year and paid your student loan payments for $250 a month for 10 years, and your company matched your contributions for 3% of your salary, the benefit at the end of 10 years would be worth $38,000,” Dicks said.
For further assistance in personal financial planning, Tole recommends students make an appointment with SFW, along with utilizing resources on its website. Additionally, students can visit One Stop Financial Services for help with selecting a loan repayment plan.
“Every student is going to go through the experience after college where they have bigger financial responsibilities than they had before, so the best way to prepare is to start now,” Tole said.
