Most young students that I remember figured that whatever “free money” the government was willing to
give loan them was ok by them and defaulted to taking the maximum student loan possible. Consequently, for many people who want to give students advice, the question becomes not, ‘How much CAN I get with student loans?” but rather, “How much SHOULD I get with student loans?” Several student finance columnists (at this time of the year doesn’t every paper suddenly have a student finance columnist to capitalize on back to school interest?) have recently wrote that automatically taking out the maximum student loan you can and not paying it back at the end of the year if you have a little extra in your bank account is a mistake. Their solid bread-and-butter rationale is that most students can’t figure out how much money they truly need, and that they will likely put themselves in a much bigger debt hole than they need to.
TM vs The Experts
I’m going to assume that if you are reading a site about student money matters you are not “most students” and subsequently you can handle a little more nuanced advice. First of all, I should make clear that there is absolutely nothing wrong with going through intensely pursuing your goal of being debt-free. Coming out of school “at zero” is not a bad deal at all (indeed, it pretty much described my state of affairs at that time). That being said, if I could do it again, I would definitely apply to take out the maximum in student loans, and I believe that it is not necessarily a bad thing to do so if you are confident in your ability to control your spending and budget appropriately.
While I was able to get through school without being exceptionally frugal and still not need student loans, I believe there are several advantages to having them. I’ve talked about this before, but it bears mentioning again that with the current setup for student loans governments will throw money at you in the form of grants if your parents make under a certain level of income. This is truly free money that never needs to be paid back. Even more importantly, simply by having student loans you are eligible for infinitely more scholarships and bursaries than you would be without the loans by virtue of the fact that you can now qualify as being in “financial need”.
Ethics? What Ethics?
One of the articles on our site that routinely gets the most attention is the idea of investing your student loan. While there is still debate to be had about the ethics of using any student loan money that you don’t spend during the year to invest in GICs, bonds, or equities, there is little doubt that it makes sense from a financial perspective. The simple math shows that if you take out a student loan, and don’t use $3,000 of it, putting it in an high interest savings account until you need to begin paying back the loan with interest is going to give you some free and easy money with almost 0 risk involved. Again, I’m not saying that I’m 100% behind this strategy, but I know plenty of student loan money that has paid for lattes, and ski trips and those aren’t exactly essential to the education process (although many students might suggest otherwise!).
I’m Not a Fan of Big Government but…
One other interesting factor is that with student debt loads in the news so much these days I believe the potential is there for substantial reforms to student loan forgiveness programs on the basis of cheap political points. The target demographic wouldn’t be students (because unfortunately we don’t vote enough to matter), but their parents. New Brunswick for example has recently instated a “Timely Completion” benefit that Jordann from My Alternate Life brought to my attention. Basically, if you finish school in a certain time frame New Brunswick will simply forgive any student debt over $26,000. By taking out the maximum in student loans you might be making yourself eligible for all kinds of government help down the road. There seems to be some very weird incentives at work here, but the government is what it is at this point.
Proving That Even Experts Can Be Right Twice a Day
Of course the worst case scenario is the one that experts are afraid of, and not coincidentally, I would say that it is likely also the most common. If you take out all that you can in student loans and make the conscious or not-so-conscious decision that paying back the loan is a problem that future you can worry about when you’re old and rich, then things probably won’t end well. Students are notorious for doing dumb things with money (hence the whole motivation for this site). I’m still not quite sure why this is surprising to people. Money continues to be a taboo subject around dinner tables across the country (do families still eat at dinner tables anymore?) and we continue to stick our heads in the sand as an education system when it comes to learning about personal finance in high school. Given those realities and the fact that most students are getting their first taste of “real money” and freedom at the same time, why don’t people immediately realize that we have created a perfect recipe for fiscal disaster? The bottom line is that the experts are right when they say that blindly taking out student loans and spending the money frivolously could severely cripple your finances as a young adult and put you behind the financial 8-ball to start your post-student life.
Only YOU Can Prevent Student Debt Tragedies
So should you take out the maximum in student loans? If you think you have the discipline and budgeting skills to make the most out of the money one way or another than I think the maximum is a good option. I definitely recommend looking in the proverbial mirror and taking an honest appraisal of your skills and mindset before going down this road though. If that Lululemon outfit looks to too tempting, or you are starting to think you could maybe buy a car now instead of putting up with public transit for one more year, then you should probably heed the experts’ warning and back off a little. The future you will thank this year’s version!