A Short Course in Student Loan Management
by , CFP®, President, Charles Schwab Foundation; Senior Vice President, Schwab Community Services, Charles Schwab & Co., Inc.
February 23, 2011
I'm in college and next semester my student loan goes directly to me for the first time. It must last the whole school year and I'm worried it won't make it. I've already written out a budget, but I've never been able to stick to one before, so I don't have much faith in myself. What else can I do to make this money last?
Great question—and so important, not only for managing your school finances but also for preparing yourself for the not too distant future when you'll be out of school and on your own. So start by giving yourself a little credit. You're aware that you could have a financial problem and you're looking for ways to avoid it. That's smart thinking. Now let's turn that smart thinking into a smart plan of action that will help you live within your means.
Think differently about a budget
A budget can often seem like a list of what you can't afford to do: can't go out to dinner, can't buy those concert tickets. But budgeting is really about what you can
do. In fact, don't think of it as a budget at all—think of it as a list of goals you want to accomplish.
- You need to cover essentials like tuition, rent, utilities, food, schoolbooks, and transportation.
- You want to have some money for fun, whether it's taking in a movie or buying something new.
- If you can swing it, you want to save some money for future needs to cover an unexpected expense or a special event.
All these goals are important—and can be a great motivation for managing your money wisely. (Just think how good you'll feel when you achieve them!) Now, of course, you have to make it happen.
Create a monthly "paycheck" to cover both needs and wants
I'm going to assume that you'll get your student loan money in a lump sum each semester. Think of this as your income and divide your semester funds into a monthly "paycheck" for yourself.
Now put some realistic numbers on paper. First list your essential monthly living expenses—your needs
—and the dollar amounts that go with them. Then make a list of the extras you'd like to have but can live without—your wants
—such as entertainment, dining out, even clothes. Estimate how much these might cost each month. Finally, add these two together and subtract the total from your monthly "paycheck." Do you have enough to cover everything? Great, you can meet goals 1 and 2. Is there anything left over? Even better. You can meet goal 3. If you're falling short, don't despair. You may need to make some trade-offs, like going out less often. You may need to get a part-time job to make ends meet. But it's your choice—and you're in control.
Open the right accounts
A big part of staying on top of your money is having the right accounts. A checking account with ATM access is pretty much a necessity, and so is a savings account. Having both will let you, in effect, keep your money in different "pockets" to more easily control your monthly spending.
In your situation, I recommend putting your loan money in a savings account and transferring a specific amount to checking at the beginning of each month. Use only the money in your checking account for the things you need and want. If after a couple of months of careful management you find that you actually have a bit left over each month, open a second savings account to stash away those extra dollars.
Use automatic transfers and payments whenever you can
Make it easier on yourself by setting up an automatic transfer each month from your savings to your checking. That way you won't be tempted to change your monthly draw. Also consider setting up automatic payments for recurring bills such as rent and utilities. The more automatic things are, the less you have to think—and worry—about.
Beware of debt
I wouldn't be doing my job if I didn't warn you about credit card debt. You may need one credit card (no more!) for practical reasons, but promise yourself not to use it unless absolutely necessary. Never charge anything under $10—and pay your entire balance on time every month. Credit cards may seem to make life easier short-term, but credit card debt can create a lot of hardship later on.
Believe in yourself
Controlling your money takes planning and discipline—just like studying and passing exams. You already have these skills. Now apply them to managing your student loan. If you believe in yourself, I believe you can do it. Good luck!
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