Paying for College, Part II: Budgeting with a Student Loan Payment

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If you read my last post, then you know that I amassed a pretty serious amount of student loan debt. While some students are wise enough to understand the future implications of taking out loans, many are blind about what a personal budget actually looks like (I certainly was), and how a student loan payment fits in.

EXAMPLE: Post-College Budget

Assume that you graduate with $40,000 in student loan debt, with a 5% interest rate and a 10-year repayment plan. Luckily, you get a job with a starting salary of $50,000. To a college grad who may have only worked hourly jobs in the past, that probably sounds great.

Let’s break down your paycheck first. After state and federal taxes are taken out, you have about $35,000 left as your take home pay, or about $2917 per month. Your student loan payment is about $430/month.

Here are your other anticipated monthly expenses:

Expense Monthly Amount
Rent $800
Utilities $150
Car Payment $250
Gas $200
Car Insurance $100
Groceries $400
Cell Phone $125
Cable/Internet $150
Entertainment/Misc. $200
TOTAL EXPENSES BEFORE STUDENT LOAN PAYMENT: $2375

Now tack on your student loan payment of $430:

$2375 + $430 = $2805 in total monthly expenses

If you stick to your exact budget, that leaves you with $112. Still ahead of the game, right? Well, what if…

…your apartment rent goes up?

…you have to pay for parking at work?

…the transmission goes out on your car?

…you want to go on a vacation?

…you decide to go to graduate school?

…you want to buy new clothes for work?

…you are invited to be in a friend’s wedding?

All of a sudden, your budget starts to feel much tighter. $112 feels like pennies. A credit card begins to look like your best option for meeting all of your short-term wants and needs, and you can’t even begin to think about saving for a house, or retirement, or…anything.

Is that the life that you want? Probably not. But if you do the leg work ahead of time–you apply for scholarships and work during the school year; you go to community college for 2 years, then transfer or you choose a state school instead of a private school; you live at home and commute or find the cheapest college apartment you can–you know what that does for your budget? That leaves you with $542 at the end of each month, instead of $112. Over the course of a year, that’s over $6500, and THAT is how you begin to live the life you want after college.

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