Budgeting Versus Defaulting on Student Loans
Students defaulting on their loans will always be a problem for the
government as long as there are students taking out loans. There will always be a few that don’t pay off
their loans. There many reasons why students default on their student loans. According
Ms. Farrell, the author of “Reducing Student Loan Defaults: A Plan for Action,” in the
Office of Planning, Budget, and Evaluation Survey, said “The main reason that students
default on their loans is that they cannot budget their finances” (Farrell 24). Even though
a number of students are working while going to school, they don’t understand the
financial burden that loans will place in their lives. In order for students to pay back their
student loans, they need to calculate their in school and out of school budgets.
If too many students neglect to pay their loans, it can create a serious problem for
students that are currently in school receiving financial aid. A school can be dropped out
of the student aid program. Under a current law, colleges and universities can lose access
to student loan programs if they have default rate of 25% or above for 3 consecutive
years. Institutions can also lose access to all programs, including grants, if the most
recent default rate exceeds 40%. The Department of Education just released
a list of more than 300 institutions that could lose eligibility for some or all student aid
programs, and 144 schools are no longer eligible to participate in student loan programs
because of high default rates (Dervarics 6). So we can see how important it is for
students to pay their student loans back; so that their school will not be dropped from the
student aid program.
Although the nationwide percentage of students who default on their loans has
dropped 50% from 22% in 1994 to 11% in 1997, it took the coming together of the
President, the Department of Education, Colleges, and college students to make people
realize that this was a problem (7). President Clinton said, “We have tracked down
defaulters and made them pay” (17). The partnership between President Clinton, the US
Department of Education, different Universities, and college students, can educate other
students through different programs. They can teach students how they can budget their
student loans into their finances and show them what the penalties are for not doing so. It
makes sense for students to budget their finances in the first place, so that they will not
fall into a pit of defaulting on their student loans. There are ways that students can
budget their finances.
First of all, students need to know what budgeting is, and how it can help them.
Budgeting can be defined as the ability to estimate the amount of money to be received
and spent for various purposes within a given time frame (Finney 175). Budgeting can
help students coordinate their activities, developing financial objectives, reveal
inefficient, ineffective, or unusual utilization of resources, make family members aware
to use money wisely, and allow recognition of problems before they occur. Although
good record keeping is required for the budget to be of use, once students get themselves
on a regular schedule of budgeting their finances it becomes just another daily/monthly
routine of life.
Second, it may be helpful to start writing the due dates of your bills on a calendar
so that you always know what bills are coming up to pay. Or, if you like organizers and
have a habit of looking forward to other up coming events, then write the due dates in an
organizer. For example, if a student writes down when their student loan payment is due,
they will see that the due date is coming up and that it needs to be paid. Students need to
plan out their bills. Maybe a student gets paid every two weeks, that student would then
need to decide what bills they are going to pay with what check. Maybe he/she could pay
their rent, electricity, and phone bill with one check, and pay their car and health
insurance, and student loan with the other check. They could then split what is left over
from both checks for food and social activities. It is a good idea to make a monthly
routine out of paying the same bills with the same check.
Third, students may also want to open a savings account and put as little as
twenty-five to fifty dollars per check into the account. This could be their emergency
money if needed. For example, if a student gets a flat tire and has to unexpectedly spend
money on a new tire, the money in the savings account would be there for that purpose.
The money can also be put away for end of the year taxes.
David M. Brownstone makes the following suggestions about financial planing.
“When approaching the question of life long financial planning a student should
keep in mid some very basic personal approaches: understand your current
financial picture and where you want to be in the future in your head and
on paper at all time, develop several alternatives to proceed the financial
goal you have outlined, continually update your short, medium and long
term goals, and if you feel you are not still too sure where you and your
family are going, seek professional help from a financial advisor. But
remember, no one will watch your finances as single-mindedly as you and
your family ”(Brownstone 5).
Remember, try to keep your money in the bank as long as possible,
because it can earn interest in your account. For example, if a student receives a visa bill
at the beginning of the month, he/she should wait to pay it until the due date to pay. TRY
TO PAY OFF ALL CREDIT CARD BILLS FULLY TO AVOID PAYING INTERTEST
TO THE COMPANIES.
Fourth, students should limit themselves to only one credit card, either Visa or
Master Card. If students have more than one credit card they may start getting the due
dates mixed up and it is easy to get into a big debt with the cards. Try to use them for
emergency purposes only, for instance, the example of the flat tire. In some ways credit
cards are even more dangerous for your spending habits. A bank card costs nothing to
acquire initially, and you can use it for almost anything, anywhere, even in large cities
overseas. Maris Groza, from the book Every Womans guide to Financial Planning
states, “Think of what you can do with this card, think also of the bill you could end up
with at the end of the month” (Groza 13).
Fifth, as a student puts money aside for social activities they are going to have to
realize, that they may have to sacrifice an activity for another one. For example, if a
student wants to go to a concert, and the ticket costs forty dollars, they may have
to give up on seeing a movie and going out to eat that week in order to have the money to
go to the concert and still cover their bills.
Students need to figure out what social activities they enjoy the most and where
they want their social activity money to go. If a student can’t go to a movie, ect. one
week because of their budget, perhaps they can include it in their finances for the next
week. If a student smokes or drinks, they need to keep track of how much money they
spend on cigarettes and alcohol. A student may find that cutting down on these expenses
will allow them to go to a movie and a concert in the same week, it could be more money
to put into their savings account, or to pay off bills such as their student loan bill. If
students follow these basic rules of living on their own, they should have no trouble
starting out in the real world. By budgeting their finances in a routine matter and making
sure all regular monthly bills are taken care of. If students budget, it benefits everyone in
society, including themselves, government, taxpayers, and schools, by not contributing to
the already large number of defaulted student loans.
Although most people in society do agree that budgeting their finances is an
important part of not falling behind on their monthly and daily bills, it is also important
for students to keep up with their student loan payments if they have one. Many
Universities, the US Education Department, and college students believe that if students
had to go through entrance and exit interviews before they received a student loan, they
would be better educated and understand why it is important not to default on those
loans. Hoping that would decrease the number of students defaulting on their student
loans. The program has been in process since 1989 in which all colleges students that
have been approved for a loan had to go through an entrance and exit interviews.
The interviews explain in detail what the student is responsible for once he/she
gets out of school as far as starting to pay back their student loan. An entrance interview
is a meeting with a financial loan officer at your financial aid office. The financial aid
officer will explain what subsidized loans and direct unsubsidized loans are to you.
He/she will go over what the interest rates and loan fees are, what your repayment
options are, when you have to start paying the loan, and if you have any
problems paying the loan that there is a deferent plan you can fall under. The overall
purpose of the entrance interview is to make you realize that it is your responsibility to
pay back your student loan not your parents, not work, nor the school! Every student
today has to go through one of these entrance interviews in order to get a student
loan. Exit interviews are also required when students graduate. The only problem with
this is that some students transfer to another school or drop out completely and do not
inform the lender; which causes the student to default on their student loan. Exit
interviews explain to students how they can make payments, what the interest rate of their
loan is, and what the different repayment plans that are available to students. The exit
interview also explains about a deferment plan that temporarily postpones payment on a
loan, grace periods, how a loan can be canceled, or transferred and how to manage your
loan records. Which again show that students need to budget their finances before and
after graduation.
Colleges now also have prerequisites that students have to follow in order to get
into a college. Students must have a high school diploma, GED, or take some test to
show that they have potential to complete a program. Colleges are also limiting their
programs to five years maximum. After the fifth year, a student has to speak to an
advisor to get their classes approved. The student is on a probation plan, with the advisor
making sure that the student is taking the right classes in order to get their degree and get
out of school. The purpose of these regulations is that the "students that have not
completed the programs are among the highest defaulter," says Ginger Gray, a Financial
Aid Officer at Glendale Community College.
The universities, the US Department of Education, and some college students
believe they can educate students through the entrance/exit interviews, by explaining how
a student loan process works so they will not default on their loan, once it comes time to
pay it off. Although educating students on how a student loan works is important, it still
would not matter if they do not budget their finances. When it comes time to pay,
students may still not have the to money make payments toward their student loan.
Budgeting helps college students organize their financial routine. It helps them to
evaluate their finances, by showing them what bills are coming up, compared to what
money is coming in. It helps students to compare and match expenses with income to
balance out their finances on a weekly, and/or monthly basis. So give budgeting a try,
and see your life become less complicated.
Bibliography
About the Author
Back to The Full Cup
Send comments to:
Tish24@imap3.asu.edu