If you’ve ever applied for a student loan, a car loan or a home loan, you know that financial institutions will give you a total amount of money that they will lend you and let you shop around from there. Remember, you don’t have to take all of the money offered.
Picture: Omar Bárcena
This might seem like common sense; a bank issues you a car loan for $15,000. That means you can afford a $15,000 car, right? Not really. Your budget isn’t determined by how much someone will loan you. It’s determined by how much you can pay back. The Art of Manliness explains how this applies to student loan debt as well:
Before school starts, you’ll get a letter telling you how much in student loans you’ve been approved for. You don’t have to accept the full amount. Take a look at your whole financial situation and decide how much you need to make it through the college year. Many students take the full amount and use what’s left over after tuition and books as spending money. But if you work while you’re going to school, you won’t need to do that.
If you take out more money than you really need, you’ll need higher monthly payments to pay a loan off on time. However, if you can afford that higher monthly payment, then paying that amount towards a lower balance means your loan will be paid off sooner and with less interest. Banks know that the more they loan you, the more interest they can make back, but that doesn’t mean you have to accept that offer.
What Every Young Man Should Know About Student Loans [The Art of Manliness]