Some People Are Using Student Loans To Pay the Bills – And Putting Themselves At Risk

Student loans have become an increasingly controversial topic in the news, what with the high delinquency rate and the repayment hurdles set by loan servicers. But they still remain one of the most viable options for those who want to pursue higher education but lack the funds to do so. In many cases, taking out a student loan creates opportunity for those with lower incomes and allows them to benefit from higher education.

But what if student loans aren’t being used for just educational expenses? The Wall Street Journal recently published a revealing article spotlighting what could be an alarming trend: borrowers taking out student loans with the sole purpose of paying for living expenses like bills or groceries. And it doesn’t appear to be just for the occasional pizza to fuel a borrower towards graduation – some of the loans are being taken out without intent to attain a degree.

Here’s what’s happening

In some instances, individuals are enrolling in school with the singular purpose of obtaining student loan aid. The reasoning may be that they don’t have enough money to cover their bills and other type of credit are not available to them – either because of previous late payments, insufficient credit history, or a number of other reasons. The lower interest rate attached to federal student loans makes these loans an appealing alternative to high-interest credit cards or payday loans.

The problem is that, instead of using the student aid for educational expenses or for paying housing and food costs while earning a degree, the money from these loans is being used for bills and other living expenses like groceries or even cell phone costs with no intention of ultimately getting the degree.

This creates a dire situation for the people taking out the loans. They understandably feel caught between a rock and a hard place, which is why they take the loans out in the first place. Many of the individuals interviewed in the Wall Street Journal article said they felt these loans were necessary to make ends meet. But unfortunately the loans – while helping in the short run – will often make their lives much more complicated in the long run and could have lifelong effects on their finances.

Why taking out excessive student loans hurts your finances

Student loans can pose profound problems to young people struggling to get by on limited incomes. For one thing, confusing repayment terms make it challenging to repay loans in the most efficient manner. Interest accumulates monthly, meaning that no matter how low the interest rate might be, you will end up paying more (possibly much more) than the initial amount of the loan.

In addition, student loans are very likely to stick with you for the long haul, because they are much harder to discharge in bankruptcy than other types of debt. This puts those who may already be financially vulnerable in a precarious situation. By taking out these loans, you aren’t stabilizing your finances but rather delaying the inevitable – the principal balance owed that will be owed down the road along with any interest that’s accumulated. It’s a money shuffle that could be dangerous for your long-term financial health.

A cautionary tale for student borrowers

In some ways it’s no wonder that young people who might never have planned to finish their schooling in the first place are taking out student loans. A recent study quoted in the Wall Street Journal article said that “schools disbursed an average of $5,285 in loans each to more than 42,000 students who didn’t log any credits at the time.” In other words, they apparently didn’t even require proof of current enrollment.

With the level of student loan debt skyrocketing (over 1 trillion is now owed nationwide) this newly revealed trend is certainly troubling. The ease of obtaining student loan aid and the loose requirements needed in order to take out high debt for educational expenses are two of the main concerns for those currently hoping to see change in the student lending system. Student loans usually don’t require a credit check (or the lender only requires a co-signer’s credit check) so the borrower may be offered higher loans than they can realistically pay back within their financial circumstances.

Both the schools and the lenders often have an interest in handing out the loans to anyone who applies, because the federal government in many cases backs the loans – ensuring that the school and the lender can be confident of getting paid back regardless of what happens to the borrower in the long run.

Borrower beware

It’s essential that anyone taking out student loans understands the true function of these loans – and the financial repercussions that occur once they’ve been taken out. What you borrow, you will pay back – with interest. Taking out more than you need means that you’ll be paying interest on a principal balance that’s higher than necessary. This can (and often does) present a huge challenge for future financial goals and can put you in a scary financial place.

Remember – the responsibility for taking out loans remains on the borrower and as the article cites, “even when schools suspect students are over-borrowing, they are restricted by federal law and Department of Education policy from denying funds.” The amount you’re offered, or the amount you choose to take out doesn’t necessarily reflect the amount that you need or the amount that’s in your best financial interest. Before signing up for debt – take a moment for a gut check. Is it a number that you can realistically assume financial responsibility for? If not, it’s time to reassess.

One Response to “Some People Are Using Student Loans To Pay the Bills – And Putting Themselves At Risk”

1. mellisa robert says:

   June 1, 2016 at 7:02 pm

   I know someone who has borrowed 20k a year for the past 4 years with no intention of paying it back. She has never worked, always on welfare. Has bad credit. So she says what can they do to me really. I will never work and they can’t take my welfare. She spends it the same way. Does not matter what something cost. She wants it she buys it. This is really bothering me.But looks as if she is correct…she will get away with it.