Extra financial aid after graduation unwise for students

by Charlene Oldham, Contributor

College kids thinking about taking an an unpaid internship or an entry-level job in an expensive city after graduation should be scrimping and saving their part-time pay in anticipation of high rents and other post-college costs.

What they shouldn’t be doing, experts agree, is taking out additional student loans to pay for the first months and years after graduation, no matter how attractive flexible terms and bargain-basement interest rates might be.   

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“A fundamental rule of student loans is that students should only take out what they need to complete their education,” says Nick Prewett, director of financial aid at the University of Missouri. “We would not recommend taking out more than a student needs during school to cover costs later.” 

The unemployment rate for young, recent college graduates averaged 8.8 percent between March 2012 and February 2013 compared with 5.7 percent in 2007, according to the Economic Policy Institute. New college graduates are also earning less than those who came before them. This can make it impossible for new graduates to dent student debt, which is higher than ever before.

“Unfortunately, it’s kind of a Catch-22,” says financial aid consultant Jodi Okun.

Forty percent of undergraduates attending private, for-profit colleges reported using federal loan funds to pay other expenses. And students attending public colleges are almost twice as likely as those at private colleges to borrow money for expenses beyond tuition and fees.

Students who borrowed money to earn bachelor’s degrees in 2011 graduated with an average $26,600 in student loan debt, up about 5 percent from 2010, according to the Project on Student Debt at The Institute for College Access & Success. Some of that debt isn’t only for tuition and fees.  

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Skimpy starting salaries may encourage some students to borrow even more money while they are still enrolled in school to cover expenses after graduation, which can be easy for many students who find themselves eligible for loan amounts that exceed tuition, fees and even reasonable living expenses.

Federal student loans are intended to only cover educational expenses and typically require students to demonstrate financial need. Many banks and other lenders also offer private student loans with fewer restrictions, although at higher interest rates. 

No matter how tempting the terms might be, financial aid experts say students should limit debt.

Instead, students should slash expenses where they can and get a part-time job to reduce their student debt load says Okun, founder of College Financial Aid Advisors in Seal Beach, Calif. Then they won’t be as financially strapped when they graduate, even with a scanty starting salary.

“Not only is it giving you extra income, it will be building your resume and making you more employable after graduation,” she says.

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New graduates who aren’t able to make payments on federal student loans should investigate repayment options before their credit scores take a hit. Okun also recommends cutting expenses and getting a second job if you’re working an unpaid internship or a low-paying, entry-level job. While waiting tables after work might not be what you had in mind on graduation day, it beats maxing out your credit cards.

“I don’t know if there is a secret solution, but work equals money,” she says “If you are taking on more debt and not bringing any money in, you can go into a spiral.”