If you qualify for student aid through FAFSA, then chances are you’ll be given a lot of choices for where your money comes from. Some, if not most will come from student loans; if you’re lucky you may receive a grant or two; and often you’ll receive what’s called “Federal work study.”
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Federal work study is essentially money that the federal government gives your university, which the university can then use to employ you while you are a student. Unlike loans and grants, you must work for it. You apply for a job at your college, and then you earn the federal funds as payment (like a regular work check). Most students who receive work study will be entitled to around $1,500 and $1,800 each semester.
If you’re brand-new to the world of student loans, you should take a look at our introductory guide that will help you understand all of the student loan basics.
This accomplishes a couple of things. The first is that it allows college students to build up a bit of a work history, which can really help them after graduation. (Note: Many students end up working in low-skill jobs such as gameroom attendants or dining hall workers, but you can find office jobs that will really help your resume stand out—so be sure to look around at everything available.) The second is that it gives the student money that they can use to cover college expenses like textbooks and supplies, or which they can apply to paying down their student debt while they are already in college.
Of all of the options, paying down your debt while in school is your best bet for reducing the total amount that you’ll owe after graduation.
A Tale of Waste
When I was in college, I was lucky enough to qualify for federal work-study. For each of the four years that I went to UConn, I received $1,800 ($900 for each semester). During my first semester, I worked as a gameroom attendant in my residence hall, and then for the rest of my tenure I worked as a public relations writer for the university (see, a fancy office job!).
The money that I earned let have a lot of fun in college. I used it to go to bars, to take weekend trips, and to buy food from outside the dining hall. I did fun stuff with my new college friends. I lived your typical college life: Putting whatever money I was earning towards having fun.
The problem with this is that I should have been using the money to pay down my debt while I was in school. Instead, I squandered $7,200 over the course of four years.
This is a hard subject to broach for a couple of reasons. I kick myself every time I think of how much money I wasted, because having $7,200 less in loans would be a dream come true at this point in my life (I graduated with over $60,000 in loans). But at the same time, the money that I spent helped me to build bonds with friends in college who remain some of my best friends. Would that have been different if I was more frugal in college? Who knows. In some aspects, sure. In the ways that matter? Probably not.
Don’t Be Like Me!
By not using my federal work study to pay down my debt in college, I was wasting a lot of money. But I didn’t just waste the $7,200 that I used for pleasure. If we assume that that $7,200 was a loan at an interest rate of 6.8% (which is the interest rate on most of my loans) then that means that over the course of a 10-year repayment plan I will have paid almost $2,750 in interest on top of the initial $7,200. That means that the cost of me having fun in college comes in at just under $10,000—a cost of $82 dollars a month. (FinAid.org has a nifty calculator that will help you estimate the interest that you’ll pay over the life of a loan.)
By not using that work study money wisely, I was essentially locking my future self into a substantial amount of debt. Oh, look there, I just kicked myself again.
I understand that you want to have fun in college, and there’s nothing wrong with that. But instead of spending all of your work study funds on beer and pizza, I would recommend you reserve a portion for yourself (say, 25% from each paycheck) and then use the remainder to pay down your debt. That way, you’ll be doing your future self a favor while also making sure that your present self doesn’t feel deprived.
How Should I Apply the Funds to My Student Loans?
The simplest way to use your work study funds to pay down your student debt would be to use it to cover any interest that you’ve accrued during the school year.
Federal student loans are either subsidized or unsubsidized. Subsidized loans don’t accrue interest while you are in school and at any point that your loans are in deferment; unsubsidized loans do accrue interest during these times. At the end of a period of deferment (say, while you are in school), if you can’t afford to pay off the interest that has accrued, it undergoes something called “capitalization”—and that’s a scary word.
When interest is capitalized, it means that it becomes a part of the principal balance. Do you know what that means? It means that you then have to pay interest on the higher balance. You are essentially paying interest on your interest, and that makes your loans a lot more expensive.
By paying off any interest that your loans accrue while you are in school, you prevent yourself from going through capitalization, which will make repayment much easier on you in the long term. If you have more work study funds left over after paying off the interest, you should use it to pay down whichever of your loans has the highest interest rate, ensuring that you’ll owe less interest (and save more money) over the life of the loan.
It’s All about Balance
College is all about balance. When you move away from home, you need to learn for yourself how to balance your social life with your studies. You need to balance your health with your desire to go out and party. And you need to balance your desire to have fun now with your desire to have an easier life in the future. Take it from me: Knowing that you’ve squandered $10,000 is no fun, and you’ll get a pretty sore butt when you spend the next 10 years kicking yourself every time you realize it.
If you’re looking for more ideas on how to pay down your student loans while you’re still in college, check out this post.