Many young people eager to improve their employment prospects take on enormous amounts of student loan debt while in college. The thinking being that the degree they are after will make such a difference in their earning ability that it will all be worth it. But is that really the case? Or have student loans become an anchor on the dreams and aspirations of several generations of Americans? With the specter of student loan forgiveness such a hot political topic at the moment, now’s a good time to take a closer look at the issue.
The Upside of Student Loans
Right or wrong, good or bad, it is virtually impossible to get a good, high-paying job today if you don’t have a college degree. But with a 4-year degree program costing upwards of $25,000 annually at state schools and more than $50,000 annually at private colleges, who can afford to even go to college? Enter student loans.
- For many people, student loans make it possible for them to get a degree.
- Student loans can actually help you build good credit if you make all your payments on time.
- Student loans are also considered to be ‘good debt’ because the money borrowed goes toward increasing your long term earning potential.
- When applying for future loans, the presence of student loans on your credit history indicates your future employment prospects are good.
- They also indicate that you have the potential to grow your income since college grads typically make 25-50% more than those with just a high school education.
The Downside of Student Loans
While student loans may enable you to secure that coveted college degree and even help you get a good job, they are not without potential downsides. The ‘cons’ of student loans include:
- Average student debt these days is several times what it was just a few decades ago.
- If for some reason you are unable to make your monthly loan payments, it will have a significant impact on your credit rating.
- When you apply for a mortgage the lender will weigh your total amount of debt, including student loans, against your income and the amount you want to borrow for the house. They may well conclude you already have enough debt and refuse the mortgage.
- Your total amount owed also has a significant impact on your overall credit score.
- If you borrowed heavily to earn a degree that has very little potential financial upside, you may be saddled with a future of high monthly payments and low monthly income.
The Dangers of Deferring
In some cases, graduating students will be given the option of deferring payment on their student loans for a specified amount of time. Typically, deferments are granted if the person can prove hardship or if they transition directly into a graduate program. But before you think of applying for a deferment on your loan or loans it’s important you take the following into consideration:
- Not all student loans can be deferred.
- Some loans that allow deferment will essentially forgive any interest accrued on the loan during the deferment period. Others, however, will not.
- If the lender does not cover interest payments during the deferment period the amount owed when the deferment period ends will be greater than when it began.
- In some cases, you may have the option of just paying interest during the deferment period. In other cases, you won’t.
- Choosing to defer your student loans may impact your creditworthiness.
- If you apply for a mortgage or other loan during the deferment period you may be rejected for having too much unpaid debt.
The Dangers of Defaulting
If, for whatever reason, you wind up 90 days past due on a student loan payment your loan will be considered delinquent. If you end up more than 270 days late with your payments the loan will be considered in default. Defaulting on your student loans will trigger a series of events that will reverberate for years to come.
- Your credit score will likely be lowered by 100 points or more.
- Your loan will be sold to a collection agency.
- The collection agency will initiate legal action against you to collect the debt.
- The default will stay on your credit report for 7 years.
- You may lose your driver’s license.
- In some cases, you may have a professional license revoked.
Delinquency or default may seem like viable ways out but they will generate shockwaves that will hinder your quality of life for years. And, in case you were wondering, bankruptcy is not a solution either. In most cases, bankruptcy laws do not cover student loans. So even if you are granted bankruptcy protection against some creditors, you will still need to repay your student loans. Unless, that is, you can prove poverty.
So What to Do?
Given that the chances of securing a high-paying job without a college degree are slim there is little debate about the value of that education. And given that a 4-year college education in a state-run school can total $100,000 (and twice that or more in a privately run school) there is little debate about the need to obtain outside financing in most cases.
The question then becomes how best to deal with the mountain of debt. Here are a few ideas that should help:
- The goodwill letter – If for some reason you were late on a payment or two it may be possible to have that fact removed from your credit history. You do this by sending a letter to the lender explaining in detail why the payment or payments were late. If you have an otherwise outstanding payment record and your reason for the late payment is valid you stand a decent chance of success.
- Stay on top of your situation – After leaving school life takes over and, other than making their monthly payment, some people lose track of their student loan situation. They shouldn’t. The loan you took out may get sold to another company without you knowing about it. This can sometimes result in duplicate records on your credit history that can negatively impact your credit score and ability to get future loans.
- Consider a personal loan – In some cases, it may be wise to consider personal installment loans as a way to pay off student loans. There are many potential advantages to doing this, including:
? The personal loan may have a lower fixed rate than the student loan.
? You can combine multiple student loans into one monthly payment.
? Personal installment loans typically have shorter payback periods.
The Bottom Line
The best way to avoid student loan problems down the road is to take out as few as possible. And that should be goal #1. But if you should wind up with student loans on your credit history keep the above facts and tips in mind. They should help you avoid the kind of painful repercussions that can result from a student loan default.