In the current education climate, student loans seem to be an unfortunate fact of life.
The majority of college students receive some amount of their college financing through a student loan. This is partly the result of the rising cost of education, under-performing investments and 529 college savings plans, student’s unwillingness to apply for scholarships, and ignorance about financial aid.
Whatever the reason, student loans are now more popular than credit cards (judging from the total amount of debt).
Since it seems our country is resigned to taking out student loans, it is important to note these not so pleasant facts about student loans:
1. Student loans have to be repaid.
“Seriously? I have to repay that? I thought that was part of my financial aid!”
I hear this disturbing thought process all too often. Students accept student loans, not realizing that it is indeed a loan, they signed a promissory note, and they are required to repay the loan.
This is also the reason that so many students get to the end of their education, and then finally realize that they have taken out $57,500 in student loans (the maximum Stafford loan amount for an undergraduate student).
Please understand that a student loan is part of your financial aid package, but it does have to be repaid.
2. Student loans charge interest
“But, my loan is subsidized and is interest free!!”
Many student have the misconception that their student loans are all interest free. The Stafford subsidized student loan is indeed interest free while you are enrolled in school. However, 6 months after you graduate, when you begin to repay your student loan, interest will accrue on that loan just like on any other.
Just because you are not required to make payments while in school, does not mean that you have an interest free loan.
3. You cannot discharge your student loans in bankruptcy
It is better to realize this now than 10 years down the road when you try to include your federal student loans in bankruptcy proceedings. Simply put, you cannot.
Your federal Stafford student loans are protected from bankruptcy. This fact is specifically stated in the promissory note you signed before your loans were disbursed. This means that even though your mortgage, credit cards, and auto loan were discharged, those pesky student loans won’t go away.
In fact, if you default on your student loans, your tax refund will be garnished too. Quite a nasty little trick if you don’t know its coming.
4. Your student loan payment will be significant
The average cost of a student loan repayment amount is $60 per $5000 borrowed, under the standard plan. The average student loan debt in this country is around $25,000. That will equate to $300 per month on your student loan payments.
You won’t be able to pay $50 here and $50 there. You will be expected to make a fixed monthly payment, for the remaining term of your loan. I don’t know about you, but I could find many more fun and productive things to do with $300 per month.
5. Student loans can hurt your credit rating
When your credit report is pulled, every student loan that you have ever had will show up on the report. Every missed payment, every default, and every late payment will be reported.
Your payment history, including your student loans, is one of the key factors in determining your credit score. You need to be aware that not paying your student loan can significantly impact your credit score.
The light at the end of the tunnel
The hope I have significantly scared you into not taking out student loans and pursuing other ways of finding money for college.
Here are some excellent resources that will help you towards this end: