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If you are one of the many students that every year start to apply for colleges, you might be thinking about all the expenses that come with getting a higher education and are considering taking out student loans to help support your finances. Only in 2020, the amount of money borrowed by students reached an estimated $102 billion. There are many reasons to avoid student loans. While it sounds like an attractive option, there are several reasons why you need to reconsider.
Here are 11 important reasons to avoid student loans:
- You have to pay interest.
- It takes a long time to pay your loan off.
- You run the risk of delinquency or default.
- Your future income may be used to pay off your loan.
- It’s almost impossible to discharge student loans.
- Your student loan can keep you from buying a home.
- You have to pay whether you graduate or not.
- Your chances of being hired may be affected.
- Co-signers are just as responsible for paying student loans.
- It has major effects on your mental health.
- There are better options to pay for college.
I will detail everything you need to consider before opting to get a student loan that can hinder your finances for life.
1. You Have to Pay Interest
When you borrow money for your college education, you do so with the condition that you will pay back interest.
Paying interest on a loan means that you will have to pay more than you borrowed in the first place. The average annual interest rate for student loans in the United States is around 5.8%, and it compounds daily.
Daily compounding interest means that the day after graduation, you will owe the original amount you borrowed plus 5.8% of this amount. The next day, the interest will be compounded on the new amount. Every day the amount that you owe gets bigger and bigger.
The longer it takes to pay your debt off, the more it will grow. You may begin to wonder, “does financial freedom actually exist,” given the increasing numbers on your loan balance.
You should also consider that the interest rate I’m mentioning is just an average, and the particular rate on your loan may vary depending on several factors.
For instance, it may depend on whether you’re applying for a federal or a private student loan.
Federal student loans always come with fixed interest rates set by the government annually. Private loan interests are more complicated because they depend on other factors like your credit score
history or your co-signer’s credit score.
2. It Takes a Long Time to Pay Off Student Loans
As the amount owed on your loan snowballs thanks to the daily compounding interest rate, it becomes harder and harder to pay your loan on time.
The Department of Education in the USA claims that repayment plans for student loans should take around 10 years, but by talking to peers and young adults in real life, you’ll quickly realize that the reality is different. You will be eating from your basic college grocery list well into your 30s.
After graduation, most people have difficulties finding jobs with incomes that would allow them to afford comfortable living conditions, let alone enable them to make large payments towards their loans. With a modest income, they resort to making minimum amount payments.
This means that they will not be able to pay off more than just the interest compounding for a long time.
It would take you, on average, 20 years to pay off your federal student loans in the United States. However, for some professional graduates, it can take more than 45 years. The amount of time needed depends on the type of loan and your repayment plan.
Therefore, before signing a student loan contract, think about the long-term commitment you’re making and how it may affect you in the future. This loan you take at only 18 can impact your employment and housing experiences later on.
3. You Run the Risk of Delinquency or Default
For some graduates, it might be difficult making even minimum payments every month to repay the student loan. If you miss your monthly payment, your loan becomes delinquent and will remain that way until you make the next payment.
Delinquency means that you might face penalties like late fees on top of the payments that are due.
The lender might allow a grace period of usually 15 days until your loan is considered delinquent, but it depends on the loan terms. However, if you haven’t kept up with your payments within a certain amount of time, which is usually stated on the contract, the lender has every right to report delinquency on your loan.
This will affect your credit score, which will inevitably decrease.
If your loan remains delinquent for more than 270 days, the loan is in default, which could mean even more severe consequences. You may lose the chance to explore other options to pay off your loan.
At the same time, the total amount, including any unpaid interest, becomes immediately due. You may also be taken to court and charged additional fees.
Taking on responsibility as big as a student loan should never be taken lightly, and what I just mentioned is only one of the reasons. Most borrowers will have to pay back their loan for an extended period, but for some, it may even become a lifetime burden.
Given that you can never be sure of your financial situation and paying abilities in the future, you also can’t be sure that you won’t need to suffer horrible financial repercussions if worse comes to worst.
Let’s not forget that with default, moving back in with parents becomes an option again.
4. Your Future Income May Be Used to Pay Off Your Loan
If you cannot pay back your debt for something like your house or your car, you have the option of giving back possession of them to the lender in order to get out of debt. This is not an option for student loans because the money lent to you is considered already spent.
After all, you can’t give back your degree or the time spent going to college to the bank.
In the case of student loans, if you fall behind with the payments, the lender can order your employer to withhold part of your wage to use as payment for the loan. When signing your contract, you’re taking on a lot more responsibility than you might think.
Not only will third-parties be able to deduct your wage in the case of not paying your student loan, but they may also dip into your social security payments and tax refunds.
These actions are well within their rights as long as you cannot pay off your loan in any other way. So, consider that when taking on a student loan, you may face an unsolvable paradox at one point. Let’s say you’re not able to afford a loan payment on your current wage.
A third party will take action and decrease this wage even further because of said reason, making it harder to reach the next payment deadline in time. All this will happen while your loan continues increasing, which consequently will make your payments higher and your loan harder to pay off as time goes by.
5. It’s Almost Impossible to Discharge Student Loans
As mentioned above, the lender of your student loan cannot repossess your degree or your time at college if you cannot pay off the loan. What happens if there is no other way of paying off the loan?
One of the only options left in this case would be declaring bankruptcy, but turning to this solution would be nearly impossible. The circumstances allowing a court to discharge a student loan are very particular.
In bankruptcy court, you will have to prove that your case is one of “undue financial hardship” for your student loans to be forgiven.
The only problem is, proving “undue financial hardship” can be challenging, to say the least. Consequently, your financial future will heavily depend on many external factors that you have no control over.
While there are guaranteed loans for unemployed individuals, they come with very unfavorable conditions that you should try to avoid if possible.
Another option that remains is student loan forgiveness, which, unfortunately, is very rare. You might be able to apply in rare and specific cases such as having total permanent disabilities, your school closing down, or the death of a co-signer.
In 2020, out of 227,382 applications for federal student loan forgiveness, only 3,776 were granted.
6. Your Student Loan Can Keep You from Buying a Home
At some point in your life, you will most likely look into the possibility of buying your own home.
In order to buy a house, you might have to apply for a loan, as real estate prices tend to increase as time goes by. Having an existing student loan can be a significant obstacle to taking out a loan and making monthly payments.
One of the main eligibility criteria for a loan is the debt-to-income ratio (ideally under 36%). This ratio becomes higher the more you pay towards a loan, which means that an existing student loan would significantly increase it.
It’s hard enough learning how to save money for a house fast, let alone with the extra weight of a student loan on your shoulders.
With a high debt-to-income ratio, you may not be able to take a loan for your home.
Furthermore, the student loan can make it impossible to be able to make monthly payments on the house. Even if you can make them, your student loan can make it very difficult to save enough money for the down payment usually required to buy the house.
Having a student loan makes buying a house significantly more challenging than it already is for most young adults.
Your ability to purchase real estate has a significant effect on your financial stability and performance, and taking a student loan earlier on in life can keep you from buying a home, affecting your finances negatively in more than one way.
7. You Have to Pay Whether You Graduate or Not
The moment you sign for a student loan, you agree to repay every single penny you received plus the compounding interest, no matter the circumstances. Even if you never graduate, you are responsible for paying off the loan.
Interestingly, a 2017 study found that students are more likely to drop out of college because of student debt. According to the survey, the financial stress due to debt amassing everyday pushes students to leave college.
Unfortunately, this means they are left with a debt that does not go away and no degree to help them generate adequate income to support said debt. So again, we’re faced with yet another paradoxical situation, which can show just how complex and challenging student loans can be.
Therefore, looking into alternative options can notably help you in navigating and avoiding these serious repercussions and hardships that you may experience when taking on a student loan.
8. Your Chances of Being Hired May Be Affected
Most employers often do background checks before hiring a potential employee. Background checks include checking criminal records and reviewing any public records available such as court documents. In a lot of cases, a credit check will be included, especially when it comes to jobs in the financial industry.
While the employer cannot see your actual credit score, they can access your credit report.
Your credit score suffers because of a student loan. If you are late on monthly payments or if you have a history of delinquent or default loans, it will show on your credit score. If a potential employer sees these records, they may disqualify you from contention based on your bad credit score.
This is especially true if your proportion of loan balances to loan amounts is too high. A high debt-to-income ratio affects your ability to be hired in general, as they may deem you as a high-risk investment.
Some jobs have it in their description that they require a good credit score, and your student loan may cause you to lose those jobs. Even if it is not in the job description, your potential employer may be concerned that you are distracted by the debt hanging over your head, or they might see it as a sign that you are not able to manage your finances properly.
Either way, having an active student loan with a less-than-perfect history can hinder your chances of getting hired, which will only make it harder for you to afford your next payment.
This, in turn, can decrease your credit score even further, trapping you in a vicious circle.
9. Co-Signers Are Also Responsible for Paying Student Loans
Co-signers bear the same responsibility of paying back the loan. In most cases, to take out a private loan, parents are required to co-sign for it. If your parents co-sign for a student loan, they will be just as responsible for paying it off as you are.
This means that they will have to face every consequence mentioned above, just like you. If the monthly payments are not made in time or at all, the co-signer’s credit record will also be affected, as well as their future earnings or their ability to apply for other loans.
They can also be sued by lenders or debt collectors.
All this goes to say that taking on responsibility like a student loan can have detrimental financial consequences for you and your loved one as well.
10. It Has Major Effects on Your Health
A college education is supposed to help you improve the quality of your life and open new opportunities, yet debt because of student loans are becoming a source of health problems.
Financial hardship due to debt can affect your mental health significantly.
Many people with existing student loans can suffer from mental and physical conditions that are believed to be directly or indirectly caused by the debt.
You may decide I don’t want to work anymore because the job is too stressful, and you can’t afford to live on the salary.
It is only natural to have a physiological reaction to the significant amount of pressure caused by the urgency of having to pay back an ever-growing amount of money. Stress caused by the loans can manifest physically in different ways. Symptoms include lack of sleep, exhaustion, headaches, loss of appetite, and irregular heart rate.
Stress can also cause depression and other mental health issues.
11. There Are Better Options to Pay for College
In order to avoid all detrimental consequences previously mentioned that come with taking out a student loan, you can explore other ways of financing your college education.
One alternative option is to apply for a scholarship. The government and other entities issue scholarships based on academic results. If you have a high enough GPA, you can explore different types of scholarships you qualify for and then apply.
By choosing this option, you will need to keep your GPA at an adequate level, or you risk losing the scholarship.
You could also apply for grants from the government. Grants are issued based on financial need rather than academic merits. You need to provide the documentation necessary, but once you are qualified for a grant, you will be able to attend college, and you do not need to pay the money you owe back.
Working while studying is another option.
Your college may provide a limited amount of part-time jobs if you prove that you need financial support. If all the job positions offered by the school are unavailable, you can look for a part-time job on your own, outside of college.
Although finding a way to finance your higher education without the help of a loan can be challenging, it may be worth taking a look at all your available options before taking on the demanding and long-term responsibility of a student loan.
Should I Take a Student Loan if I Don’t Need It?
You shouldn’t take out a student loan unless you absolutely need it. There are better options for financing your education, such as scholarships and grants. You should only get a loan if you have no other choice.
There are other options, such as income share agreements, but you should only consider these if you have exhausted all other options. You should also make sure you understand the terms of the agreement before signing anything.