Student loans are on the rise.
The average student-loan debt right now is $26,549, a 54% increase from 2005, according to FICO Banking Analytics. That same report shows that 11.8% of U.S. consumers have two or more open student loans on their credit reports.
But is taking out student loans a wise decision? Here are the good, the bad and the ugly when it comes to student loans.
Student loans can be a good thing. Even students with loans nearing $100,000 sometimes don’t regret taking them out to pay for school. Hope International University graduate Matt Hopster is one such person.
“I don’t regret them because I feel like education is a very important investment,” Hopster said. “It’s important to everyday life and to career fields.”
In the blog post “Should I borrow for my education?” by Ed Irish, director of financial aid at The College of William and Mary, he compared taking out a $21,367 student loan with taking out a $22,000 new car loan. The student loan would likely be a 10-year repayment of $227 a month. The car loan would be a five-year repayment at likely $386 a month. But one will last longer than the other.
“Let’s see where we are at the end of 10 years,” Irish wrote in the blog. “Your student loan has been paid off and you are reaping a lifetime of intellectual, social and economic benefits as a result of your education. The car … well, you may be lucky and still have it, but more likely you will be in the middle of repaying a second loan.”
Student loans can positively impact your credit score if you’re diligent with repayment, according to the non-profit organization American Student Assistance.
Since student loans are an installment type of loan (meaning, you pay a fixed amount for the life of the loan), they’ll have less of a potentially negative effect on your credit score than credit cards, which have a revolving balance. Also, student loans provide you an opportunity to build credit.
“I think student loans generally fall into good credit, especially if the borrowing is kept to a manageable amount,” Irish said.
Student loans can potentially interfere with life plans, which happened to Hopster.
“Ten years ago, people would just find a job immediately or have a little time to find one,” Hopster said. “For me, I had to start working as much as possible so it delayed applying for career jobs because I’m working so much elsewhere trying to pay off these loans.”
While Hopster doesn’t regret his education, he does regret the way he went about paying for it. Especially since he wasn’t able to consolidate his loans and now pays around $1,000 a month in repayment.
“Look for consolidation options within certain companies because some do and some don’t [offer them,]” Hopster advised. “Consolidating can greatly decrease your payments based on interest rates.”
Once you sign those student-loan papers, there’s probably no going back, which could create an ugly situation for some students. The idea that anyone can declare bankruptcy and have student-loan debt washed away is a major misconception among students, Irish said.
“It’s a very remote option,” Irish said of student loans being discharged through bankruptcy.
According to the Washington Post article “Five myths about student loans,” private and federal student loans can only be discharged if they pass the standards put forth in the 1987 case Marie Brunner v. New York State Higher Education Services Corp.
In a nutshell, your situation would have to be pretty dire to get bankruptcy relief from student loans. The standard …”requires that the borrower cannot maintain a minimal standard of living while repaying the loans, that the circumstances that prevent repayment will probably persist for most of the life of the loans and that the borrower made a good-faith effort to repay the loans. In the words of one bankruptcy judge, a successful undue hardship petition requires a ‘certainty of hopelessness,’” according to the article.
It doesn’t take an MBA in finance to see that most students don’t meet that extreme criteria.
But don’t think that student loans are inherently evil. They help pay for education when grants, scholarships and parents can’t. But if you take too much out, can’t get them consolidated and don’t have a job that pays well enough after graduation, it can put you in a sticky situation.
“I think people should be very cautious of what they’re doing with student loans,” Irish said. “I think it’s well worth it, though, and that a lot of people are really able to manage it.”
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