Student loan debt is on the rise and the numbers are staggering. Total student debt is approximately $1.2 trillion and is second only to U.S. mortgage debt. This level of debt is not only a burden on students but it is a burden on the economy as a whole.
Here are 5 things you need to know about student loan debt:
- This type of debt is nearly impossible to discharge in bankruptcy. It is critical to understand that bankruptcy laws have changed. If you find yourself in that unfortunate situation, it is likely that you’ll be stuck with your student loan debt. According to an article in The Wall Street Journal on 01/06/2014, fewer than 1,000 people try each year to have student loan debt discharged in bankruptcy.
- Student debt is on the rise. A report issued by The Institute for College Access & Success (TICAS) states that in 2012 the average student loan debt was $29,400. The average debt increased at a rate of 6% per year from 2008 through 2012. This is roughly 3 times the rate of inflation and is in line with increases in college costs.
- Interest rates will impact borrowers. Interest rates on federal student loans are now more closely aligned with market interest rates. While rates are low now, they may not be in the future. The current rate for undergraduates is 3.86%. New laws have put caps on those rates at 8.25% for future years. If rates were to rise to this level combined with rising debt levels, the impact on borrowers and the economy as a whole would be significant.
- Using private loans (non-federal) can be risky. According to TICAS, loans made by banks and private lenders typically have the highest interest rates for those that can least afford them. The report goes on to state that private loans lack flexible repayment options that are often found in federal student loans.
- Don’t borrow too much. Just because you CAN do something doesn’t mean you SHOULD. Banks and financial institutions are all too willing to give students a loan. Don’t borrow funds simply because the bank is willing to lend it to you. Before you borrow, think beyond college graduation. There will be other big purchases to make like homes and cars. The more you shell out in student loan payments, the less you can devote toward a mortgage or retirement funds.
As college costs continue to rise, the impact of borrowing is increasingly significant both on the borrower and the economy as a whole. This demonstrates the need to plan for education costs very early on while making economical decisions on how, where and when to pursue an education. Without minimizing the importance of a college education, it isn’t worth a lifetime of insurmountable debt.