Applying and qualifying for a student loan has become essential for most college and postgraduate students in the country. In fact, statistics show that there are around 43.2 million students in America who owe a collective amount of $1.7 trillion in student debt.
Getting a student loan can definitely help one finish their studies. Sadly, they’re also not the easiest loans to pay off. These repayment plans are infamous for their heavy impact on credit scores, high-interest rates, and not to mention the mental exhaustion from starting out your career with debt.
That’s why you should be extra careful when applying for a student loan. Don’t only look at the pros. We strongly advise assessing the situation from all angles so you can effectively make an informed, objective decision. For starters, let’s break down the aforementioned disadvantages of student loans:
1. Higher-Than-Normal Interest Rates
Have you ever wondered why the monthly payments on student loans are so high? That’s because the interest rates on these plans are higher.
Unlike with secured personal loans like car and house loans, there’s no asset that serves as collateral in case the borrower defaults on payments—which is a big risk for the provider. As a result, they’d bump the interest rates up to compensate for the said risk.
Federal student loans have a fixed interest rate of 4.53% for direct subsidized and unsubsidized undergraduate borrowers. Federal direct unsubsidized loan rates for professional and graduate students are at 6.08%. Lastly, federal direct PLUS loan rates for professional or undergraduate borrowers are at a steep 7.08%.
On the other hand, private student loan rates are a bit more volatile. The fixed rates could vary anywhere from a frugal 4% to an extremely pricey 14%. This might be a given, but if you opt for private student loans, we strongly suggest looking for options that are on the lower end of the spectrum. High rates are often reserved for those with bad credit standing.
2. Heavy Impact on Credit Scores
With the high-interest rates and heavy monthly payments, it’s not unusual to hear that many borrowers lag a month or two behind on payments. How long are you allowed to miss your dues?
The exact terms and conditions vary based on your loan provider, but most federally funded student loan programs would only enter default after a 270-day delay. While it’s not advisable, missing one or two payments is still tolerable—although, you’ll be considered a delinquent. The provider only resorts to stricter guidelines once the borrower completely defaults.
What’s more alarming, however, is that the U.S. Department of Education states more than 20% of borrowers default on their student loan payments. This percentage roughly translates to millions of defaulted accounts annually.
The first thing that would happen if you default on student loan payments is your credit score tanks. Don’t take this lightly. Bad credit history due to defaulted student loan payments can take years to restore.
Second, you might be forced to undergo wage garnishment. This means that your employer would withhold a portion of your salary and allot it for student loan debt payment.
Finally, the loan provider can take the delinquent borrower to court. Although, this would only happen if the borrower refuses to cooperate and avoids making the correct arrangements to settle the dues.
Note: You can check the student aid website for the full list of details and consequences that delinquent borrowers face.
3. Lengthy Repayment Period
To say that most workers spend the majority of their careers paying off student debt is no exaggeration. In fact, a survey by the New York Life shows that most Americans take an average of 18.5 years to pay off their student loans. If you finished studying at 23, you’d already be past 40 by the time you complete your repayment term—which is insane.
Unfortunately, shortening the repayment plan on student loans is not often a choice. The average student needs to borrow around $25,000 to $50,000. Meanwhile, the federal-mandated minimum wage is $7.25, which totals just under $14,000 per year.
Even if the student finishes school and lands a decent-paying job, statistics show that the median combined annual household income in the country is just under $70,000. Yes, this could likely cover student loan debt. However, most households earning this amount already have kids to support, mortgages, rent, and car payments, among others.
There are some success stories where students pay off their debt in just five years or so, but this isn’t very common. The fact remains that most people take two decades to pay off college debt.
Not only is this terrible for your long-term financial management, but starting out your career with bad debt isn’t exactly a confidence booster. That’s why some debtors feel panicky and anxious to finish their repayment fast. No young adult should have to deal with that much debt so early in their life. It’ll definitely take a toll on one’s mental health.
How to Handle Student Loan Applications and Repayments
Unfortunately, foregoing student loans is not feasible for many students. Studies show that more than 83% of students feel they can’t afford the fees and dues that come with a college education. Furthermore, CNBC reports that the recent COVID-19 pandemic has forced more than half of enrolled students to look for alternative ways to pay tuition.
That being said, it’s 100% understandable if applying for a student loan is your only shot at getting a degree. Here are some tips to ensure everything goes well, from the application to the last repayment period:
Explore All Available Loan Providers
Don’t jump on the first student loan plan you see, even if it’s a federally funded program. Explore all your federal and private options then compare the interest rates, student aid benefits, repayment terms, and borrower terms and conditions.
Consider Debt Refinancing Options
Stuck with a terrible student loan plan that you blindly signed up for years ago? Consider refinancing your loan. Look for a new loan provider who can give you better terms, reduce your overall debt amount, and accommodate a repayment term that matches your lifestyle.
Don’t Increase Your Liabilities
We know how exciting it can be to receive your first paycheck. Even if you’re making barely above minimum wage, the mere fact that your spending capacity just shot up is enough reason to celebrate.
However, you should still be mindful of your spending. Don’t increase your liabilities until you’ve paid off at least half of your student loan debt. The luxury bags, designer clothes, and flashy car can wait a few more years.
Focus on Finishing Your Repayment Fast
There are multiple reasons why you should always strive to pay more than the minimum on your student loans. First, it speeds up the repayment term. The quicker you get your loan plan over with, the sooner you’ll be able to work toward other milestones such as buying a house or car.
Second, it prevents interest from adding up. Interest rates are percentages and they’re a portion of the total amount you owe. That means you can reduce the overall debt and accrued interest on your plan if you always pay more than the minimum and direct payments straight toward the principal amount.
Lastly, it’s good for your mental health. Seeing your total student loan debt quickly shrink is a big confidence booster. You’ll find yourself even more motivated to finish the repayment term quickly.
Get a Side Hustle
Let’s face it, a nine-to-five job isn’t enough to cover your student loans. If you want to finish your repayment plan quickly, you’ll have to boost your earning capacity as well. A good way to do that is to build another source of income.
For example, you can try creating an eCommerce store. Find a niche you’re interested in, research in-demand products to list, build an online store, then start selling. If things go well, you can even get an online payment processor that accepts card transactions from customers all across the globe.
Considering all the disadvantages, should you completely ignore student loans? Definitely not. Being able to pay for college is a privilege not everyone has. Lack of money should never be a hindrance to one’s education. If applying for a student loan is the only way you can afford tuition, then by all means apply for a loan.
The best approach is to be patient and objective. Getting into a good school is already a tall challenge in itself, so having to find ways to pay for tuition as well can feel overwhelming. However, do not rush the process. Doing things haphazardly and blindly signing for the first plan that comes your way might be initially easy, but you’ll likely encounter issues in the long run.
Don’t be afraid to seek the advice of a reputable financial manager. Look for a professional who can explain how loans work, what the best debt management strategies are, and how you can utilize these loans to improve your credit standing.
Plus, fulfilling all these applications can be exhausting and intimidating. Taking on them by yourself will simply cloud your reasoning. Trust us, having someone to support you throughout the process is much better for both your physical and mental well-being.
What steps are you taking to pay off your student loans as quickly as possible? Share your tips with us in the comments section below!