Student debt is everywhere. College students are using it, college graduates are paying for it, parents of those college students are shouldering part of it, high school students are thinking about it, and the economy is affected by it. As shown by a study shared by ASA.org, more than half of college students in the country take out loans every year to cover the cost of education.
This is roughly about 12 million students borrowing to pay for tuition fees and getting a degree in college. It also shows how there are 37 million borrowers that are having to deal with outstanding loans. And to top it off, 5.4 million student borrowers or 14% has one past due loan at the very least. And the amount being borrowed is getting bigger.
In 2010, the average loan debt per student borrower was about $25,350. But after a year, there was about a 5% increase to $26,600 and there are no signs of slowing down. In fact, the total student loan industry now stands at more than $1T. Also, more than half of the loans are in deferral or delinquent.
The industry has broken the trillion mark and is not to far behind in growth in terms of mortgage and credit card use.
Student debt shows its limiting nature
Student loans affect so much in so many ways. It carries a lot stress for college students and that doubles when looking for a job. For those fortunate enough to have a job, they are made to realize the hard fact of monthly payments. These would go to living expense and student loan payment. And this could even be more if the student fell prey to student loan debt scams. But these are not the only effects of student loans.
Carrying student debt can ripple into other areas of a student’s life. It extends to macro-economic levels and carries as well possible repercussions on the same level. Student debt is not only about making the monthly payment and ensuring a steady employment. There is more to having student loans that just making monthly statements.
NYtimes.com shared recently just how much prohibitive student debt is. There are areas in a graduates life where student loans plays a big part. Some of them are:
Putting business plans on hold
There are business-minded graduates who has plans of putting up a business of their own. These can be based on skills developed throughout the years, using the college degree to use it for business, or a hobby that can be financially rewarding. But student loans are holding these plans back.
There is reason to believe that the increase in student loans resulted to a decrease in small business ventures. One of the things looked is a person’s “debt capacity”. There is only a certain amount where people are confident about capping off a debt amount. Once reached, they are not comfortable taking out more debt.
For most, student debt already represents a big part of their debt capacity and this puts business plans on hold. Setting up a new business requires capital investment where most of it would be in cash. More than the getting the legal documentations in place, the business would need initial capital investment to get the business running. This would be for equipments, setting up an office or just the initial amount needed for inventory.
The more troubling part is that about 60% of job generation is coming from small start up businesses. And with most college students laden with student debt, this takes them out of the race even before it started. Start up businesses are left for a few people to explore.
Getting your own house is a big deal for most college graduates. This one of their biggest dream. But sadly, graduates carrying a mountain of student debt tends to put this on hold for the distant future. Less and less 30 year olds are putting off getting a mortgage after the 2008 financial crisis. But those with student debt has been affected more.
Prior to 2008, about 30% of 27 years old to about 30 years old had mortgage debt. But moving forward that year, there were only about 22% holding mortgage loans. There was a big decrease in the number of people putting off mortgage loans. The total student debt may pale in comparison with the mortgage industry but there are substantial college graduates that are unable to explore getting a house of their own because of debt.
Another ripple effect of student debt is the choice of employment graduate look into after college. The amount of their student loan is. most oftentimes, commensurate to how lucrative the industry they want to be in. More of a common sense decision rather than greed, it follows the simple logic that to pay a big student loan, the graduates need to look for a job that would give them a high salary. This will enable them to pay for living expenses and the student loan at the same time.
There are ways to pay off the student loan but until then, the graduate is made to face the reality of looking for a job not because of passion but because of student debt payments. Job seekers are finding themselves seeking employment in investment banking and other high paying professions.
Student debt in college can also prevent a person from pursuing further studies. There are some people who want to take on further studies as a personal investment but puts them on hold until such time that they can pay off their student loans in college.
The problem lies in the fact student debt takes a long time to pay off. And by the time that they are already paid off, life might have re-shuffled the priorities especially when the family is involved. More than pursuing further studies, you find that the need to save for the children’s needs are far more important. You end up foregoing the idea of self-improvement altogether.
Here is a video on the impact of student loans:
Managing student debt
In light of all of these, being able to manage student debt payments can bring in a lot of benefits for the graduate. Some tips to do this are:
- Make a budget. Ensuring that income and payments are properly matched up with extra amounts going into emergency funds and if possible, retirement funds as well. This makes sure that you are able to meet the payments for your student loan.
- Commit to a goal. Having a goal and committing to sticking to it can help guide you in paying off student debt. If you want to pay off the loan in 5 years time, make a solid plan in order to meet the objective.
- Increase income. Extra monthly income can do great wonders for your budget. It can increase your payment amounts over to student loans allowing you to pay at a faster rate. It can also help you save up more especially for the emergency fund. This will be your support fund when you encounter bumps along the way.
- Frugal expenses. As you increase income, try matching it with lowering down expenses. This can free up even more funds that you can allocate over to student debt payments. One upside to this is as you get used to living below your means, you will be able to build up your emergency funds faster, pay off mortgage loans at a shorter time, and save up for retirement earlier.