Managing Student Loans

Student loan debt across the U.S. now exceeds credit card debt. Figures cited in Time show that 11.2 percent of current student loans are now in default which represents borrowers with payments 90 or more days in arrears. With the continued emphasis on the importance of a college degree more and more students are borrowing beyond their capacity to repay the loans.

Many student borrowers are new to the world of finance and have not acquired the financial skills to fully understand the implications of amassing debt. The reality is that a fair percentage of students are graduating with debts that can accrue to the size of a mortgage, and may well take as many years to clear. Young people are signing up to loans unaware of the interest rates applied or the significant impact that a future default can have on them or on a co-signer.

All students should try to educate themselves about the nature of loans before signing their future away. It is shocking to see that some colleges that apply student loan counselling before loans can be dispersed, are only offering half an hour to students. Considerably more time should be taken to grasp a full understanding of how loans work, the benefits of paying the interest during college even on federal unsubsidized loans, and the repayment options open upon graduation.

Student loans are none dischargeable, meaning that even personal bankruptcy cannot eliminate them. Defaulted payments accrue interest that is compounded on the original debt, resulting in the principal borrowed becoming completely irrelevant as a meaningful figure.

The documentary ‘Default: The Student Loan Documentary’ is recommended viewing for students as it highlights individual stories of those who have seen their loans grow to insurmountable levels, as in the case of one graduate who left college with a student loan debt of $45,974 and now faces statements demanding $73,789. Compounded interest, penalty fees, deferrment costs, and charges cause such increases, and if young students are unfamiliar with those terms it will pay to learn exactly what they are.

The optimum way to keep a handle on student loans is to graduate in four years, something only 40 percent of students actually do. Each college year the maximum of federal student aid should be sought, along with scholarships and grants. Research the colleges that provide the best financial aid, though this is primarily dependent upon financial need being determined. If student loans are necessary then exhaust federal student loans and only consider private student loans as an absolute last resort. If federal loans are used then loan forgiveness programs should be looked into, and student loan calculators utilized.

Private student loans represent the worst case scenario for students. In most cases a student will require a responsible co-signer with established credit. It is imperative to understand that the guarantor is equally responsible for any default and should only agree to sign if they are willing and able to shoulder the payments if the principal borrower fails to do so.

Until recently students did not have the option of fixed rate private loans but they are now being introduced. To avoid horrific scenarios such as interest rates doubling it is definitely worth considering fixing the rate even if the initial costs are higher. Private loans are an expensive option and can limit the career decisions a student later makes, as the cost of repaying them may well mean a further professional qualification becomes simply unaffordable.

The important thing is for students to educate themselves about the implications of student loans, and how loans work, as once taken on they can represent a long term debt if there is future planning involved. There is plenty of help and advice available online to help students make informed decisions.