4 Things You Must Understand About Student Loan Debt

Coins are spilling from a glass jar.

Flickr user Ron Reiring

Taking student loans is often the only way that most students can fund their higher education. It has in fact become so commonplace that students don’t think twice about taking on huge loans just so they can attend the most prestigious college on their shortlist.

Unfortunately, some student loan applicants mistakenly presume that once they graduate, everything will go smoothly—they will get a job and pay back their loans within a couple of years, leaving them free to buy their dream home, a new car, or some luxuries. In their single-minded determination to get to the college of their dreams, many students don’t take the time to understand what will happen if they find they cannot pay back their student loans. Nobody wants to think it will happen to them but the fact is it happens more often than you think.

Here are a few things you must understand about student loan debt.

You Cannot Get Out Of Paying Your Student Loans

Once you take a student loan, the obligation to pay it back is binding, regardless of whether you drop out of college or you decide to change programs or anything else.

After high school, some students go along with the flow, taking student loans just to experiment with college or for the ‘experience’, without thinking about the consequences. For those who decide that college life is not for them, this could turn out to be a very expensive experiment as they are still obligated to pay back the loan that they have taken along with the interest. Lenders do not care about paying the price for your experiments or your mistakes.

If you change your mind and decide you want to do a completely different course altogether, say you want to switch from nursing school to art school, you will have to pay back what you’ve already spent on nursing school. Remember, you may be allowed to apply for another loan to fund another course but that does not let you off the hook with your first loan. You still have to pay that back.

To avoid making these expensive mistakes, it is crucial to take time to think, plan, and have kind of strategy in place before jumping into the fray.

So you have to repay your student loans no matter what. However, there are student loan forgiveness programs out there that you could qualify for. After paying back so much, or paying for a certain amount of time, students who are working in the public sector or non-profits could have their federal student loans forgiven.

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Bankruptcy Is Not An Option—Here’s Why

You may have heard that bankruptcy is an option for anyone who cannot pay back their loans, but what many students do not know is that student loans cannot be discharged in bankruptcy. Because it was being used liberally by students, this option was banned by Congress in 1977 for federal student loans. Later, in 2005, it was banned for private student loans too.

There is a reason behind this. When you take any other type of loan, you have to provide something as collateral. If you are taking a loan to buy a home, vehicle or some other big-ticket item, the value of your home, vehicle or the item is automatically considered as the collateral. If you cannot pay it back and declare bankruptcy, the lender can liquidate your assets by foreclosing on your home, repossessing your vehicle. They can even garnish your wages and Social Security to get back their money.

When you take a student loan, there is nothing tangible that can be held as collateral. In this case, lenders consider your ability to earn a higher income after you graduate as the collateral on the student loan. Under these circumstances, there is nothing lenders can garnish to get their money back.

As long as you have the ability to earn an income, you have the ability to make your monthly payments, regardless of how much or how little you pay back every month.

There is a clause where you may be able to get your student loan discharged in bankruptcy if you can prove undue hardship, but the requirements are almost impossible to meet.

You May Be Able To Lower Your Monthly Payments But It Comes At A Price

Lowering your monthly payments may sound like an easy solution if your monthly salary is too low to cover the amount, or if you are in a hurry to get on with your life, which entails splurging on a home, a new car, or weekend getaways.

While lowering your monthly payments is easy, you must understand that it comes at a price. When you lower your monthly payments, you are in effect extending the life of your loan, which means you will be paying interest on the balance over a longer period of time. By the time you have finished paying off your loan, you will end up paying a lot more by way of accrued interest.

Before you decide to lower your payments, you must calculate how much you will end up paying so you can make an informed decision as to whether or not it is worth it.

Getting Out Of Debt May Take Longer Than You Expected

Federal student loans for a bachelor’s degree have a standard 10 year repayment plan. The truth is very few graduates actually manage to clear all their debt within 10 years. According to the statistics, it takes an average of 20 years for graduates to repay all the student loans that they took to fund their bachelor’s degree. That’s a sobering thought.

Ok, Now for the Good News

None of this is meant to scare you away from student loans, only prepare you. You need to first exhaust all your gift aid options, apply for federal loans, and make a solid plan when it comes to private loans. Be prepared, do your homework, and stick to your plans.

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