While you can’t put a price on knowledge, there’s definitely a cost to pursuing higher education. Undergraduate and graduate programs usually involve taking on student debt, which can later impact your ability to pay bills, buy a house, or even have a family.
If you take on student debt, make sure you use it for a degree that will help you pay it off. The second best way to prepare for your future, besides school, is to know how to manage the debt you may accrue.
Types of Student Loans
There are four main types of student loans:
- Parent PLUS
Subsidized loans are considered ideal because, if you qualify, taxpayers pay the interest while you are still in school. Six months after classes end—either through graduation or by withdrawing—you become responsible for paying the loans. If you decide to pursue graduate school, taxpayers continue to pay the interest on your undergraduate school subsidized loans while your graduate program lasts. These loans are only available if you can demonstrate financial need.
With unsubsidized loans, interest accrues from the beginning, but you will not have to make payments until six months after classes end. You don’t need to demonstrate financial need to qualify for this loan.
Parent PLUS loans are federal loans in your parent(s) name(s). It will not affect your own credit score or finances. Parents are responsible as soon as the money is received, but they can apply for deferment so that payment is not due until six months after classes end. Unfortunately, borrowers with a poor credit history will have a more difficult time qualifying, but this can be rectified by adding on a co-signer.
Private loans come from banks or credit unions, states, or even the school itself. They typically do not have the same favorable interest rates as the above three federal loans. Likewise, they do not come with any of the protections offered by federal loans, making them the least ideal of the four main types.
Long-Term Consequences of Student Debt
It can be very easy for student debt to completely derail your life financially. Taking on too much can haunt you for decades. Having too much debt can impact your ability to:
- Go to graduate school
- Buy a home
- Have your own apartment
- Pursue your dream job
- Maintain a good credit score
- Receive tax refunds
Pursuing graduate school is often required for higher-paying jobs, but doing so means you need to determine if you can afford it. If you’re carrying too much undergraduate debt, you may not be able to get another massive loan for continued education.
Buying a Home
In 2015, Equifax asked millennial renters why they weren’t buying homes. Over half of them responded saying it was because of their student debt. Depending on the size of the monthly payments, student loans could severely hinder your ability to save the down payment required for buying a home.
But that’s only if you can afford a home. Many people are still living with family because the cost of rent is simply too much with the amount of debt they carry.
Dreams often get put on hold for jobs which pay more, even if the work doesn’t provide any fulfillment, purpose, or pleasure. Your financial obligations can prevent you from pursuing jobs which you love—such as non-profit work—and instead make you chase a better paycheck. Student debt may even end up disqualifying you from a job, as having too much debt influences your credit history and makes you appear financially irresponsible.
Credit bureaus perceive student debt like any other loan. Thus ailing to make timely payments or having too much debt will negatively impact your credit score. And credit score itself affects so much when it comes to your quality of life.
If You Default
If you get too behind on your payments, your lender will consider you in default. That means you haven’t kept your commitment to pay, for a time period specified in your loan. If you are past due on your student loan payments by more than 270 days, the IRS can refuse to give you your tax refund. The federal government can seize your refund, your Social Security benefits, and even garnish your wages if you fail to make payments.
Unlike other debt, you usually cannot get free of student debt through bankruptcy.
Staying Ahead on Your Student Loans
The best way to stay ahead of student loan debt is by paying it off as fast as possible.
When you can afford to, pay more than the minimum amount. The more money you put in, the less interest you’ll accumulate, which can take years off your repayment schedule. On the other hand, keeping the equivalent of a few student loan payments in savings can keep you on schedule, even in a financial emergency.
You can also apply to refinance your loan if you have a good credit score and steady income. Refinancing takes your existing loans and consolidates them into one private loan, usually at a lower interest rate. However, this may not work for people who rely on income-driven repayment plans or student loan forgiveness programs.
Most importantly, make a budget and stick to it. If you find yourself with extra cash, either from side hustles or gifts, put them towards your debt as extra payments.
Plan for Your Future
The world relies on educated workers, but that education is expensive. Don’t let student debt follow you for the rest of your life. Pursue your degree armed with the knowledge of how you can manage your debt after graduation. Contact us to be connected to an experienced financial advisor.