What are the negative effects of student loans?

Millennials have the unenviable distinction of being the most indebted college students in history. According to an analysis from New America, consumersunder the age of 34 owe a combined total of over $620 billion in student loans as of mid-2019. That's a sad fact when you consider that many college students are financially inexperienced, and many take out more money than they need. It's important to match your loan to your expenses and borrow as little as possible.

While it's often necessary for students to take out loans to pay the full cost of their education, it is important to carefully consider how you use the money you receive. Mismanaged money could have a profound impact on your life. Here are ten ways student loan debt can negatively affect your life in no particular order.

Key Takeaways

• Carrying student debt may impact many areas of your life from buying a home to saving for retirement.
• Student debts may be forgiven under certain circumstances, but almost never if they are in default.
• Co-signing student debt makes the co-signer responsible for the loans if the primary borrower defaults.

Foregoing Grad School

While it may be a big expense, going to graduate school can mean the difference between a low- to mid-range salary and being able to hob-knob with the upper crust. For instance, the average starting salary for someone with an undergraduate degree in business administration was a little more than $57,000, according to the National Association of Colleges and Employers. Compare that to the entry-level earnings of someone with a master of business administration (MBA) at almost $85,000.

If you want to go to grad school, you'll have to do some heavy thinking. Weigh out the prospective costs and the likelihood of how much you'll earn in your field after you graduate. And don't forget to factor in your current debt load. The typical undergraduate accumulates $27,000 in student loan debt.

Students who leave their undergraduate programs with significant amounts of debt often cannot afford to take out another massive loan. That means having to put off or—even worse—completely forgetting about going to graduate school altogether.

Forget Buying a Home

Student loan debt significantly impacts one's ability to purchase a home. When Equifax asked in 2015 millennial renters why they did not buy a home, 55.7% of respondents listed “student loan debt/not enough money saved” as the top reason.

Even if you can afford the monthly payments, putting money toward your student loans may prevent you from saving enough for the minimum down payment required by many lenders.

Living at Home

While some renters can’t afford to purchase homes, other millennials with student loan debt can’t even afford to rent apartments—especially those who live in big cities like New York, Chicago, or Boston.

The average rent for a one-bedroom apartment in the United States continues to increase from $1,596 in 2019 to $1,621 in 2020, according to Apartment Guide. That can be pretty hard to pay if you have almost $30,000 in student loan debt. In fact, roughly 14 million young adults between the ages of 23 to 37 are still living at home with one or both of their parents, according to a Zillow analysis released in May 2019.

According to Student Loan Hero, "Americans [of all ages] owe over $1.56 trillion in student loan debt, spread out among about 45 million borrowers. That’s about $521 billion more than the total U.S. credit card debt."

This figure is a much larger number than in previous generations. Many of these young adults aren’t leaving the nest because they don't make enough money to pay back their student loans and pay rent at the same time.

Lowering Your Net Worth

Having a tremendous amount of student debt can certainly decrease your overall net worth. A 2014 report from the Pew Research Center revealed that disparities among college graduates with student loan debt compared to those without debt. The median net worth of a household headed by a college graduate under the age of 40 with student loan debt was $8,700. However, the median net worth of a household headed by a college graduate under the age of 40 with no student loan debt is seven times greater, clocking in at $64,700.

Put Your Dreams on Hold

Student loan debt affects more than your financial independence and your standard of living. It also determines which dreams you're able to pursue and which ones will become a distant memory. You may find yourself sacrificing a job that offers you more fulfillment and purpose for a career with a higher salary.

For instance, you may have dreams of working for a nonprofit organization. But you may have to give that up when you realize that the accompanying salary may not live up to your financial obligations. In fact, you'll probably have to forego these aspirations for a job that pays more to cover your student loan payments.

A Lower Credit Score

The major credit bureaus treat student loans like any other type of installment loan. Failing to make timely payments can negatively affect your FICO score. A lower credit score places you in a higher risk category. This makes lenders less likely to extend you credit in the future if you want to purchase a car or a home.

It can also increase the amount of interest you have to pay back to the lender if the credit application is actually approved. Insurance carriers also use credit scores to determine insurance rates, so you'll also take a hit there, too.

Student Debt Doesn’t Go Away 

Student loan debt is different from other types of debt. For instance, a consumer who can’t afford to make car payments can return the car to the dealership and a homeowner can hand the keys back to the bank if they can't keep up with the mortgage payments.

That principle doesn't apply to your student loans. By the time you are in the student loan payback process, there’s nothing left to return. The money has already been spent—whether you spent it on school or not. And don't even consider bankruptcy. Student loans are very rarely discharged in bankruptcy court. There is one exception, though. And that's student loan forgiveness, but this option may be more difficult to come by.

Being Disqualified for a Job

Companies frequently conduct background checks, which can include credit checks—especially if you're applying for a position in the financial industry. Most employers, or 72%, run a background check on new employees, while nearly one-in-four employers or 28% did not, according to a CareerBuilder survey. The survey also found that 29% of employers ran a credit check on new employees.

Besides showing a candidate's employment history, employment reports can include a criminal background check and public records search, which would show any bankruptcy filings or court documents. Although the vetting process doesn't allow employers access to your credit score, they can review a candidate's credit report as part of the background check. If you are late making your student loan payments, you should expect to have this information viewed by prospective employers who may hold it against you.  

Seizure of Your Funds

If you have a federal loan that is more than 270 days past due, you may not get a state or federal tax refund for a long time. That’s because the federal government can seize this money if you ever default on your loan. It can also take any other type of government payment, such as Social Security (older relatives who co-sign loans: take note). The feds can also garnish up to 15% of your income to help pay back your loans.

A Higher Default Rate

When you default on your student loan—or any other debt for that matter—you fail to make your payment on time. After a certain period, that debt becomes delinquent. You remain in default until you make that payment and bring your account up to date.

Roughly 11.5% of student loans are 90 days or more delinquent or are in default, according to Student Loan Hero. And the news is worse if you left college without getting a college degree. The U.S. Department of Education states "students who borrow for college but never graduate are three times more likely to default" than those who do graduate.

The Bottom Line

More students are taking out student loans to pay for college. Before even considering taking out a loan, it’s essential to recognize the consequences of borrowing money and to be disciplined enough only to borrow what is needed. Plan well before you borrow—including factoring in the salary you can expect upon graduation for the fields that interest you—and make careful plans to repay your debts.

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