As of 2015, 68% of students graduating from a four-year institution had some form of student loan debt, according to a recent report from the Institute for College Access and Success. Additionally, Student Loan Hero reports that more than 44 million Americans collectively owe over $1.3 trillion in student loans, varying on average from $3,000 to $53,000 per person. What this means is that the nationwide average debt per person has continued to increase year over year, and according to the institute, it now sits at an average tab of $30,100.
And while the recession saw lenders tighten their restrictions on who can apply for certain loans (i.e., mortgages), they continue to take advantage of young, inexperienced Americans who often have little to no credit history to speak of.
“Student loans are the only credit vehicle where a lender continues to extend credit year after year without knowing the person’s ability, or even willingness, to pay,” Vice President of Analytics and Business Development at Experian, Michele Raneri, told Bankrate.
Lenders know that student loans differ from other types of debt in many of the worst ways, but that doesn’t stop them from going after their goal. Senator Elizabeth Warren, a Harvard law professor who specializes in bankruptcy, has even stated that “student loan debt collectors have power that would make a mobster envious.” Suze Orman, a personal finance expert who spoke at an event hosted by Politico with Warren, went a step further, saying that financial institutions are effectively “financially raping … our children.”
With that in mind, we give you five of the biggest reasons why you should think carefully before piling on the student loans.
1. They don’t go away
Unlike with other types of debt, your student loans (in most cases) won’t disappear if you end up filing for bankruptcy because you can’t afford to pay them back. And while it isn’t true that your student loans can never be discharged in bankruptcy, it is very, very hard to have them reduced or eliminated.
Part of the reason that it’s so difficult is because the law is vague. You see, currently, student loans cannot be discharged unless the individual filing them can prove that it would cause him or her “undue hardship.” Except “undue hardship” isn’t defined in bankruptcy law. Meaning that whether you succeed in discharging your loans is subjective; it’s up to the court.
If you can’t pay your loans but don’t want to file for bankruptcy, loan holders will sometimes negotiate temporary reduced payments or deferments. But this might not be the best call. Why? Because your loan will usually grow larger while you are postponing payments or paying smaller amounts. And after you’ve recovered from economic hardship, your loan will be even more unmanageable than it was before.
Private loans can be particularly nasty. While federal student loans often come with borrower protections — such as deferment, forbearance, grace periods, and income-based repayment options — private loans aren’t required to offer you any of these luxuries. They can demand a certain amount of money from you each and every month, and, generally, there isn’t a whole lot of flexibility.
2. Interest rates can be ridiculously high
The interest rates on student loans are much higher than on most other types. Federal loans are often between 5% and 6%, with some graduate loans just under 9%. Private loans can vary between 2.5% and 12% — three times the rate of most mortgages, and getting close to the rate of an average credit card. Furthermore, many private loan interest rates are variable, making repayment even more uncertain. While the current climate means that variable interest rates are competitive, this could easily change as they begin to rise.
Federal student loans are now capped with fixed rates, which takes some of the guesswork out of how much you’ll actually be paying. However, the annual percentage can still change from year to year. What this means is that the loans you take out during your senior year of college could still have a higher interest rate than the money you borrowed freshman year. As Credible points out, a 2% difference can mean thousands of dollars more over the lifetime of the loan.
While federal student loans certainly look pretty good when compared to most private loans, it’s important to understand that the federal government isn’t doing you any special favors here. Rather, the government expects to make a bunch of money off of your debt. In a 2015 letter to the former Secretary of Education, six different state senators wrote that according to President Obama’s budget that year, “The federal government is still expected to produce $110 billion in profits from its student loans over the next decade” — a figure the senators consider unfair. “Student debt is threatening to drag down both our families and our economy itself,” the letter continues, arguing that the Department of Education should stop implementing policies “designed to maximize federal profits on the backs of our kids.”
3. They’ll hold you back
According to a 2016 report from American Student Assistance, 42% of college graduates delayed moving out of a family member’s home because of existing student debt. A full 24% of graduates delayed that move for two or more years. Of the non-homeowners the organization surveyed, 71% said student debt was the reason they couldn’t save for a down payment to buy a home.
Previous surveys from the organization show that home ownership isn’t the only delayed financial milestone. Making early steps toward retirement, getting married, or even having children are at stake because of student loan burdens. The consequences of delaying adulthood doesn’t just mean a slower start for millennials, however. “This downward spiral has a cascading impact on the nation’s economy as the generation charged with investing in the nation’s future is delaying their lives because of student debt,” notes the organization.
According to the 2015 survey, 73% of young college graduates have delayed saving for retirement or making other investments because of their student loans. A third said that they put off marriage due to their debt, and 43% said that student loan debt has delayed their decision to start a family.
And while some of these statistics may seem surprising at first, they become much easier to fathom when you take into account that for many young people, their student loan burden manifests in the form of a monthly payment equivalent to a second rent check. This means that there is often very little money left at the end of the month for even everyday expenses, let alone retirement savings.
4. Don’t count on student loan forgiveness programs
Student loan forgiveness programs can save you thousands of dollars, yet there are restrictions, and the professions which qualify are limited.
At the moment, only a few occupations (those considered to be “public service” jobs) are eligible for student loan forgiveness. Currently, some of the sectors which qualify include military service, law enforcement and public safety, early childhood education, health care, and public school teaching, among others. Those in government positions, or who work for certain non-profit organizations, can also qualify.
Of course, there are restrictions on the types of loans that can be forgiven. At this time, only Federal Direct loans and Federal Family Education loans can be forgiven, with a few exceptions if some types were consolidated.
Still, even if you do work in one of the qualifying professions, you won’t get your loans forgiven right away. In order to become eligible, you must make 120 on-time, full monthly payments under a qualifying repayment plan while employed full-time.
Which brings us to another sticky point: 120 monthly payments adds up to 10 years, so the program doesn’t actually help young people when they most need it. Regardless, if you think you might qualify for federal student loan forgiveness, you can read more about it through the Federal Student Aid website.
5. They can be high risk
Many young people, fresh out of high school, are told that they should apply to their “dream school,” and not worry about the money. Guidance counselors preach that financial aid will undoubtedly help make their college experience affordable. But allowing students to naively apply to private institutions with yearly tuition going as high as $50,000 without so much as a warning about the potential consequences of student loans seems cruel, foolish, and irresponsible. This especially holds true considering research from the American Institute of Certified Professional Accountants indicates “that less than 40% of all borrowers had a firm understanding of how hard student loans would be to pay back,” and “60% of borrowers said they have some regret over their student loan decisions,” per Bankrate.
Normally, when you take out a loan, it’s a very serious endeavor. You’ll want to weigh the risk and thoughtfully consider whether or not you will be fully capable of paying the loan back. You’ll also want a clear understanding of what protections are in place for you as a borrower. In the case of student loans, the borrower often doesn’t have a clue whether or not he or she will be able to pay back the loan without any trouble. In what other lending situation is this a smart decision?
As Forbes’s Josh Freedman writes, individual student loans are, in essence, akin to the “anti insurance.” Indeed, “rather than spread the risk, they concentrate it on the individual — who has to bear all the downsides if something goes wrong.”