Student Loan Debt
Taking out a loan or multiple loans to attend college is nothing new. Students have been using loans to pay their tuition for decades. The government even offers low-interest loans to make repayment of student loan debt easier once you graduate.
But this doesn’t mean repayment is actually easy. More often than not it’s the opposite. Student loans are actually one of the primary reasons people struggle financially after college graduation.
The average student graduates with approximately $40,000 in loan debt. Faced with an unpredictable job market and the cost of living always increasing, it’s impossible for many to keep up with payments, let alone get ahead financially.
Even if you think your loans are affordable, having to repay student loans can delay how long it takes you to reach financial milestones, like buying a house or saving for retirement. Many people in their 20s and 30s – well past college graduation – are postponing things they want in life because of the expense of their student loans. Many might run out of time before they reach their goals.
What are three ways your student loan debt is potentially ruining your financial future?
1. It Negatively Impacting Your Debt to Income Ratio
Although lenders don’t look as unfavorably on student loan debt as they do on excessive credit card debt, it still affects your debt to income ratio in a negative way. The debt-to-income ratio is the percentage of your income that is taken up by debt obligations.
Financial experts recommend having a debt-to-income ratio of no more than 25 to 35 percent. Having a ratio higher than recommended can affect whether or not you qualify for a loan. If you do qualify, you’ll likely pay a higher interest rate, which means you’ll be paying more to borrow money.
2. It Postpones Your Dream of Being a Homeowner
Not everyone wants to own a home these days, but if this is one of your dreams, your student loan debt can put it on hold.
Studies show that college graduates are waiting longer than ever to purchase their first homes, in part because of their monthly student loan payments. Others might be able to afford it, but don’t want to be saddled with more debt than they already have. Some are stretched so thin they won’t even qualify for a mortgage.
It’s also important to realize how difficult saving is when you have a student loan. Buying a home usually requires putting a chunk of money toward the down payment, but saving for this is nearly impossible if you are paying several hundred dollars a month in student loan payments.
3. It Delays Your Retirement
Chances are if you just graduated from college you aren’t thinking about retirement yet. But financial experts recommend that you start saving for it, even though it is decades away.
People who begin saving for retirement as soon as they start working benefit from compound interest. It’s possible to retire with a significant nest egg, but you need to work at it and build it over time. The more you are paying in student loan debt the less you are saving for retirement.
To learn more about compound interest and to calculate what you can save, check out this information from the US Securities and Exchange Commission.
Is Bankruptcy the Solution to Help You Deal with Student Loan Debt?
For many people with student loan debt, bankruptcy will never be a consideration. It will take them longer to reach their financial goals, but they’ll manage to make ends meet and eventually pay off their loans.
For others, though, student loan debt will drive them into a serious financial hole. This might be due to the loss of a job, a divorce, or a medical emergency that makes debt that at one time was affordable impossible to pay off.