Millennials today have undeniably made history by being the only group with the most student loan debt. An analysis by New America found that consumers who are under 34 years owed at least a combined total of over $620 billion in mid-2019. The numbers do not stop at that, between 2009 and 2019, records show that student loan debt increased 113%, reaching $1.4 trillion. This highlights how bad the student debt crisis is for the country. It further shows the danger that looms ahead. Remember, college students, are very inexperienced money managers which means they will take out more money than they actually need, further getting into loans.
These stark numbers aren’t as alarming as the fact that many college students are graduating from campus with an average college debt of $29,000. This is a burden that most cannot handle and has negatively affected their ability to move forward financially and economically.
It has been proven that having too many student loans can hamper your ability to maintain a monthly budget, pay all your bills and afford a decent living.
Student loans are important and play a crucial role in bringing education closer to the people who cannot afford it. But, it is equally important that students carefully consider how they are using the money that they receive.
How Does College Debt Affect Your Future Life Choices?
Carrying on too much debt, it does not matter what type of debt, will impact so many areas of your life. The following are some ways in which student loan debt is hurting and curtailing your efforts to progress.
It Affects Your Ability to Buy A Home
Student loan debt will have a big impact on your ability to buy a home. A 2015 survey by Equifax of millennial renters sought to determine why they did not buy a home. 55.7% of those surveyed said, “student loan debt/not enough money saved” as the main reason.
Assuming that you can still afford the monthly payments, still putting money towards your student debt may hamper your ability to save enough minimum downpayment that is required by many lenders.
Student Loan Debt will affect your Debt to Income Ratio
Any big loan that goes unchecked has the potential of drastically lowering your debt-to-income ratio. This a ratio that determines how much of your income goes to pay the debts that you have taken. Most lenders will look at your DTI to determine if you qualify for certain loans for example a car loan or a mortgage.
In most cases, it is advisable keeping your DTI at 35% or less. The higher the DTI the lesser the likelihood of you qualifying for a loan. Well, in some cases, you may be able to qualify for a loan but at high-interest rates which means more money will be going to cater for the loan.
Lowers your Credit Scores
The three major credit bureaus treat your student loan just as any other type of loan. If you fail to pay your loan installment on time, this will negatively affect your credit score. People with a low credit score are categorized as ‘high risk’ and what that means is that lenders are less likely to extend credit to them in the future should they need to buy a home or a car.
A lower credit score, just like with a high DTI, increases the amount of money that you have to pay to the lenders if the credit application has been approved.
In addition to that, in case you need insurance, brokers and insurance companies will actually look at your credit scores, which means you will take a hit there too.
Your Student Loan Debt is Here to Stay
Unlike so many other types of debts, U.S. student loan debt does not go away. For example, a consumer who has taken a car loan and cannot afford to make the repayments. can actually return the car to the car dealership, on the other hand, a homeowner can decide to hand back the keys to the bank if they cannot keep up with the payments.
This principle doe not apply to student loan debts. There is nothing you can return, money has already been spent to educate you. If you are considering bankruptcy, do not even think about it, on rare occasions do student loan debts get discharged in a bankruptcy court. However, the good thing about these loans is that they can be forgiven, but this option is extremely difficult to come by.
It Hurts your Retirement Savings
Another major damage caused by student loans is that it limits the amount of money you put towards your retirement. Just like your mortgage, just like your car loan repayments, student loan debts will compromise your ability to save for retirement. Since there will be a delay in your retirement contributions, you will definitely delay the benefit of compound interest.
You need to get a handle on your debts. Student loan debt can and will create a financial hardship that will affect several areas of your life. Before it blows out of proportion, you need to figure out how you can manage this source of financial stress. One good way to stay on top of it is by creating a budget and maybe a debt payment plan. This will help you focus, making it easier for you to manage it. Another way is by getting an additional source of income.