If you’re getting ready to apply to college and don’t have the funds to pay for your entire education, you might think that taking out student loans is a necessary evil.
College graduates from the class of 2017 who took out student loans borrowed nearly $30,000 on average, according to data reported by schools to U.S. News in an annual survey. The total student debt in the U.S. has now reached $1.46 trillion, and that number only continues to increase.
But fortunately, you don’t have to become a part of that statistic, as there are many alternatives to borrowing money. Here are three reasons why taking out student loans to pay for college is a bad idea – and what you can do instead.
You’ll have to pay interest. One of the worst things about student loans is the fact that you’ll always pay more than you originally borrowed, thanks to interest. According to 2017 research from New America, the average interest rate across all student loans is 5.8%, but that can vary depending on the type of loan that you take out.
With private student loans, interest can vary depending on your or your co-signer’s credit score and other factors. Federal student loans, on the other hand, have fixed interest rates set by the government. The U.S. Department of Education adjusts interest rates annually on newly issued federal direct loans; the new rates take effect every July 1 and are fixed for the life of the loan.
While the federal student loan interest rates will take a dip soon, keep in mind that since it fluctuates each year for new loans, it’s not something that you have any control over. And while you should exhaust all available federal loans, which come with more flexible repayment options, before considering private loans, remember that you will always end up paying more than what you initially borrow.
Falling behind on student loan repayment can lead to delinquency and default. After just graduating from college, you might find yourself living on a modest income. If you have student loan debt on top of that, it could be a bit of a struggle to make those monthly payments.
Unfortunately, if you don’t make your payment on time, then your loan becomes delinquent. There’s generally a grace period of 15 days before borrowers will be faced with any late fees.
If your loan is more than 90 days delinquent, your loan servicer will report this to the credit bureaus, and your credit score will go down.
If the loan is still delinquent after 270 days, then it goes into default.
Once your loan goes into default, there are many consequences, including losing eligibility for additional federal student aid. Your wages will be garnished, meaning your employer may be required to withhold some of your pay and send it to the loan holder to repay the loan. Your lender might take you to court. And, it may take years to get your credit score back in good standing.
Student loans can hurt your debt-to-income ratio. Your debt-to-income ratio is, like it sounds, the percentage of debt that you owe compared with your income. So the more of your income that’s spent on debt payments, the higher your debt-to-income ratio will be.
Ideally, this ratio should be under 36%. If it’s much higher, it could affect your ability to get another loan down the road. For example, when applying for a home loan, debt-to-income ratio is one of the major factors that determine eligibility.
It’s probably no surprise then that, as a result of student loan debt, many young graduates have ended up delaying major life decisions, like buying a home or car, getting married or saving for retirement.
But believe it or not, you don’t have to go into debt to attend college. Here are just a few alternatives that you might want to consider before taking out a student loan.
Apply for a scholarship or a grant. The government issues grants based on financial need. And normally, this money is yours to keep, which means you don’t have to worry about repaying it, as you would with a student loan.
Like a grant, a scholarship also doesn’t have to be repaid. But unlike a grant, scholarship eligibility is often based on academic merit, rather than financial need, so if your GPA drops, you could lose your scholarship.
You can get a scholarship through the school that you apply to or through another organization, such as a private company, an individual, a nonprofit, a religious group or a social organization.
Explore crowdfunding. With crowdfunding, you can ask your family members, friends, parents’ friends and others to contribute to your college fund.
First decide how much money you want to raise. You can use a crowdfunding platform such as GoFundMe or Indiegogo. Set up a campaign with an honest story about why you need the funds. Share your campaign on social media and with friends and family members. If you can get a core group of people to contribute, it could mean reducing textbook costs or getting help with college tuition, for example.
Work while you study. Through the federal work-study program, universities provide part-time jobs to students who are in financial need. Keep in mind however, that even if you’re granted work-study, you aren’t guaranteed a position and may still have to apply and find a job on your own.
Student loan debt is not a burden that you want to have hanging over your shoulders upon graduation. If you do have to take out a student loan, then at least try to make sure that the loan doesn’t exceed your yearly salary. So, if you expect to make $40,000 just out college, based on your major, then try to make sure that your student loans are $40,000 or less.
Do what you can to minimize your student loan debt, and in the future, you’ll deal with less stress and be able to spend more money on the things you choose.
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