Student loans are a burden faced by most college graduates. GuideVine takes a look at five must-know facts if you’re one of the millions of graduates facing student loan debt.
Student loan debt has a drastic influence in your net worth. And the reality is, a student loan isn’t like other debt — it must be managed carefully. And even if you have a well-paying job and always make your payments, there are still numerous ways student loan debt can keep you from reaching you and your loved ones’ financial goals.
Student Loan Cosigners Face Serious Risk
If you think you can hide poor financial planning from your parents, you’re in for a surprise. Banks will notify your cosigners if you default on a student loan, and worse, they’ll be asked to make the payments and your major financial mishap will show up as hit on their credit report.
Student Loans Can Keep You from Home Ownership
Student loans can make it really difficult to own a home. We’ll get to their affect on your credit report later, but when it comes to buying a house, the lender has to take into account not only your credit score, but also your ability to make the mortgage.
Banks will consider your debt-to-income ratio to make sure you can make the monthly payments. While a single loan may have a payment of only $50 to $100, most students take out multiple loans, so it’s likely your student loan repayments are adding up to at least $300 to $500 per month in expenses to your budget. Combine that with your other bills and the unique expenses you’ll face as a homeowner and add a monthly mortgage payment that’s likely to equal or exceed your student loan payment. Compare that number to your salary, which if you’re a recent graduate is likely around $45,000. Sounds like a lot, right? Wrong.
You’ll lose about 16 percent of your gross income (based on this tax bracket), which comes about to about $600 a month before deductions that you won’t take until the end of the year. You also have to pay for food, utilities, transportation (including any car loan, insurance and gas), other debts (like credit cards), clothing, entertainment, health insurance (unless you want to take the tax hit later) and other incidentals. It adds up fast.
Lenders want to make sure your stable enough to avoid late or missed payments — the additional expense of student loan repayments can keep you from that level of financial stability for years.
Bankruptcy Is Rarely an Option
The only way to get out of your student loans with bankruptcy, which will also destroy your credit for at least a decade, is to prove “undue hardship.” And simply believing your financial situation constitutes undue hardship won’t get you very far. There are serious restrictions and requirements to meet, and your financial situation usually has to be so grave and hopeless that it’s unlikely you’ll ever be able to pay back even a small amount of your loans in your lifetime. Less than 1 percent of those who apply for undue hardship relief actually qualify.
Missed Payments Can Cripple Your Credit Score
Your payment history is 35 percent of your credit score. So if you’re late, your score will go down. If you’re sent to collections, your score will take a nosedive that’s difficult to pull up from. The good news is that putting your loan into forbearance or deferment doesn’t affect your score. It will be mentioned, but that alone won’t change the number.
Paying Student Loans Off Early May Hurt Your Credit Score
While not paying your student loans can have a negative effect, paying them off early could hurt some people. Student loans are defined as “installment credit,” similar to auto loans. Installment credit, particularly student loan debt, is considered “good” debt because they show an investment in your future. And with installment credit, the amount you owe is fixed, unlike revolving credit.
For most people, paying off debt is a good financial move, but you should consult a financial advisor before paying off everything. If student loan debt is the only debt on your credit report, once the accounts are paid off and closed, you’ll lose the positive boost from the account activity.
Make Sure Your Student Loan Debt Doesn’t Hurt You
Not understanding your student loans is the easiest way to upset your financial future. Many of us signed student loan documents we didn’t really understand because we were new to the financial world. Your parents say to sign here, and you sign here, right? If you can, ask your parents for copies of your original loan documents and read them. It’s a lot of legalese, but your parents, a financial advisor or a legal expert can help you understand what certain clauses mean.
Once you’ve done that, seek out an educated decision about what’s right for you based on your current needs and future goals. Find answers and solutions to avoid letting your student loan debt overwhelm you and keep you from accomplishing your financial goals.
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