Student loans are the major burden for a recent graduate. It is usually talked about as 'good debt.' Good debt is usually a mortgage, student loans, or a business loan. All of these loans will help you increase your net worth in the future, theoretically. 'Bad debt' is consumer debt that is acquired by buying things.
So, technically student debt is good debt as your education will help you earn more money in the future. However, as a lot of students are doing, if you have taken out private student loans and paid much of the college bill through loans, you've probably borrowed too much. I borrowed a private student loan only in my first year for $9,000 due to a change in circumstances. I could have borrowed less, as I used left overs from the loan (which was around $1,500 per semester) to live a better life, travel a bit more, etc. I thought that the value of $1,500 was much more to me in college, than it would be while I was working. I did not consider interest. However, if I were to to do this again, I would have done exactly the same thing as I still believe that the private education I received is better than what I would have received going to a much cheaper college. I also believe that being able to travel every break (as I also received about $1,500 refund from the government loans in the last 3 years) has taught me more about the world.
However, the only reason I would do this again is because I ended up graduating with around $26K in student loans in total from a private liberal arts college with tuition of $45K per year. Half of it was federal subsidized loans and the other half was the private student loan that grew to $13K due to interest. Supposedly, if you take out about the same as your first year's salary after college, then you will be able to pay it back at the terms set by the lender. Of course there are programs such as IBR, however, you should aim to pay the least amount in interest. So far, I have not had trouble paying back my loans and I am aiming to have them paid off in 5 years or so.
Imagine you have $100K in private student loans, your monthly payment would be $1,150 with 10 year terms at 6.8% interest as calculated with the FINAID Student Loan Calculator. If you were making $27,600 a year, you would be spending 1/2 of your gross salary on your loans. That is unsustainable. Therefore, these kind of student loans are toxic or bad debt. If you had to pay $25K per year at the school you chose, you chose the wrong school.
Private loans usually means that you have borrowed all you could from the government, therefore, you are taking out loans that the government does not think you can afford. Consider that. Also, consider that student loans can pretty much never be dismissed in bankruptcy. There is only a small chance of dismissal if it is your second bankruptcy and you have included your student loans in the first bankruptcy. Also, private student loans do not usually have a fixed interest rate, therefore, if your credit goes down and the LIBOR goes up, your interest rate could sky rocket. Mine was at over 12% at one point when I had no credit history. You usually have to get a co-signer and you have no control over their credit score. Also, if you are unable to pay the loan, they are liable. This could ruin relationships and two sets of credit scores.
There are so many things wrong with private student loans and, therefore, I do not consider them to be good debt. I'm trying to get rid of the $11K I have left as quickly as possible.
No comments:
Post a Comment