High student loans used to be a necessary nuisance on the road to gainful employment. Today, Americans owe around $1.6 trillion — up from $1 trillion in 2012 – and the year-to-year percentage gain has doubled from 2018 to 2019.
A recent examination from the Washington Post shows the burden to be impacting everything from when (or if) we marry and start a family to small business growth and delays in homeownership. Long-term, that’s a problem.
But how will your high student loan debt affect you over the next several years? Let’s have a look.
The financial effects of high student loans
You see figures like that $1.6 trillion above. More importantly, you see the rate of growth. And then you look at where you are in your college journey.
If you’re a freshman with designs on a bachelor’s degree, it’s discouraging enough. Throw in a master’s degree or doctorate — as many professions now require — and it can feel downright overwhelming.
But how will your student loan debt impact your specific financial situation? Turns out it can in a number of ways:
How do high student loans affect your debt to income ratio?
Essentially, DTI is the computation of two equations that determine the percentage of your gross income that goes toward housing, and the percentage of gross that goes toward housing plus all other recurring debt (e.g., credit cards, STUDENT LOANS, child support, car loan, alimony, and legal rulings).
That’s called your front-end DTI. Twenty-eight percent (or 0.28) is considered “acceptable.” In real figures, it’s calculated like this: $60,000 gross per year * 0.28 = $16,800 for housing only, or up to $1,400 per month
If that’s all lenders considered, then you could technically qualify for a house or rental payment of up to $1,400 per month. But it doesn’t account for the back-end DTI (of 36%, or 0.36).
What is back end debt to income ratio?
The computation on $60,000 times 0.36 equals $21,600, or $1,800 per month (which, again, includes the $1,400 for housing). That remaining $400 difference would need to include your credit cards, student loans, car loan, and the rest.
If you owe more than $400 on these things combined, it will affect the housing eligibility figure (or front-end DTI), and vice-versa.
In broad terms — remember the $1.6 trillion figure — student debt accounts for 8% of national income.
So, if you want to know how your high student loan debt will likely affect your personal situation, multiply what you expect to be paid (or what you’re earning) times 0.08.
How much do student loans affect credit score?
Equifax, Experian, and TransUnion are the three major credit reporting agencies. They’re the one who decides whether you’re eligible to live in a decent part of town or not.
What makes a good credit score? As importantly, what makes a bad one? And how does your student loan debt factor into it?
The credit reporting scale goes from 300 to 850. This isn’t golf, so, obviously, the higher the better. Things that can negatively affect your score:
- A cycle of late payments
- Bankruptcy
- A bill in collections
- Defaulting on an entire loan
Many lenders allow for a brief period of time when your loan can go into “forbearance,” which means you owe the debt but you have a grace period for starting payments (usually six months).
The forbearance period won’t affect your credit score like missing payments, consistently paying late, or defaulting on your loan altogether.
Late payments can damage your credit score by as much as 35%. Assuming yours is perfect (850), that would take you all the way down to 552, which is considered “bad” by the three credit reporting agencies.
Defaulting on your loan has an even greater impact, and it stays with you for seven years. This makes it difficult to get future loans even if you’ve found the money to eventually pay off the debt altogether.
The Personal Effects of Student Loan Debt
Student loans can hang over your personal life like a cloud if you let them. It can do damage to your relationships, self-esteem, and even reputation. Here’s how.
How does debt affect marriage?
Part of the reason many are delaying or avoiding marriage altogether is this. Most people have student debt. And if you’re marrying someone, you’re inheriting theirs as well as your own.
For those who damn-the-torpedoes and do it anyway, they have to wrestle with the inevitable financial challenges. Aside from the other person’s financial baggage, they have to deal with how that person prioritizes their financial baggage.
No wonder finances are often cited as the number one reason marriages fail. The burden of student loan debt isn’t helping.
How does debt affect mental health?
Debt often feels like a millstone tied around the borrower’s neck. You live every day with the knowledge that “what’s yours” isn’t really yours at all.
In contrast to the “American Dream” of owning your own home and being financially independent, it’s easy to feel like you aren’t measuring up.
Not helping the situation:
- Calls from debtors
- The eventual letter from the collection agency
- Delinquent taxes
- Having to put groceries on your credit card
- Not being able to afford the gas in your car so you can go to work
Challenges with your student loan debt can harm your reputation in a variety of ways. There’s the aforementioned blow to your self-esteem.
The credit reporting agencies treating you like a pariah. The risk of seeing your name in the newspaper for bankruptcy or delinquent taxes.
The only “good news” in getting sideways on your student loans is this: they can’t take you to jail for it. But they can garnish your wages, resulting in soul-crushingly smaller paychecks and the increased likelihood of it “getting out” that you’re a credit risk.
How do you avoid these pitfalls, financial and personal? By making sure it doesn’t get to that point. In the next section, we’ll discuss some ways you can take control.
Defeating student loans means two things: financial literacy and borrowing smart. Let’s dig a little deeper on these, shall we?
Student loans are good debt on the surface. That’s because they’re meant to be an investment in yourself. Of course, that’s debatable if you’re chasing a degree in a field with poor job prospects.
Do your research before picking a major, avoid credit cards like the plague.That’s relevant here because the more additional debt you incur, the more difficult it’ll be to pay off your student loans.
Sometimes it may not be possible to avoid using a credit card. Few of us have $500-$750 lying around when the tread’s bare on all four tires at once or when your refrigerator breaks down.
But you can plan for those situations with an emergency fund from the difference between what you make and what you spend each pay period.
Even if the emergency fund doesn’t clear the full amount on those large purchases, it can make it a lot easier to pay off sizable expenditures quickly.
How can I make college cheaper?
Despite the negative side of student loans, it’s actually a good thing. It allows you to make purchases you couldn’t possibly afford in-the-moment but desperately need (i.e., an education, and a home).
It spurs the economy, creates jobs, and leads to a higher-quality way of life. But you have to be smart about it, particularly when it comes to the skyrocketing cost of education. How do you do that?
- Take advantage of cheap or free college: Many high schools are making it possible for their seniors to graduate with an associate’s degree at the same time they collect their high school diploma.
- Attend an in-state college through undergraduate: combine this with keeping your first two years of undergrad free or low-cost, and you can escape with a four-year degree and very little debt.
- Pre-plan your post-graduate strategy: student loans at this stage are usually avoidable. But you can mitigate that with work-study programs, part-time work, and saving as much money as possible during the undergraduate phase.
- Think about consolidating: it’s not always a good idea but you won’t know that until you do the math. In low-interest times, it can be a good idea to lock in those fixed rates at a payment you can handle.
But it’s also possible you could be raising your payment if you consolidate loans with a lower rate under the newer fixed rate.
Last but not least, realize that not every dollar that pays for college has to come from borrowed money. You have options.
Federal Pell Grants: these are usually income-eligible but if you qualify, then you do not have to pay back the amount granted. Ever. Learn more here.
Work-Study Programs: Jobs designed for students who have to work and go to school. You show up, you get paid, and, depending on the position, you get to study during the long, boring hours while you’re doing it. More on those here.
Academic Scholarships: Universities will award you an amount for how well you’ve done academically. It’s usually a conglomeration of your high school or undergraduate work and your scores on specialized tests like the ACT or SAT.
Specialty Scholarships: These opportunities are all over the place. They can be awarded for anything from demonstrated excellence in a special talent or extracurricular activity to your participation in community service.
Working students can even qualify for scholarships offered through their place of employment.
Apprenticeships: More students are looking to technical education fields as a direct step into the workforce after high school. They do this, in part, to figure out what they want to do with their lives.
Advanced manufacturing and other fields are getting wise to it and wooing these students with apprenticeships that lead to full-time employment and educational benefits once the employee has signed on with the company for the long haul.
An Inheritance or Gift Monies: Grim, we know, but recently deceased (and well-to-do) relatives who were fond of you may leave a little something for you to remember them by.
Most high school-graduating seniors usually get an influx of cash from family and friends as well. Saving these monies to pay for college instead of something frivolous will lower the overall amount you eventually have to borrow.
We hope you’ve found this look at the long-term effects of student loan debt useful. Now take what you’ve learned and create a plan of action. Best of luck!
