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Are There Some Benefits to Using Student Loans?
In Spite of Bad Press
In recent years, the student loan crisis has received a lot of media attention. This has alerted the general public to the fact that going deeply into debt, in order to go to college, is not a good thing.
Collectively, Americans owe more than $1 trillion in student loans. This doesn't take into account over-extended credit cards and home equity lines, often tapped to underwrite a four-year degree.
It's very clear that student loan debt, which cannot be absolved by bankruptcy, is a national crisis. Default rates are reportedly soaring, but, surprisingly, exact figures are hard to nail down.
According to the US Department of Education, 13 percent of students who attend a public college fall behind on their repayment schedule after three years. It can be reasonably assumed that lifetime default rates have hit levels never before seen.
While this borrowed money isn't being repaid, the amount outstanding continues to grow as interest accrues and late fees are added.
Consequently, a large number of former students, as well as their parents, are ruined financially. A number of these families have gone public with their plight. Some former students have even gone on record as saying they wish they never went to college, or, if they could do it over, they would have chosen a more affordable school.
Defaulting on a student loan can also lead to revocation of a professional license, erasing hopes of earning high enough wages to pay down the debt.
Student Loan Horror Stories
It's not uncommon to hear about people now owing in excess of six figures, even after having taken out relatively modest loans. After receiving their degree, or dropping out of school, they are unable to find high-paying jobs in their field. As a result, their loans have gone into default, and the total amount that's come due has swelled.
Other students borrowed heavily from the outset, typically because they were convinced an elite school would later pay dividends. Oftentimes, this happened because they took out federal, as well as private, student loans. Since private lenders are extremely reluctant to bankroll an education, without a co-signer, this is where parents or another relative steps in.
After graduation reality hits. The loans must be repaid, and both they and their co-signer are on the hook.
Digging Yourself Out of Debt
Student Loans Can Make College Possible
However, despite the frightening stories, student loans have a purpose. They can make education possible for students who otherwise couldn't obtain a four-year degree. In this instance, a reasonable amount of debt is a blessing.
One seasoned high school guidance counselor once told a group of college-bound students to limit their debt to a total of $20,000. This is less than the maximum $31,000 the federal government allows you to borrow. The guidance counselor, a very smart woman, however, reasoned that sticking to this lower limit reduces the likelihood of defaulting.
A totally free ride to college is very rare, especially for students who choose to live away from home. Full-tuition scholarships are only given to top students. These academic superstars may also receive need-based grants, as well as work study, to help defray their living expenses.
Usually, though, they still need to pay something in order to cover their room and board fees, and this is where federal student loans come into play . Even very accomplished students are expected to take out loans if they want to live on campus. This is true even if their families don't have a lot of money.
The Amount You Should Borrow
What is the upper limit a student should borrow?
College is Now a Necessity
For students whom can't attend college, without federal students loans, it's usually a bad idea to turn down this opportunity for fear of taking on a moderate amount debt. In this case, this borrowed money can be considered "good debt." This is much different from the foolishness of mortgaging your entire life to attend a college you can't afford, and graduating with a massive mix of public and private loans.
For a high school senior with excellent grades, this opportunity won't pass your way again. That's because you'll likely receive excellent financial aid packages, which can offset much of the tuition. In this instance, trying to avoid all student loan debt could be an expensive mistake.
A college degree is needed now more than ever. It's become a requirement for many entry-level jobs. Without a bachelor's degree, your career options will be limited and you stand a greater chance of being unemployed.
According to figures from the Bureau of Labor Statistics, the unemployment rate for college graduates is 3.4 percent. However, this shoots up to 7.4 percent for those with only a high school diploma.
It's true that college is not for everyone. But everyone needs some sort of plan. For example, someone with a set of skills in very high demand, such as an electrician or a plumber, can earn a good living without the credentials afforded by a bachelor's degree.
Making Education Possible
The Right Use of Student Loans
Having access to thousands of dollars, which can be repaid over time, has allowed countless people to earn a degree. Without this assistance, they would likely be chained to low-wage jobs their entire lives.
But it's important to use educational assistance properly. This may include choosing a relatively affordable state school. Otherwise, you risk dropping out before completing your courses.
Financial constraints are a leading reason why educational plans are disrupted. When this happens, your loans must still be repaid. Unfortunately, countless young adults across America hold large loan notes, but no degree.
Financial Planner Talks About Student Loans
Your Best College Options
Despite the fact we've been conditioned to believe we must attend our "dream school," students of more limited means, who aren't at the top of their class, may be better off going to a community college or living at home and commuting to a public university.
This is the group most at risk for suffering college-related financial problems. (This, in turn, can lead to dropping out.) That's because smart, but not brilliant, students probably won't receive as much financial aid as will a valedictorian. All four-year colleges want to boost their reputation. So they try to recruit exemplary candidates, to whom they give the most help. For this reason, a high-ranked student from a middle-income family may receive much more "need-based" aid than a poor student with less impressive grades.
One way to increase your chances of landing a good financial aid package is to apply to a college, or multiple colleges, in which your grades and SAT scores place you at the top of the pile. Shooting for the stars will probably mean you need to take on heavy debt in order to attend your dream school.
The Best Time to Take Out Student Loans
Of course, it's always preferable to avoid student loans altogether. This may be possible if your family is willing to help with some or all of your education. Living at home and commuting to a state college or university can also allow you to sidestep serious debt, especially if you work full-time during the summer break and part-time the remainder of the year.
Even if it's not possible to graduate loan free, you may be able to forestall taking on any debt until you are closer to graduation. This greatly lowers your risk of finding yourself in the untenable position of leaving campus without a degree, while owing thousands of dollars you'll have difficulty paying back.
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