Student loans. This phrase evokes feeling of despair, frustration, and dread. According to Sallie Mae, the number one lender of these loans, interest for these loans vary from 2.5 percent to 9.6 percent APR. That means if you take out $20,000 in loans yearly, by graduation for a four year university, you'll have $85,127 in outstanding loans if you qualify for the 2.5 percent interest rate. After graduation (consummation), your rate may increase further. Based on these numbers, it is no surprise that recently, student debt has overtaken credit card debt in the United States.
There is currently over $1.2 trillion of outstanding student loan debt, and the number of delinquencies, over 90 days is about 4 percent higher for student loan debt than credit card debt. According to the WSJ, more than 40 percent of student borrowers are not making their loan payments, and there is now a higher risk for borrowers to default raising concerns that they may never pay back their loans. Unlike credit card debt, student loan debt cannot be forgiven when you declare bankruptcy. While investments in human capital such as attaining higher education is something that's valued in the U.S., it seems to be that this investment is not worth the time and money for millions of students. For those who drop out or are unable to find high skilled labor after graduating college, they now carry debt that they are unable to repay and are now trapped by debt. This makes it harder for those individuals to apply for credit cards, mortgages, or anything else requiring a high credit score. If they are able to attain any of those, their interest rate will be much higher than their peers who have a good credit score.
No wonder most student loans are labelled as predatory.
However, it may not be the loaners to blame, but rather the colleges. Recently, more borrowers have applied to have their student loans cancelled due to misleading and false advertisement by colleges in recruitment. More than 7,500 applicants for loan forgiveness have used the "borrower's defense" law to attempt to cancel their loans. This surge is due partially to the prevalance of for-profit colleges such as Corinthian Colleges, Inc. These for-profit schools use ads that promise empolyment and hire earnings that they may not be able to deliver on. Last year alone, over $27 million in debt has been cancelled.
This brings up the question, is higher education worth investing in?
My answer is yes, but only if you understand the consequences of these loans and are willing to carry out the burden of debt.
One example would be the loans carried out by Ivy Leaguers. These borrowers are paying back their loans faster than anticipated by lenders through refinancing their loans at lower rates and paying more than required of their debt. While lenders have targeted these students in the past, due to the hefty tuition at these colleges and lower default rates, these borrowers are using their status as reliable individuals with high credit scores and relatively high incomes to apply for lower student loan rates.
This isn't to say that if you do not attend a prestigious university, you shouldn't go to college. In the majority of cases, higher education will increase your average income levels substantially. However, that increase in income also comes at the price of loans.
