Millennials have the unenviable distinction of being the most indebted college students in history. According to a report from the New York Federal Reserve Consumer Credit Panel, consumers under the age of 30 owe a combined total of over $1 trillion in student loans as of 2018.
Unfortunately, many college students are inexperienced with money, and many take out more money than they need. It's important to match your loan to your expenses and borrow as little as possible.
- Carrying student debt may impact many areas of your life from buying a home to saving for retirement.
Student debts may be forgiven under certain circumstances, but not if they are in default.
Co-signing student debt makes the co-signer responsible for the loans if the primary borrower defaults.
While it's often necessary for students to take out loans to pay the full cost of their education, you need to carefully consider how you use that loan.
Mismanaged money could have a profound impact on your life. Below are ten ways student loan debt can negatively affect your life.
1. You Might Have to Forego Grad School
Student loan debt can hinder you from attending graduate school. The average undergraduate accumulates $30,000 in student loan debt. Students who are leaving their undergraduate programs with significant amounts of debt often cannot afford to take out another massive loan.
2. You Might Not Be Able To Afford Buying A Home
Student loan debt significantly impacts one's ability to purchase a home. When Equifax asked in 2015 millennial renters why they did not buy a home, 55.7% of respondents listed “student loan debt/not enough money saved” as the top reason they were not able to purchase a home.
Even if you can afford the monthly payments, putting money toward your student loans might prohibit you from saving enough for the minimum down payment required by many lenders.
3. You Might Have to Live at Home
While some renters can’t afford to purchase homes, other millennials with student loan debt can’t afford to rent apartments. Across the board, roughly 14 million young adults between the ages of 23 to 37 are living at home with one or both of their parents, according to a Zillow analysis, released in May 2019.
According to Student Loan Hero, "Americans [of all ages] owe over $1.56 trillion in student loan debt, spread out among about 45 million borrowers. That’s about $521 billion more than the total U.S. credit card debt."
This figure is a much larger number than in previous generations. Many of these young adults aren’t leaving the nest because they aren’t making enough money to pay back their student loans and also pay rent.
4. You Might Have a Lower Net Worth
In 2014, a report from the Pew Research Center revealed that disparities among college graduates with student loan debt vs. those without debt. The median net worth of a household headed by a college graduate under the age of 40 with student loan debt is $8,700. However, the median net worth of a household headed by a college graduate under the age of 40 with no student loan debt is $64,700—which is seven times greater.
5. You Might Not Be Able to Pursue Your Dreams
Student loan debt affects more than your financial independence and standard of living; it also determines which dreams you pursue. For example, you might have a desire to work for nonprofit organizations; however, you are likely to forego these aspirations for a job that pays more to cover your student loan payments. You may find yourself sacrificing a job, which offers you more fulfillment and purpose, for the job with a higher salary.
6. You Might Have a Lower Credit Score if Payments are Late
The major credit bureaus treat student loans like other types of installment loans. Failing to make timely payments can negatively affect FICO credit scores. Lower credit scores indicate higher risk and will make lenders less likely to extend you credit to purchase a vehicle, home, etc. It can also increase the amount of interest charged if the credit application is approved. Also, companies like insurance carriers often use credit scores to determine insurance rates.
7. Your Student Loan Debt Doesn’t Go Away
Student loan debt is different from other types of debt. A consumer who can’t afford to make car payments can return the car to the dealership. Similarly, a homeowner can hand the keys back to the bank. However, by the time you are in the student loan payback process, there’s nothing left to “return.” The money has already been spent—whether you spent it on school or not. Also, student loans are very rarely discharged in bankruptcy court.
8. You Might be Disqualified for a Job
Companies frequently conduct background checks, which now include credit checks. According to an article on CNN, 34% of companies perform a credit check on some job applicants, while 14% do a credit check on all job applicants. If you are late making your student loan payments, you should expect to have this information viewed by prospective employers who might hold it against you.
9. The Feds Might Seize Your Funds
If you have a federal loan that is more than 270 days in default, you might not get a state or federal tax refund for a long time. That’s because the feds can seize those tax refunds if you default. They can also take any other type of government payment, such as Social Security (older relatives who co-sign loans: take note). Additionally, the feds can garnish up to 15% of your income to help pay back your loans.
10. You Might Have a Higher Default Rate
According to the website Student Loan Hero, 11.5% of student loans are 90 days or more delinquent or are in default, and the news is worse if you left college without getting a college degree.
According to the National Center for Education Statistics, "students who borrow for college but never graduate are three times more likely to default" than those who do graduate.
The Bottom Line
More students are taking out student loans to pay for college. However, it’s essential to recognize the consequences of borrowing money and to be disciplined enough only to borrow what is needed. Plan well before you borrow—including factoring in the salary you can expect upon graduation for the fields that interest you—and make careful plans to repay your debts. Also helpful: Seeing if you qualify to have any of your college loans forgiven. It's worth trying.