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Student loans overtake credit card debt!

October 18, 2010

Pop quiz: what type of debt overtook credit card debt this past month in the amount of money owed?

If you answered student loans, you are correct. According to the Federal Reserve, Americans now owe about $830 billion in educational loans and about $826.5 billion in revolving debt (mostly credit card debt).

This past week, we had around 1,000 students start another semester at Northeastern Junior College. Many students will use loans to help finance their education. As colleges across the country start up for another semester, it is easy to see how the student loan amount will increase significantly.

Is this something that should worry you? Yes and no. There are definite benefits to student loans, but there are potential drawbacks as well.

First, the good. Student loans make getting an education past high school a reality for many who cannot afford to pay cash for college. If a student finances college through student loans and goes on to graduate and find a job because of that degree, it can help that person change the standard of living for himself or herself.

When students apply for financial aid and receive loans, they can find a few favorable terms. Re-payment of student loans does not begin until the student graduates or is no longer a full-time student. Most federal student loans have interest rates lower than what you can receive from a private bank. Students also can qualify for student loans before they have a credit history that would qualify them for other loans.

Next, the bad. Obviously, student loans need to be repaid. They generally stay with an individual until they are paid off. Even if a student goes through bankruptcy, there is a good chance the student loans will remain. Also, it is easier for student loan companies to garnish your wages than it is with other types of debt. Also, with the ease in getting student loans, an individual can borrow more than what he or she can pay off.

Here are my tips: Parents, it is O.K. if you want to help your son or daughter pay for their education if you can afford it. If your children have fewer student debts, it can help them get on their feet after high school. However, if you do not have money set up for retirement or to take care of yourself, do not sacrifice your financial future for your child’s education. There may be student loans to help pay for college, but there are no retirement loans for those who have not saved for it.

If you want to help pay for college, start as early as possible. My wife and I started a college fund for our daughter a couple months after she was born, and we contribute to it every month. You can set up a 529 or Coverdell IRA to save for college and receive some tax breaks. If you can save even $25 a month for 10 to 15 years, you can build up a decent sized account toward your child’s education.

Students: Be smart. If you are going to borrow money to finance your education, take advantage of that education. Get good grades and ensure you get the knowledge and critical thinking skills necessary for you to succeed after college. If you take out student loans and flunk your classes, you will be making payments on a loan that got you nowhere.

Also, make sure the amount you borrow does not exceed the amount you will expect to earn your first year working after college. For example, teaching and social work are honorable professions, but you would not want to borrow $100,000 in order to attend a private institution if you are working toward a job that pays $30,000 a year.

When considering a college, look at the cost. Consider a community college, which generally is cheaper than four-year colleges. For Sterling residents, students can attend NJC for two years for only about $7,000 in tuition. It generally would cost more than twice that in tuition, plus living expenses, at another college in the state.

Most jobs with growth and strong income potential tend to require education past high school. Most college graduates can expect to earn about 75 percent more than someone with just a high school education. This being said, college can be expensive, and debt can put an individual in a giant hole even after completing a degree.

Your education is an important investment, and it should be treated as such. If you make the most of it and play it smart, the money you borrow for college can pay off huge. But if you waste it or do not use student loans wisely, it can be a lingering force that can continue to hurt your personal finance for decades.

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One Comment leave one →
  1. November 12, 2010 2:28 am

    student loan and credit card debt is often a lot to repay, but consolidating these debts can make the process easier… alternative student loans

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