Over the past several decades, student loans have been a godsend to college-bound students who have no other way of paying for a higher education. While it has become standard practice to borrow money to pay for a college degree, many are still clueless as to how they should effectively manage their debt and what ramifications of not being able to pay off debt within the agreed terms.
Student Loans and Delinquency Rate
As of this year, student loans delinquency have reached 35% , which clearly indicates that more graduates are having trouble paying back their debt even after finding gainful employment. In 2004, the total amount of student loans delinquency granted surpassed $1 Trillion dollars, which is more than the total credit card debt of the entire United States population. This has triggered a ripple effect in the national economy, and caused certain difficulties in the credit sector, the likes of which have not been seen since the stock market crashed in the 1920′s.
Why is Loan Delinquency Rate at Such a Height?
A few decades back, a college degree almost guaranteed a job after four years. This rule no longer applies today, with the current job market as it stands. Thousands of new graduates brave looking for a job right after their scholastic sojourn, but as it stands, only 60% get hired within a few weeks after leaving school. For the other 40%, it takes months, sometimes even up to a year or so to get a job and it is not always in line with their degree either.
This poses a great deal of difficulty not only in paying their bills but also in keeping up with their monthly payments for student loans. Delayed post-grad employment often results in more credit card debt and delinquency in paying student loans, since rent, utilities, and food often takes precedence as far as budgeting is concerned.
Faulty Debt Management by Newly Grads
There is very little doubt that thousands, if not millions of young men and women have trouble managing their debt, especially in the case of those who do not pay close attention to their personal expenditures. Faulty debt management has a lot to do with a person’s inability to prioritize spending, which requires allocating a fixed amount for loans before spending on anything else.
Most new graduates also fall prey to a false sense of security, which is reinforced by the lengthy term they have chosen when they applied for a student loan four years prior. The thought that they have more time to pay back the loan allows young people to put it on the back burner until the point where penalties and arrears have been levied due to delinquency. Many financial experts agree that it works against college students to choose loan terms that span more than a decade because it creates serious financial problems for them.
Effects of student Loans Delinquency on Fresh Graduates and Newly Employed Individuals
One of the most important things that young people should understand when it comes to taking out loans is that there are costs attributed to not making payments on time. Among the most common effects of loan delinquency include (but not limited to) the following:
Reduced Credit Score
This is something that college-bound students should think about before they fill out an application for a long-term student loan. Becoming a delinquent debtor can cause your credit score to plummet in a matter of months. This can be a serious problem for fresh graduates since most employers include credit score as one of the factors in deciding whether or not they will hire an applicant for a particular job.
A low credit score would definitely make an applicant less attractive to potential employers since it indicates irresponsible behavior. Being passed up for a job can cause a domino effect on one’s finances, which would ultimately lead to even more serious debt problems along the way.
Declined Mortgage Application
An individual’s chance of getting approved for a mortgage (or sometimes even a lease) would be highly compromised if he/she has been delinquent in paying back student loans. It is important to keep in mind that the way you handle your debt has a huge impact on how future debtors will see your value as a potential client. It is highly likely that your credit score would be nowhere near it needs to be to qualify for a mortgage, which means you either continue renting to find a co-signer for the loan.
Practical Solutions to Student Loans Delinquency
Create a Repayment Schedule that You Can Follow
Knowing the terms of the loan you signed up for would come in handy in formulating a repayment plan that is uniquely designed to work for you. Paying back your student loans on time can be as simple as allocating a fixed amount each month based on your total income. There must be a hierarchy when it comes to expenditures, and student loans should be on top of the pyramid, followed by rent, credit card debt, and utilities.
Having a fixed repayment schedule is highly ideal because it does not only make sure that your loans get paid on time, but it also creates a well-defined financial structure. In most cases, young people just need to find their bearings and be able to follow a strict routine in order to get their finances in order.
Choose a Shorter Loan Term
Many students these days assume that they are better off taking on loans that span more than a decade or so. This is highly counter-intuitive, not to mention risky for their financial well-being because it extends the obligation longer than necessary. It is best to keep in mind that the sooner you are done paying back student loans, the sooner your finances can stabilize in a way that allow for a little breathing room.
As it stands, anything longer than 7 years is less than ideal, and 10 years or more would be tantamount to financial suicide. Paying back your loans in five years or so would do wonders for your financial future as you will be able to make room for more important things such as buying a home and saving up for retirement.