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May-2nd-2015

Financial Implications of Student Loans

6-1024x681Various people (not withstanding Joel Stein) may consider Generation ‘Why’ a bunch of children who idly take Instagram pictures of their parents’ home-cooked dinner in full delinquent glory. Older generations buying into this inaccurate description does very little to aid in understanding the actual truth behind the financial predicaments the demographic is currently facing.

The generation of Babyboomers are who had the luxury of walking into a job straight after their degree has created a rift in what people think is actually happening with millennials. The fact is that the unemployment rate, worldwide, has never been as low as it is now – this has very little to do with Instagram and a lot more to do with economic sustainability. Student loans have never been higher, retirement options have never been lower and medical aid is a gloriously fluffy luxury.

There is currently up to $730 billion in outstanding student-loan debt. Only 40% of that is being actively repaid, with the remaining 60% comprising struggling students and graduates who have been forced to default.

With a giant chunk of the millennial population labouring under huge amounts of student debt and very little job opportunities, the piece of paper signifying their degrees has never been as meaningless. Now, more than ever, the need to read fine print when it comes to student loans is crucial.

Long-term implications of student loans:

The difference between student loans and other kinds of loans is that with the student variety you can’t wriggle out of them. Homeowners who aren’t able to manage their mortgage payments can forfeit their keys, credit-card debts can be discharged in bankruptcy. The cancellation of a student loan, however, is virtually impossible.

The interest may be lower on student loans, but it needs to be carefully worked out in order to deduce whether the decrease is substantial enough to make a real difference when paying it back. A back log of interest after four years will land you in a position that could be just as financially dangerous as a normal loan.

It does not make any sense to spend $200,000 on a designer degree with the intention of starting a career with an annual income of $20,000. Consider the job market of the degree toward which you are studying. Paying back student loans has pushed back retirement plans, medical aid and other amenities that were once considered normal in past generations. A professional degree may allow you to pay back the loan AND invest in the future; while others will only you to live from pay check to pay check. This is a crucial factor that needs to be considered before signing the dotted line.

One perk of student loans, is that they are generally tax-free. This indeed makes a difference in terms of paying back what is owed, while not having to worry about interest AND tax.

If you default on your student loan, your loans may be turned over to a collection agency. You could be sued for the entire amount of your loan and your defaulted loan may appear on your credit record for up to years. This will stand in the way of acquiring a mortgage or even credit cards. In some cases, you may not be able to renew any professional licenses in the career you hold.

The bottom line is that student loans are becoming more available in this day and age because there are no other means through which struggling high school graduates can obtain a degree. And though these loans may indeed be useful, it is very important to read the fine lines and implement a plan that will guarantee their repayment.

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