The collective student loan debt in the United States today is over a trillion dollars. For a little perspective: if that amount were divided equally among the population of the United States, that would be about $3,200 for everyone (all 311 million of them). Suffice to say, a trillion dollars is a lot of money, especially when you consider the fact that most people signing up for student loans are barely able to make financial decisions for themselves. At just 18 years old, lots of people take on loans that are going to affect the next two decades of their lives.
Now that I’m out of college, there are definitely some things I wish I had taken the time to understand before signing on for student loans. Yes, college is important and I’m glad to have the degree that I do, but going into it knowing the full story would have been better. That said, here are the four things I wish I’d known about student loans.
#1 Student loans are with you for life. First of all, student loans cannot be gotten rid of through filing for bankruptcy. “I’ll never declare bankruptcy! How embarrassing!”, you may be thinking right now, but bankruptcy exists to protect consumers and give them a chance to get out of debt if they find themselves in a place where they simply cannot handle their financial situation. During bankruptcy, you “discharge,” or wipe out debts. Most things like credit cards debt or medical bills can be discharged during a typical bankruptcy. Student loans, on the other hand, can never be discharged. That means if you are totally broke and get rid of everything else, you still have to pay student loans. The government is also able to garnish you wages (that means they can take them straight from your paycheck) to get payment for student loans that you don’t pay. Even if you can’t work and receive disability checks (hopefully that won’t happen to you, but you never know how life will go), the government can take student loan payments from the disability checks to contribute towards your student loan debts.
#2 There are income-based repayment options. Now that the scary stuff is out of the way, you should know that you really don’t want to default (stop paying and not tell anyone about it) on your loans. The federal government understands that it isn’t always possible to pay your loans in full right away, so they have various repayment options. One of the most common for people who are in a bad way financially and who can’t imagine things will improve anytime soon is the income-based repayment plan. This plan takes 15% of your discretionary income for a fixed period of time, instead of a fixed amount of money every month. There is also the graduated repayment plan, which offers lower payments at the beginning (you know, when you’re still poor) and has higher payments later on.
#3 Paying off loans is not a good time. You take out student loans on the assumption that you’re going to be making a lot of money later. That may be true, but paying off loans is still a real downer. According to some recent, ten percent of graduates have student loan payments that are more than 25% of their income. You may be paying as much as $1,000 per month, which is a lot when you’re only making $30,000 or $40,000 annually. Once you’re out of college, you’ll wish you had that money to spend on fun stuff like vacations, or real furniture.
#4 Only take out what you absolutely need. When you apply for student loans, you will probably get offered more than you need for tuition to cover books, living expenses, and the rest. A word of advice: don’t take out any more than you absolutely need! Yes, it might sound cool to use the money on a nice TV or sofa, but skip it and enjoy your shabby-chic college lifestyle without the extra debt.
Sara Collins is a writer for NerdWallet, a personal finance site dedicated to helping readers learn about the best ways to save money.