Student Loans Can Ruin You
Education is critical. But student loans can ruin you.
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Education is one of the most valuable and important things in life. It is critical. But what few people will tell you when you are getting ready to go to college is this: How you finance that education can make the difference between a successful life and a life of misery and failure.
Student loans cannot be erased in bankruptcy
Most debt in the U.S. can be eliminated through bankruptcy. It is not a fun process by any means, but it gives people who have taken on too much debt a second chance at building a successful life. But, and here comes the kicker, unlike other regular loans (mortgage, car, credit card, etc.), student loans cannot be erased in bankruptcy. Yes, you read that right. Student loans can almost never be discharged in bankruptcy.
Marriage vows say "till death do us part." With divorce rates as high as they are, that may not be true for many marriages anymore, but with bankruptcy law being what it is, it certainly is true for student loans. If you can't pay your student loans, they will be with you until your death.
Let's compare two examples:
Example 1 (Regular Loans): You have $400,000 in regular loans (mortgage, car loan, credit card debt). If you file for bankruptcy and go through the bankruptcy process, your debts will be erased, you will have a fresh start free from the weight of debt, and you will be able to rebuild your financial life.
Example 2 (Student Loans): You owe $400,000 in student loan debt. If you file bankruptcy and go through the bankruptcy process, in almost all cases your debt will NOT be erased, you will NOT get a fresh start, and you will continue to pay for your student loans until you die or until you pay them back. No second chance for you.
Student Loans - I only pay what I can afford
Most student loans offer the opportunity to pay only what you can afford, at least for a while. While this sounds like a great idea, it creates a snowball effect that can be financially devastating. How? If you don't pay the interest you owe, the difference between what you paid and what you should have paid is added to your loan amount. So now your student loan is bigger than it was before.
For example, say your student loan is $100,000 with a 10% interest rate. If you have the money, you would have to pay at least $10,000 a year in interest with after-tax money.
But if you take a year off from paying your student loan, that $10,000 in interest is just added to your student loan. And your new student loan balance is now $110,000 at a 10% interest rate.
You can see how "pay only what you can afford" can easily explode the amount of student debt you owe and make it harder and harder (if not impossible) to pay off your student loans.
Student Loans - A Return to Debtor's Prison (The Virtual Version)?
A few hundred years ago, not being able to pay your debts was considered a moral failing, and there were debtor's prisons where debtors could be imprisoned for not paying their debts. Over time, society came to the conclusion that while people should pay back what they owe, there may be situations where the debt situation is so catastrophic that they have no realistic chance of ever repaying their debts in their lifetime.
To insist on debt repayment in these situations would simply be cruel, the lender would not see most of his money anyway, and the borrower's life would be destroyed. To change that, people were given a chance to start over with a personal bankruptcy that wiped out their debts after going through a bankruptcy process. A second chance, if you will. This is now true for regular debt, but not for student loans. These are forever and they can put you in a virtual debtor’s prison, so to speak.
Summary & Does this mean that I should not go to college?
No, it does not. Education is still a great investment when done right. However, when financing an education, it's important to look at the financial numbers and not get caught up in the excitement of your next life move (going to college, etc.).
Meet with a qualified financial advisor to help you understand what you are getting into. Run the numbers. Running the numbers will ensure that you don't overspend and end up with a student loan payment that's too high for your future budget. This clarity will help you make informed decisions about how much student loan debt you can afford.
How much student debt you can afford also depends on your degree. If your chosen career after college has a high salary, you can afford more debt than if it does not. All this may sound boring, but the difference between financing your education right and doing it wrong can mean the difference between a great life and a miserable one, because student loan debt can't be erased in bankruptcy.
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