9 Big Things Americans Get Wrong about Student Loans
While student loans can be a conduit to a decent, relatively successful life, the problem manifests in recipients not considering the whole picture; sometimes, with external parties such as friends and family fueling the bias.
According to one study, out of every 10 college graduates, 7 have student loan debt which evidences that loans are the default way for the majority of aspiring college graduates to fund higher education. Here are 9 big things most Americans get wrong about student loans.
The collateral
To access a loan, some form of collateral must be presented. Otherwise, loans would equate to giving out money based on promises only. For a car loan, the guarantee is the car; for a mortgage, the guarantee is the house; and for student loans, the collateral is your future income.
If you are unable to repay a loan, the collateral is seized. You lose your car; your home is foreclosed, etc. For a student loan, the lender may lay claim to a given percentage of any income earned including tax refunds and even social security (garnishment)!
How forgivable are student loans?
Student loans seem sufficiently innocent, but given that future earnings are the collateral, the only excuse that can lead to forgiveness is if you are unable to work. Student loans are outright among the most unforgivable loans – even largely immune to bankruptcy.
The common reason for forgiveness is disability in the case that you cannot work at all. But if you can work, regardless of the size of your income, you will have to contribute towards repaying your student loan.
Refinancing for lower rates
Refinancing, if done shrewdly, can lower your rates and repayment duration thereby saving you thousands of dollars. Sadly, refinancing is something many loan beneficiaries do not understand.
Refinancing is possible if you present a lesser risk for the lending institution. On this basis, you get leverage to negotiate better terms. Requisites for refinancing primarily include a superb credit score and a high income. The better you meet the refinancing requirements, the more you can save.
Loan relief
If you got your loan through a private establishment, it may be possible to get some form of relief for more convenient loan servicing. If you are struggling to make monthly contributions, contact your lender and inquire whether relief is possible.
The institution may revise your terms as per the health of your finances to empower you to meet your obligations. If lucky, your installments may even be suspended until you are more capable.
Repayment options for federally-guaranteed loans
Many people do not know that there are repayment options for federally guaranteed loans. If the quantity of your income makes it hard to service your debt, you can benefit from income-based schemes where your rate is determined by the quantity of your salary.
The lowest cap you may enjoy is 10%, but this will also mean a considerable increase of the repayment duration. Bear in mind that the longer the repayment period, the more interest you will pay.
Who is responsible for the debt?
Parents who are unable to afford a college education for their kids sometimes opt to take student loans on their behalf. They wrongly think that since the money is technically for a son’s or daughter’s education, the child will be responsible for paying it back.
The truth is that only the one who takes on the debt is responsible for it. If a parent, the institution will demand payments from you and not from your progeny. Additionally, it is virtually impossible to restructure repayment to shift the burden to the student.
What happens if you do not graduate?
Loan terms do not include an exit clause in the case that you do not graduate. Whatever the outcome, you will have to service the loan. This is a monumental concern for those who halfway into college decide that further education is not ideal and they, thus, drop out to chase dreams. To be safe, before taking on debt, be certain regarding the path that you have chosen or you may end up without a degree and with debt.
Co-signing student loans
Americans take loan cosigning too lightly yet as a cosigner, to the institution, you are just as responsible as the loan beneficiary. If for any reason the recipient is unable to meet his/her repayment obligations, the institution will come after you.
This means that if the student dies, for instance, you may still end up paying the loan. Furthermore, it may adversely affect your credit score leading to the upward revisal of rates when you desire a personal loan. The rule of thumb is that you should not cosign a loan if you are not in a position to repay it.
Beware of scammers
Scammers never miss an opportunity to take advantage of those in distress, and they have found many victims in student loan strugglers. Often, unscrupulous persons set up a site that exhibits allegiance to the Department of Education, and they market loan forgiveness if you pay a lump sum upfront plus small monthly payments. Before you get into any binding financial arrangement, do due diligence, and you will be safe.
If you are yet to join college, be prudent and try your hand at getting a scholarship to escape the perils of student loans. Even if you are already a college student, it may still be possible to get a grant if you look hard enough. Above all, always make sure you read and understand the terms, conditions and options of any loan before taking on the debt.
