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Understanding the Dark Side of Student Debt - Part 1: What It Is

By William Sun


Imagine getting into your dream college. You have the opportunity of a lifetime to learn from the best professors in the world, to research using cutting edge technology, to build life-lasting social connections. However, once you walk away from college, you are left with a $320,000 student debt that is yet to be paid off. This happened to 32-year old Ravi Kantha (1), who took out loans of $160,000 to $170,000 to get his degree at law school. His story is not unique however; with tuition averaging at around $21,000 for public schools and $33,000 for public schools (2), 30 to 40 percent of all students will have taken federal student loans (3). By the time graduation arrives, nearly 70% of all students who received a Bachelor’s degree will have some form of education debt.

While these statistics may be alarming, it is important to take a step back to understand student debt. Where does this debt all come from? How does it grow throughout the years? If unpaid, what will happen? How do students pay off the debt in the first place? As rising college and university students, understanding how student loans work, the impacts of student debt, and how to escape such debt is critical.

Where It Comes From & How It Works

Student debt first begins when students apply for financial aid, which includes any money given to help a student pay for secondary-education related fees, ranging from tuition to housing. While there are 4 primary types of financial aid, the main cause of student debt is a student loan, where money is borrowed from another institution and must be repaid with interest. Specifically, interest is money added onto the original amount borrowed through a fixed or increasing rate.

Negative Effects

Now, onto the most frightening part of student debt: the negative effects. The accumulating consequences of student debt can unfortunately have significant impacts upon a graduate’s life.

While it may not be the life-destroying liability it is portrayed to be, student debt can certainly impede an individual’s future economic security and well-being.

Lowering of Net Worth- Graduating with some form of student debt automatically places your net worth in the negative range. While this won’t immediately have significant effects on your life, over time a negative net worth could build up to impede your ability to borrow loans, make large purchases and much more.

Effect on job opportunities- Having a monthly student loan payment takes a heavy toll on students. With this debt hanging over their head at every moment, graduates often don’t have the time, energy, or money to find and apply for their dream jobs. Instead, they are usually forced to take whatever career they can find in order to start to pay off their debt, even if the job isn’t one within their passion or field.

Delay in abilities to buy a home- If a student already has one huge debt to pay off, adding another in the form of mortgage is simply too much to ask. Besides having to juggle two accumulating debts in the first place, many graduates with pre existing student debt do not even qualify for mortgages in the first place. Indeed, a study conducted by the federal reserve found that a 1.5% decrease in homeownership rates is directly related to a 10% increase in student debt. Without owning a home, graduates are in a very difficult position to establish security, much less beginning to raise their own wealth.

Influence on marriage and family- Unfortunately, student debt also impedes a graduate's willingness to marry, as people are naturally more wary of marrying someone with 6 figures of debt. This lack of stability in an individual also contributes to hesitation in starting a family. With most middle-class families spending an average of $12,000 to $14,000 a year on a child, the expenses of raising a child, combined with existing student debt, makes it very difficult to begin a family.

Impact on credit score- If student loans turn out to be too much, a graduate could potentially miss paying all the debt on time, leading to a lower credit score. With this lower credit, many aspects of a graduate’s financial life are hurt- higher interest rates, fewer loan options, less housing, and difficulties in finding a job or even taking out services are just some of the effects of a lower credit score

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