While you may need to take out a student loan to pay the full cost of your education, it is important to carefully consider how you use the money you receive. It's important to match your loan to your expenses and borrow as little as possible. Otherwise, mismanaged money could have a significant negative impact on your life.
Here are 10 ways student loan debt can potentially negatively affect your life.
Key Takeaways
- Carrying student debt can affect your ability to buy a home if your debt-to-income ratio is too high.
- If you have too much student loan debt, you won't be able to save as much for retirement.
- Student loan debt can lower your credit score, especially if you fail to make on-time payments.
- Student debts may be forgiven under certain circ*mstances, but almost never if they are in default.
Impact on Grad School
Students who leave their undergraduate programs with significant amounts of debt often cannot afford to take out another massive loan to go to grad school. That means having to put off or forego graduate school.
Depending on your career path, going to graduate school can potentially affect your salary. For example, the average starting salary for a computer and information sciences major for the class of 2022 was $86,964 with a bachelor's degree and $105,894 with a master's degree, according to the National Association of Colleges and Employers.
If you want to go to grad school, weigh the costs and the likelihood of how much you'll earn in your field after you graduate. Factor in your current debt load.
Challenges Buying a Home
Too much student loan debt can significantly impact your ability topurchase a home. First, putting money toward your student loans may prevent you from saving enough for the minimumdown paymentrequired by many lenders.
Lenders consider a number of financial factors when deciding whether to approve you for a mortgage. Your debt-to-income ratio is among them. If the amount of debt you carry is considered too high for you to afford additional monthly mortgage payments, a lender will likely reject your loan application.
Challenges Renting
Some peoplewith student loan debt can’t even afford to rent apartments, especially if they live in major cities like New York, Chicago, or Boston where the cost of living is higher. Like lenders, landlords also consider how much you can afford to pay. They will likely run a credit check on you to determine whether you will make rent payments reliably.
Note
If you cannot afford to repay your debts, you may consider working with a reputable debt relief company. These companies can negotiate with creditors to try to lower the total amount of debt you owe.
Lowered Net Worth
Carrying student debt decreases your overall net worth. When you calculate your net worth, you include both your assets and your liabilities.
Your assets such as your home and investments increase your net worth. Your liabilities, including your debt like credit cards, outstanding mortgages, and other loans lower your net worth. The higher your student loan debt, the lower your net worth because your student loan is a liability until you pay it off.
Delayed Career Goals
Student loan debt can affect which career goals you're able to pursue. You may find yourself sacrificing a job that offers you more fulfillment and purpose for a career with ahigher salary that will allow you to pay off your debts, including your student loan debt.
Credit Score Damage
The major credit bureaus treat student loans like any other type of installment loan. Failing to make timely payments can negatively affectyour FICO score. A lower credit score places you in a higher risk category. This makes lenders less likely to extend you credit like an auto loan or a mortgage.
A lower credit score can also result in lenders only approving you for their higher interest rates, which can increase the total cost of your loans. Insurance carriers also use credit scores to determine insurance rates, so you may face higher insurance rates as well.
Permanent Debt
Student loan debt is unsecured debt that typically cannot be discharged in bankruptcy. With secured debt, a lender can seize the underlying asset such as a car or a home to offset losses if you fail to pay the loan. With student loans, you remain responsible for paying it.
Student loans are very rarely discharged in bankruptcy court. You may be able to get student loan forgiveness, depending on your specific circ*mstances.
Being Disqualified for a Job
When you a apply for a job, companies will frequently conduct background checks, which can include credit checks—especially if you're applying for a position in the financial industry.
Besides showing a candidate's employment history, employment reports can include a criminal background check and public records search, which would show any bankruptcy filings or court documents.
Although the vetting process doesn't allow employers access to your credit score, they can review your credit report as part of the background check.If you are late making your student loan payments, you should expect to have this information viewed by prospective employers who may hold it against you.
Seizure of Your Funds
If you have a federal loan that is more than 270 days past due, you may not get a state or federal tax refund for a long time. That’s because the federal government can seize this money if you ever default on your loan. It can also take any other type of government payment owned to you, such as a Social Security payment.
The federal government canalso garnishup to 15% of your income to help pay back your loans.
A Higher Default Rate
When you default on your student loan—or any other debt for that matter—you fail to make your payment on time. After a certain period, that debt becomes delinquent. You remain in default until you make that payment and bring your account up to date.
Note
Students who borrow for college but never graduate are three times more likely to default than those who do graduate, according to the U.S. Department of Education.
Is Student Debt Worth It?
Student debt can be worth it if you can manage your payments responsibly. Taking on a student loan can help you earn a degree, which can open more opportunities for employment, including jobs with a higher salary. However, if you do not complete your degree or land a higher paying career, student debt may not be worth it.
Can You Discharge Student Loan Debt in Bankruptcy?
Students loans cannot be discharged in bankruptcy. In rare cases, a court may determine that paying your loans would cause undue hardship and may discharge your student loans. However, you must file a separate action called an adversary proceeding.
Does FHA Consider Student Loans?
When you apply for a Federal Housing Administration (FHA) mortgage, your student loan debt will be factored in as part of your debt-to-income ratio. This ratio helps lenders assess your risk by determining whether you have enough income to reliably pay your total debt obligations.
The Bottom Line
Before taking out a loan, make sure you understand the consequences of borrowing money and only borrow what you need. Make a plan for repaying the loan before you borrow, factoring in the salary you can expect upon graduation for the fields that interest you.
