Why college loans are the worst debt

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As far back as I can remember, personal finance scholars had only one bulletproof guideline on debt: differentiate between “good” and “bad” debt.

The “good” debt mostly came in the form of mortgages because you could build equity through home ownership. Better yet, you can deduct a portion of the interest if you itemize the deductions on your federal taxes.

Then there are bad debts such as credit card charges and installment loan charges, which cannot be deducted and can lead you into a financial black hole.

But probably the worst debt of all is college loans, especially if they don’t lead to a degree or gainful employment.

How is college debt worse than bad credit card debt? For most people, it’s not deductible. Worse yet, except in extreme circumstances, you cannot get rid of it even in bankruptcy. It will stay with most people for decades if they don’t pay it back, even until retirement.


The burden of student debt

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The 44 million Americans who have college loans also carry the kind of burden that gets worse over time. This prevents them from buying houses and settling down. When they default, they are further burned by a damaged credit rating, which puts low-cost credit out of reach for those struggling with loans and other debts.

According to a new report According to progressive think tank Demos, “student debt is particularly damaging to individuals who are struggling to repay their loans. Defaulting borrowers struggle with rapidly accumulating fees, penalties and interest; borrowers who default on their loans face ruined credit and debt that is often many times greater than their original loan balance.

Robert Hiltonsmith, author of the Demos Report, noted: “The majority of people struggling to repay their college loans have relatively low debt; half owe less than $ 16,400.

“This contradicts the common media portrayal that distressed borrowers have excessive debt beyond the average, and raises the question of whether a higher education system funded primarily by debt puts students at undue risk. are trying to develop their skills and move up the economic ladder, ”says Hiltonsmith.

Relatively small debts can cause big problems, he found. “There is no such thing as a ‘safe’ amount of student debt: borrowers with low balances find it difficult to repay them at the same rate as borrowers with higher balances. “

Not surprisingly, low-income borrowers and students of color were more likely to default on their loans. And the loan amount was unrelated to the default rate, according to the study. One-third of those in default owed less than $ 10,000.


Millennial debt

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Despite President Donald Trump’s campaign call to privatize the university lending industry, which is dominated by the federal lending program, there is little relief in sight for student borrowers. A moratorium on college debt would help tremendously. At the very least, the government should stop charging interest on these loans.

Would it make sense to increase the federal tax deduction for interest on student loans? This is unlikely because it won’t do much to reduce the true cost of college education, although the cost of after-tax funding will drop somewhat.

Right now, you can write off $ 2,500 interest on loans – if you meet certain income conditions. You cannot write off interest if you are married and file separately, and you lose the write off if your adjusted income is more than $ 80,000 for single filers and more than $ 160,000 for joint filers. Other rules also apply.

Yet the true cost of college hangs heavy if going into debt doesn’t lead to a well-paying job, which is increasingly difficult to find in the age of automation, outsourcing and outsourcing. globalization.

Reasonable solutions to lower college costs include increasing grants to public college students to eliminate loans, allow graduates to free themselves from university loans in bankruptcy, and increase grants to public schools to help them cut back. scholarship fees. But I would give these proposals a low chance of passage in the current political climate.

Demos’ “Compact Affordable College Plan”, Which he published almost three years ago, has several more sensible ideas.


Franken questions DeVos

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In the meantime, the best way to avoid college debt is through a careful planning strategy. Consider low-cost, debt-free degrees that involve community and suburban colleges. Emphasize institutions that provide grants rather than loans. Avoid for-profit colleges.

Most importantly, do the math that shows you how much it will cost you to incur college debt over time. How much will your monthly loan payments, including principal and interest, be upon graduation?

When you do your funding calculation, you will find a number of free calculators online – keep in mind that you should also project your estimated graduate salary as well as your debt repayments.

Want to get an idea of ​​how much you’ll earn once you graduate? Each college should provide you with this information. You can also check PayScale surveys, which follow the gains by degree.

If you can’t handle a monthly loan bill without reducing your income to zero, you have to make a decision. Will your university debt ultimately be good or bad? This exercise is not only good personal finance practice for any debt you incur, it should be an essential part of your college planning journey.

Note: This story has been updated to correct the conditions under which you are allowed to deduct up to $ 2,500 in interest, according to IRS rules.

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