Students take on college debt with the best of intentions. You have been told that a college degree is a ticket to success. That they should pursue their dreams. This student debt is good debt.
But how is it that bright students have debts that they cannot repay? Here are three reasons and ways to avoid these financial pitfalls.
You are told that it is “good debt”
In high school, students hear that they should get a college degree in order to have a well-paying and successful career.
“We as a society have this obligation to attend university, so to speak,” says Daniel T. Kirsch, author of “Sold My Soul for a Student Loan”. “We encourage everyone to take on debt and we call it ‘good debt’.”
But student debt isn’t good if your degree doesn’t result in a job that makes enough to pay it back.
Such is the case with 36-year-old Jennifer Atkins from Jacksonville, Florida. As a first-generation college student, she believed a college degree would help.
“I had the mentality at the time that I was doing what I should be doing in life,” says Atkins, who earned three degrees, including a 2014 Master of Nonprofit Management.
Atkins now has two children, over $ 100,000 in student loan debt, and is unemployed. She quit her job in 2017 because of complications with her second pregnancy and hasn’t found a job lucrative enough to justify the cost of childcare.
Avoid this trap: Limit borrowing so that future monthly payments do not consume more than 10% of net wages. By that standard, someone expecting to make $ 50,000 a year could afford a monthly payment of about $ 279, according to NerdWallet Student Loan Affordability Calculator. At the current student loan rate of 4.53%, that payment would support the college debt of approximately $ 26,800.
The loans don’t feel real
Some students are willing to take on large college debts because they fail to adhere to the reality that they will eventually have to pay it back with interest. This is in line with what behavioral economists call “current bias,” the notion that people often make decisions that will benefit them in the short term and overlook future consequences.
Atkins recalls taking incremental student loans during his ten years of college education – $ 3,000 here, $ 5,000 there. She worked throughout school, but the credit was essential to make ends meet.
“None of this was real to me then,” says Atkins. “I had no problem clicking ‘Accept’ on these student loans.”
In hindsight, Atkins says she wished she had mandatory career counseling to walk her through the numbers and understand her debt in the context of her future income and expenses.
Such advice may have helped. Imagining our future selves can help us overcome current biases, says Jeff Kreisler, co-author of Dollars and Sense on behavioral economics.
“If you make the future more concrete, you can connect with it,” he says.
Avoid this trap: Do the math as you go. Every dollar you borrow must be repaid with interest. However, you can choose to borrow less than you are offered. It may be tempting to take the full amount, but you will have a lower monthly payment in the future if you only borrow enough to cover tuition and basic living expenses.
You are missing information
In many cases, students lack the financial education they need to make credit decisions.
Susan Dawson, 47, has a PhD in history and works as a historian for a federal income agency. But she says that if she had known the income opportunities in her field, she would have chosen another profession.
“I feel stupid because I didn’t know what questions to ask,” said Dawson, who has a six-digit student loan and lives and works in Washington DC
Some of the things she would have liked to ask about include:
Typical merits in their field.
Your future monthly student loan payments.
This is how the interest rates on student loans work.
Avoid this trap: Check the Bureau of Labor Statistics’ Professional Perspective Handbook Research wages and educational requirements for different areas. Use a student loan calculator to estimate future monthly payments. Interest accrues during school time – unless you have subsidized loans – but you can pay interest during school to keep your balance from bloating.
This article was written by NerdWallet and originally published by The Associated Press.