The number of people who have student loan debt continues to skyrocket. In fact, the amount of student loan debt has tripled in the last decade alone. At $1.5 trillion, this staggering burden is hitting Americans harder than a credit card and auto loan debt.
The estimates say that by 2023, 40% of student loan borrowers will be in default. To be in default means you haven’t made a payment in about a year. When that happens, the lender sends your account to be dealt with by a third-party collector.
The Economic Climate
A lot of it has to do with the economic climate and fraudulent claims made by the for-profit school. When the Great Recession hit in 2008, millions of people found themselves without work. To boost themselves, they decided to get a college degree. The prevailing thought is, if you have a degree, you could find better work and make more money.
That didn’t exactly happen. For-profit school latched on and made promises towards students. If you go to their school, they have a high job-placement percentage. So, the student flocked. They later found out that it was tough even to hire people with college degrees. You were more likely to have a bachelor’s degree working fast food than a sustainable career.
http://financialhelpers.com/student-loan-debt-crosses-the-1-5-trillion-mark/
Those who borrowed a student loan tended to be in financial stress already. They weren’t working, could barely afford the rent, and were likely living at home. After they graduated, nothing changed for them, other than a pile of debt they were required to start paying back. The problem is, monthly payments cost nearly as much as a cheap apartment.
Student Loan Debt Hardship
Kristin Blagg, a research associate at the Urban Institute, says default problems mostly impact urban communities and people of color.
“The issue of default appears to be more concentrated in neighborhoods of color. People who default on their student loans are more likely to live in Hispanic and black neighborhoods,” she said. Minority families have less parental wealth to help. Whites also have better employment opportunities.
It’s also true that people who default on their loans live in communities with a lower median income. They can’t find the work necessary to pay back their loans. Non-defaulters are more likely to have a higher salary and can afford their bills. Still, there are plenty of young adults living at home rather than embarking on their journey.
The Harsh Impact of Student Loan Default
The main difference between default and staying current is the impact to the user’s credit score. If you’ve fallen into default, then your score will most likely tank into the 500s. Students who keep up with their loans will be in the high 600s.
Having such a low credit score can derail your life plans. If you want to buy a house, get a new car, or even if you need a loan, your options will become extremely limited. If you do manage to find financing, the interest rates will be through the roof. That means you’ll have to pay a lot more over the life of that loan than you would if you had good credit.
Where many defaulters get into trouble is their loan keeps growing larger. If you stop paying for a year, the interest will keep piling up, and the loan will increase larger. So, even if they decide to start paying, it’s becoming a vicious cycle impossible to dig out.
If you’re a service worker that requires a license, you can be disqualified from work. Having a work license, such as a nursing or teaching license, needs you to remain in good standing with your loan. Many states will pull a person’s work license if they’ve defaulted.
“Negative effects of student loan default can be wage garnishments, tax offsets, and other methods of loan collections,” said Elaine Griffin Rubin, senior contributor at Edvisors. “In addition, some states suspend or revoke state-issued professional licenses, and some states suspend a driver’s license because of a defaulted loan.”
