5 Amazing Reasons Why Student Loan Debt Isn’t Scary
According to Forbes, college graduates from the Class of 2016 have over $37,000.00 in student loan debt.
To put things in perspective, these students will have to pay $300.00 per month for over ten years to pay off their debt. And that doesn’t include interest…
So if you’re a recent graduate, or are in the middle of using loans for your education, you’re probably freaking out right about now.
But what if I told you there were actually benefits to using student loans?
Because guess what? There are. In this post, you’ll discover five amazing reasons why student loan debt isn’t pure evil.
1: Good Debt Vs. Bad Debt
When it comes to personal finance, there’s good debt and bad debt.
Good debt is debt that that you take on in an effort to make more money.
A simple example is taking out a loan to buy a rental property.
In this example, you take out a loan to make a down-payment on a house. Even though you take on debt, you then go on to rent the home to someone else. Each month, this person pays you rent that is higher than your monthly payment for the loan.
This is good debt, because you borrowed money in order to make that money back – and then some.
Bad debt on the other hand, is debt from buying things that don’t increase in value or generate income. Usually, this debt has high interest rates, too (think credit cards).
An example of bad debt is buying a new outfit on credit.
You don’t have the money to buy the outfit, so you put it on credit. Each month that the outfit is not paid off, it costs more and more. This is because interest is added to the cost of the outfit.
At the same time, with each passing month, new trends are popping up. This makes the outfit less desirable – so it loses value.
This is bad debt, because you end up paying more than the original price of the outfit – and the outfit is losing value at the same time.
Based on these two examples, it’s obvious that student loans are good debt.
This is because by taking out the loans and earning a degree, you will be able to make enough money to pay back the loans, and more, in the future.
And this line of thinking is 100% correct. According to the Pew Research Center, millennials who worked full-time in 2012 that had a bachelor’s degree earned upwards of $15,000 more than those who didn’t have a college degree.
So the first reason student loan debt isn’t all that bad is because it’s good debt.
It’s an investment that will help you earn more money in the future.
2: Establishing Credit
Your credit score will affect every big purchase you ever make.
This means purchases like buying a home, renting an apartment, buying a car – even some jobs require you to have a good credit score.
When you make your student loan payments on time, you begin to build a good repayment history. This boosts your credit score, and gets your score high enough for when it’s time to make one of the big purchases listed above.
Also, when you’re in your late teens and early twenties, it’s very easy to get into credit card debt. You’re not making much money, and it’s hard to resist buying a new outfit by swiping your credit card.
When you take out student loans, you can avoid having a credit card – and eliminate this temptation altogether. That’s because you don’t need the credit card to build your credit score, since your student loans will do the work for you.
This expands on the first reason why student loans aren’t bad – because they’re good debt. Not only are you taking on good debt that will help you earn more money in the future, but you’re building up your credit score at the same time.
To keep things as simple as possible: just having a college degree greatly improves your employment outlook.
A study by Georgetown University, found that 35% of job openings from now until the year 2020 will require at least a bachelor’s degree.
This same study found that 30% of these jobs will require an associate’s degree – or at least some college. Only 35% will require no college at all.
This means that, by simply having a college degree, you may be qualified for all of these jobs. But if you never step foot in college, only 35% of new job openings for the next 2 years will be available to you.
On top of that, earlier I mentioned how the Pew Research Center found that millennials who worked full-time in 2012 made upwards of $15,000 more than their counter-parts with no degree.
As you can see, by simply having a degree, you not only gain access to more jobs, but more jobs that pay higher salaries.
4: Ridiculously Low Interest Rates
The interest rates for most student loans are insanely low.
For the 2017-2018 school year, direct subsidized federal loans had an interest rate of just 4.45%.
To put that in perspective, the average interest rate on a credit card is around 15%.
So not only are student loans good debt, but the interest rates on them are more than three times lower than credit cards – which usually cause bad debt.
And on top of that, notice how they’re called “subsidized” federal loans?
This means that the government pays the interest on the loans while you’re in college.
If you take out $20,000 in loans, you owe $20,000 when you graduate.
Try finding a credit card that will pay your interest for four years.
And it gets better…
The IRS allows you to deduct up to $2,500.00 of the interest payments you made on your student loans when you file your taxes.
This means that, if you used $2,500.00 to pay your student loan interest, you’re not taxed for earning that $2,500.00.
Depending on how much you earn, this could mean reducing your tax costs by 5% if you make $50,000.00 that year.
Believe it or not, there’s more…
Because of inflation, sometimes you can come out ahead just by making interest payments.
For example, if the interest rate on your loan is only one percent, but inflation is at two percent, you end up winning by only paying interest.
You do have to make a small investment in government bonds to take advantage of this. The strategy is described in the linked article.
But since the investment is supported by the United States government, the returns are as close to guaranteed as possible.
To make the most of the advantages in this section, refinance your loans ASAP.
Then check in again every now and then to see what new refinancing options you have.
If you consistently make payments on time, you’ll be able to refinance at lower and lower rates.
5: Easiest Loans to Repay
When it comes to federal student loans, you can use different repayment options that:
· Make student loan debt the easiest type of loan to repay
· Aren’t available with any other type of debt
For example, there’s payment plans that base your monthly payment on your income.
When using this type of plan, your monthly payment will usually be 10% of what you make that month – making it very manageable.
Even better, some jobs make you eligible for loan forgiveness.
In this scenario, after you make 120 payments, your loan disappears – tax free. Jobs that make this possible are government jobs and positions at non-profit agencies.
If you still can’t afford your payments with one of these plans, there’s others to choose from.
But if all else fails, you have other options to postpone your payments.
There’s deferment, which allows you to lower, or even postpone your payment for 3 years if you’re not making enough money.
Or, there’s forbearance, which allows you to pause payments for up to a year.
This is unique to student loan debt. No bank is going to allow you to defer credit card payments.
So another positive of using student loans is that the repayment plans are customized so that payments are as easy to make as possible.
And if you can’t manage them, you can delay payments until you’re earning enough.
Student loan debt is scary, but worth it.
Not only does finishing college make you qualified for higher-paying jobs, but the loans have low interest and helpful repayment plans.