We all know about the student debt crisis in America. Student loans in the United States total more than $1.6 trillion! Moreover, the average borrower has $32,731, with monthly payments of $383. This already looks pretty scary! However, there are more terrifying facts about student loans you need to know.
How Student Loans Impact Real People
Student loans present a very real burden in American society. Often, students take out loans with the promise of a brighter future. However, we see far too many instances of people taking out tons of debt with little to no return. Here are a few examples of real people I’ve spoken with:
- One couple had $120,000 in student loan debt. They went to a private school far away from their family and never finished their degrees. Sadly, they only bring home $1,200 a month.
- Another couple still has $52,000 in debt. Their average income over the last 10 years was only $3,500 a month. Because they opted for an income-based repayment plan, their monthly payment has zero impact on the principal balance. In other words, their loan amount has grown.
- One student has over $60,000 in student loan debt. He wants to become a missionary. However, his student loan debt exceeds the debt limit for most missions agencies.
- A single mother dreamed of her son attending university. However, she didn’t have the cash to send him. Desiring a better future for him, she took out $40,000 in student loans. But he never finished school. Because the loans are in her name, she bears the responsibility for them.
We can discuss facts about student loans all day, but you need to see how they impact real people. Moreover, do you know a common theme with all people who take out student loans? Most students simply choose not to think about the long-term consequences of taking out student loans.
If you’re looking at going to college, I implore you to take into account these scary facts about student loans.
5 Scary Facts About Student Loans
1. The government can garnish your wages for federal student loans without a judgment
Normally, garnishment entails a long and difficult process. But you might wonder, what on earth is garnishment? Simply, garnishment means that a lender takes a portion of your paycheck to pay an overdue debt.
Garnishment usually takes several years because a lender must sue you and take you to court. If they cannot reach a settlement, the judge can issue an order for the lender to automatically take some of your wages. Lenders typically don’t like going this route because of the long and expensive nature of the process. However, the federal government has no problem garnishing your wages.
Under federal law, the government can skip the due process and garnish your wages without a court order. That’s right! If you fail to pay your federal student loan, they can go straight for your paycheck. Talk about going straight for the neck!
Now, I will say that this is NOT the case for private student loans. Private lenders must obtain a judgment to garnish your wages.
2. It’s almost impossible to discharge student loans through bankruptcy
Most people think it might be possible to find relief by filing for bankruptcy. Generally, when people think of bankruptcy, they think of a chapter 7 bankruptcy. This is what most consider to be a “clean slate” which wipes out all unsecured debt.
But not so fast.
It’s nearly impossible to discharge student loans through bankruptcy. Notice that I said nearly impossible. That’s because it’s possible, but highly unlikely.
In order to receive a bankruptcy discharge for your student loans, you must pass the Brunner Test. You must prove:
- You’ve made every reasonable effort to repay your debt
- You won’t manage to maintain a reasonable standard of living if you’re forced to repay your debt
- The current financial hardship involved in repaying your debt won’t go away for the majority of your repayment period
In other words, unless you’re really old or have a disability, it’s unlikely that bankruptcy will help you.
3. Interest on student loans compounds over time
Remember when you first heard about compound interest? Some even give it the title of “the eighth wonder of the world!”
Just in case you don’t know about compound interest, it basically means that you earn interest off your interest. For example, if you invest $100,000 dollars and you make 10% interest that year, you’ll end the year with $110,000. Next year, you earn interest off of $110,000. Indeed, with your retirement and investment accounts, compound interest works in your favor.
But did you know your student loans also compound? And no, this does not work in your favor.
Let’s say you have a student loan of $30,000 at 6% APR. Your monthly payments are $333 for a 10-year term. However, you get into a pickle and take a lower-paying job. The loan company then offers you an income-based repayment plan where you pay $200 a month. Do you know what happens? Your term more than double to 23 years, and you end up paying a total of more than $55,000!
But let’s also say that you get a forbearance for three years. In a forbearance, you stop paying for a defined period of time, but the loan still accrues interest. Using the same amount at 6% interest, after three years your overall balance will grow to nearly $36,000. That’s nearly $6,000 more that you have to pay!
Many people fall into the trap that they get “relief” when they put their student loans in forbearance. However, they forget about the compounding interest. This is definitely one of those facts about student loans people tend to ignore.
4. Federal student loans are stupid easy to obtain
I still remember my first time filling out the Free Application for Federal Student Aid (FAFSA). I loved it because it turned out I qualified for quite a few federal grants! But I recall a couple of line items my parents didn’t want me to touch: the federal student loans.
However, a couple of years later I no longer qualified for as many grants. I wanted to stay in school, so when I filled out the FAFSA again I opted for the student loans.
That’s it! All I had to do was opt-in for the student loans. I agreed to some terms and conditions and the next thing I knew my school received the money. I even had a little extra for my pocket. But I had to pay all of that back and then some.
The government makes the process of obtaining loans stupid easy. It’s an incredible amount of power to put at the fingertips of 18-year-olds. Many likely have zero concept of the consequences of borrowing money!
5. Student loan forgiveness programs are a sham
A couple of days ago, I spoke over the phone with a physical therapist who wanted to become a missionary. Only one thing stood in his way: his $200,000 in student loans. He kept going on about his plan to obtain the Public Service Loan Forgiveness (PSLF). He still had five years to go.
I had no choice but to speak bluntly to him. I told him that the government approves only 1.2% of PSLF applications. However, this didn’t deter him. He went on to say how most people didn’t do it right. He would be the exception. I wished him well but implored him to explore other options.
You might wonder where I got the 1.2% statistic. I got it directly from the Federal Student Aid website. You can check out the data for yourself.
I also wrote an entire article on student loan forgiveness. Check it out and see if you believe the government will wipe out your student loan debt.
Hope for Any Situation
Indeed, these are some scary facts about student loans. And if you find yourself with a ton of student loans, you might wonder what you can do. However, you can still find hope in any situation.
Next, you’ll want to start working a plan. I found that Dave Ramsey’s 7 Baby Step plan works extraordinarily well. Dave Ramsey highlights this in his book, The Total Money Makeover. If you click the image above, it will take you straight to Amazon where you can purchase his book.
If you’re about to graduate high school and want to avoid student loans, then I highly recommend Debt Free Degree by Anthony ONeal. This will lay out a step-by-step plan to help you obtain your degree without student loans.
Finally, be careful when it comes to student loans. Increase your awareness of the dangers and educate future generations so they don’t fall into the same traps. Create a plan, stick to it, and free yourself from the burden of debt! That way, you can increase your generosity, live, and give like no one else!
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