There’s been a surprising trend in consumer debt over the past few years. For the first time ever, student loans have surpassed credit cards as the largest source of debt among American households. Total student loan debt has surpassed the $1 trillion mark, and the average person who took out a loan for higher education has $25,000 left on his or her tab. And the number of people defaulting on student loans has risen, forcing many of them to endure nasty phone calls from collection agencies on their home, cell, and business phones. (Strangely enough, the default rate on student loans among people who attended for-profit colleges and universities is substantially higher than that found among Americans who earned a degree from a traditional institution of higher learning.)
But to millions of Americans who struggle to pay off their student loans while putting food on the table, this trend may not come as much of a shock. With the price of college tuition rising substantially over the past decade and a degree becoming more and more of a standard requirement for well-paying jobs, the fact that more people have elected to borrow money to pay for higher education isn’t very astonishing at all.
Of course, it doesn’t help that most student loans are structured to be repaid over a time period that ranges between ten and twenty years. Even with loans that have low financing rates, that’s still a lot of extra interest that Americans are having to pay in addition to their original loan amount. Here are seven reasons why most student loans haven’t been paid off yet.
1. No permanent job. In the good old days, students graduated from college or university and already had a job lined up; and those who didn’t generally found one within weeks. But that scenario isn’t as accurate anymore. New college grads are waiting months before they get hired, and even then it may not be at a permanent position. Those who aren’t getting any income are likely not paying off their student loans, and those who are lucky to have a job may not have enough extra money to work on their outstanding debts.
2. Unemployment. And then there are those students who did manage to get a full-time job upon graduation, but then lost it a few years later when bad economic times hit. The sudden fiscal crunch meant that these individuals had to make certain sacrifices, especially if their joblessness lasted several months or more than a year. Often, this meant forgoing student loan payments in favor of paying utility bills or putting food on the table.
3. No discretionary income. Once college graduates are employed, they’re often living on their own without much extra money in their pockets. After slicing up their paycheck to address housing, utility, food, and auto costs, there’s not much left for the student loan fund. Even though their credit scores take a hit, young adults still elect to save money and not throw it at what seems like an insurmountable debt.
4. Credit card debt. Even though it’s fallen to number two on Americans’ debt list, it’s still a major factor in a household budget. Since it’s likely that young adults racked up credit card debt while in school and still need their cards for unexpected or large expenses, they may feel that making credit card payments is more important that repaying student loans – especially since credit card interest rates tend to be higher than student loan financing rates.
5. New home. If they’re lucky enough to have a steady job for some time, they may choose to save up toward a down payment on a new home rather than earmarking extra funds toward student loan repayments. And once they do buy the new home, they quickly discover that even though their budget gives them enough leeway for all of their bills, unexpected homeowner costs tend to crop up all the time. When this happens, the student loan payment is often the first budget item to be sacrificed.
6. New baby. If young adults decide to start a family, new costs seem to fly at them from all directions. From prenatal care classes and cribs to diapers, formula, and baby clothes, household budgets (like the sleep schedules of new parents) tend to revolve around a new baby. Plus, saving money for college is often tax-deductible, so parents may be more likely to funnel funds in that direction instead of toward old debts. Finding extra money to pay off student loans is often difficult or impossible.
7. Medical bills. Unfortunately, most Americans are just one serious illness away from bankruptcy, especially if they have little or no health insurance through their employer. Medical bills for short hospital stays can easily run into the tens of thousands of dollars. And if someone is diagnosed with a chronic affliction or condition that requires lifetime medications or therapies, then his or her personal finances will take an even bigger hit. Given the choice between maintaining their health and paying off their student loans, it’s not hard to see which bill people throw into the trash.
Here’s the good news: New legislation has been implemented that is designed to reduce the financial burden that student loans put on Americans. Now, student loan debtors have options ranging from loan consolidation and refinancing to monthly payment reductions and loan forgiveness. So while the loan amounts still won’t vanish overnight, college graduates may find it easier to repay their student loans in the future.