College Debt – Diversification and What this Means

As we all know, college debt is getting out of hand. Too many college students are relying on college debt to pay for their school instead of working hard to pay for it as they go. This not only puts them behind in achieving financial security, but has other negative effects on their finances. To make matters worse, it is rapidly growing and changing in its form.

A recent article from the Wall Street Journal highlighted the fact that nearly 50% of the total college debt is owned by private lenders. The article gives an accurate picture of the increase in popularity of student loans:

“By the end of September, borrowers are expected to owe a whopping $840.5 billion in federal student loans, according to an analysis of federal budget data by FinAid.org. That’s up 10% from a year prior. Tack on capitalizing interest—most borrowers don’t start paying back these loans right away and in most cases interest continues to accrue—and the figure balloons even higher.”

This article does a great job at illustrating two things. First, it highlights the fact that the government isn’t the only lender to college students. Perhaps because of the increasing costs of tuition (or maybe the refusal to work in college), students are now borrowing from both the government and private lenders. Secondly, it illustrates that the college debt total is increasing.

What does this mean for college graduate’s finances?

As the article goes on to explain, this affect people’s finances in a dramatic way. Not only does it make them more susceptible to use credit to pay for stuff that they don’t want to work for, but it increases their monthly expenses. Wall Street Journal even suggests that it affects their retirement. Here’s a more thorough explanation of how college debt affects your finances.

Example 1: Bobby

Bobby is in his final semester of college and has created a financial mantra based on that which he sees in popular culture. The U.S. government and other celebrities often live their life based on using debt to propel yourself forward faster, so he has done the same. He took out student loans for his entire four year college. By the time he finished school, he graduated with a Bachelor’s degree and $98,000 in loans. He has a full six months before he has to start paying these off, so he starts looking for a job right away. While he would love to explore ideas of living abroad, he is forced to accept his fate and pay off his loans.

Example 2: Susan

Susan just graduated, but she left college as one of the few who knew the importance of living a debt free lifestyle. He paid for her school with summer jobs and scholarships. Because she has no student loans, she now has the flexibility to follow her dreams. Also, any extra cash she earns (above her budget) is directed towards either retirement or spending things on herself. She enjoys the piece of mind that her hard work and determination in college now provides her.

To put it simply, while the population may be using student loans (both federal and private) more freely, it can still have a negative effect on your finances for decades to come. Make sure to think long-term before calling it quits and borrowing money for your education.

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