Americans are drowning in debt. They have so much of it that now 73% of American consumers die in debt. It is an unfortunate reality of the modern world that you must get into debt to get ahead. Nowhere is this more apparent than with student debt. To get the education many people believe they need, they must dive headfirst into a mountain of loans. Keeping debt from suffocating your finances requires an understanding of what debt is, how it can affect you and how to get relief. So, let’s look at the facts so we can do just that.
The ins and Outs of Debt
To be in debt means that someone or a group of someone’s has either given you something or done something for you, and now you must return a good or service of equal or greater value. This could be a material item or a favor, but the most common kind of debt these days is cold hard cash. Prices go up all the time, and the requirements of modern American life get more and more expensive. Therefore, we often find ourselves having to borrow money from financial institutions to buy the things we want or need.
While this practice gets us the stuff we want, it also puts us in a precarious position. Being in debt is no picnic, mostly because of interest. Businesses are not your friends, they don’t lend you money just to be nice. You pay for the privilege of borrowing the money with interest, a percentage of the original amount borrowed that gets added to the amount you owe; this usually happens every year.
So, for example, if you borrow $1,000, you might have an interest of 5%, which means after a year you now owe $1,050 if you don’t make a payment. It goes up every year, so the longer you are in debt, the more you pay. If you make small enough payments on your debt, theoretically you could be in debt your whole life as the growing interest outpaces your payments.
Student Loan Debt
One of the most common kinds of debt is student loans. 70% of Americans graduate with some form of student debt. It can be a significant amount of money but fortunately, student debt is different in a few ways from other forms of debt like credit cards or mortgages.
Credit card bills and other forms of debt usually require you to begin paying back the debt immediately. Student loans, on the other hand, give you some choice. A lot of the time, they don’t require you to start paying them back until after you graduate, to give you a chance to get some income first.
You might be given as much as 20 years to pay off student loans. This may sound nice to have so much time, but don’t forget about interest. The longer you take to pay off the debt, the more you pay. Average student loan payments hover just above $200, and often times that isn’t enough to pay off the interest.
The interest rates on student debt are also much lower on average than credit cards and more similar to mortgages. Don’t celebrate too early, though. Since tuition is so high nowadays, even low-interest rates can add up to quite a bit. The average student loan debt is about $17,000 dollars.
There is some positive news for medical students, however. Medical school debt is of course much higher than normal tuition, but loans for medical students are usually much easier to deal with as they have lower interest rates. Lenders are confident that medical students will get high paying jobs after they graduate, so they don’t have to worry about them paying it back as much.
Those with student loans also have the benefit of having, for the moment, some form of government support. The government can provide financial aid, if you qualify, to help lessen the amount of debt you get yourself into. It also helps people get approved for loans that they might not otherwise qualify for.
Should the worst happen and you lose the ability to effectively pay back your debt, the government, under the Department of Education, can help you in a few different ways. If you have many different loans, they can consolidate them into a single monthly payment, possibly with a lower interest rate. They can also help you with deferment or forbearance if it comes to that.
The Dangers of Debt
Nobody wants to be in debt, of course, it’s just unavoidable. Living in debt can have severe consequences beyond the simple financial. Getting in over your head in debt can be a harrowing experience, as debt can creep into other parts of your life if left unchecked.
Everyone knows being in debt costs money. It impacts your future earnings, not just the ones you are making now. Long-term debt means you’ll be spending money in the future when you need it most. Debt has to play a part in many, if not all of the financial decisions you make. Debt is unavoidable at times, just remember that it will be with you for a while and will affect your bank account long after you have signed on the dotted line.
Besides being a drain on your finances, debt can end up costing you more in other areas as well. Your credit score determines things like eligibility for other loans and their interest rates, and about 30% of your credit score is determined by your current loans and how much you have been paying them off. A poor credit score can stop you from getting an auto loan or mortgage, or at the very least cause you to get unfavorable credit scores.
If the credit companies know you have a lot of unpaid debt, they are less likely to trust you to pay them back. Therefore, they charge you more interest to hedge their bets. Your interest goes up, your debt increases, your credit score takes a hit and it starts all over again. It’s a vicious cycle.
Debt may be just a number in a computer somewhere, but it can have tangible effects on your body. The stress and anxiety associated with debt are common and cause real health problems. It can not only ruin your day or relationship, but it can also increase your risk of serious medical complications. Simply thinking about it can be bad for you.
Some dangers of high debt stress include:
- Muscle tension or pain
- Chest pain
- Change in sex drive
- Stomach upset
- Sleep problems
Your risk of heart disease, obesity, diabetes, mental health problems and more increases significantly the more stress you are under.
If you find yourself getting suffocated by student debt, there’s no shame in asking for help. Simply keeping track of your spending and changing your habits isn’t enough. Dealing with debt isn’t easy, but fortunately, there are ways to get relief. Opportunities exist in both the private and public sector to help you reduce or even eliminate your student. Or, at the very least, make paying it off easier. These opportunities include:
- Consolidation: as mentioned earlier, the government might be able to consolidate multiple loans into one with a lower monthly payment through the Direct Consolidation Loan program. Beware of scams, however, many companies offer to help you with a process that is already easy and free through the Department of Education.
- Income-Driven Plan: You may find that you qualify for an income-driven payment plan for your loans. This plan examines your monthly income and adjusts your monthly payments accordingly. That way, if your income is reduced for some reason, you won’t get behind on your payments.
- Deferment and Forbearance: Not the best option, but it’s out there. These options put a hold on your debt, meaning you don’t have to pay it now, but it will start up again in the future when your income is higher. Beware, however, sometimes interest continues to accrue despite you not having to pay down your debt.
- Forgiveness, Cancellation and Discharge: For some people, it can be possible to have part or all of their federal student loan debt erased, freeing them from having to pay it. However, this process usually has strict requirements such as military service, working as a public-school teacher, disability etc. https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellationCheck online to see if you qualify.
A Necessary Evil
You could be forgiven for not wanting to deal with debt. It can be an ugly and stressful ordeal. Unfortunately, not everyone can get by in life without slipping into it. But understanding debt and seeking help when you need it can help you get debt free earlier. That way, you can eliminate the risk of poor finances and even poorer health.