{"id":354407,"date":"2016-02-08T08:00:22","date_gmt":"2016-02-08T15:00:22","guid":{"rendered":"https:\/\/www.creditrepair.com\/blog\/?p=354407"},"modified":"2022-08-04T11:47:03","modified_gmt":"2022-08-04T17:47:03","slug":"the-student-loan-crisis-and-your-credit","status":"publish","type":"post","link":"https:\/\/www.creditrepair.com\/blog\/lending\/the-student-loan-crisis-and-your-credit\/","title":{"rendered":"The Student Loan Crisis and Your Credit"},"content":{"rendered":"

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Education is invaluable \u2014 at least, that\u2019s what the American Dream would have us believe. The reality of modern-day tuition is another story. Earning a college degree was once a safety net, a surefire way to find a good job, earn a steady income, raise a family and retire comfortably. Unfortunately, times have changed. First-hand experience<\/a> quickly showed me how risky a borrowed education can be, and I\u2019m not alone. According to Experian<\/a>, more than 40 million Americans rely on student loans to pay for a college, a 27.5 percent increase since 2008. In 2014, the average student<\/a> graduated with $33,000 in student loan debt.<\/p>\n

The effects of a $1 Trillion problem are significant in the U.S., threatening the national economy and the individual borrower on a daily basis. If you are among the latter, education debt can affect your financial stability and credit health long before the first payment is due. Risk factors include:<\/p>\n

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  1. Liquid funds<\/strong>. Federal loans provide income-sensitive repayment terms and manageable interest rates. That said, private loans are not subject to the same regulations. Lenders like Sallie Mae are quick to offer credit to young adults, promising easy payment terms and a bright future. In reality, many private loans are saddled with high, variable interest rates, inflating minimum payment amounts and lengthening the repayment period. Bioethicist Sam Garner recently<\/a> recounted his story for Slate.com, detailing how earning a bachelor\u2019s and master\u2019s degree saddled him with nearly $200,000 in student loan debt, a burden he slowly chips away at a rate of $1,500 per month.As Garner learned, the crushing effects of student loan debt can affect everything from your ability to pay for housing and utilities, finance a car, and even buy simple things like groceries. Saving for emergencies<\/a> is difficult, placing you at greater risk for unpaid debts, overdue bills and long-term credit damage.<\/li>\n
  2. Debt-to-income ratio<\/strong>. Debt reduction is one of the best ways to improve your credit, but for those with high student loan balances, it\u2019s easier said than done. As interest compounds on your principal balance, so does your Debt-to-Income (DTI) ratio<\/a>, or the amount of your gross income that goes toward repaying your debt. DTI won\u2019t affect your credit on its own, but as your DTI ratio creeps into the 40 percent range, lenders will view your financial state too risky to provide new lines of credit. DTI can also affect your credit utilization ratio, or the amount you owe vs. your total credit limit, a factor that accounts for 30 percent<\/a> of credit scoring. The sum of these consequences means you\u2019ll have trouble finding loans for even the simplest expenses, including the option to refinance your student loans at a lower interest rate.<\/li>\n
  3. Risk of default<\/strong>. Perhaps the greatest struggle faced by indebted students is the risk of default. New grads who are unemployed, underpaid or who simply cannot meet unrealistic repayment terms are subject to lawsuits, wage garnishment, continued accruing interest and up to seven years of significant credit damage. Student loans are also exempt from discharge during bankruptcy.<\/li>\n<\/ol>\n

    Easy answers aren\u2019t available to those seeking an education, and until the collegiate system changes, students must learn to protect themselves while earning a degree. Pursue your degree cautiously by taking the following actions.<\/p>\n

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    1. Consider earning potential and market trends<\/strong>. College-bound Americans are often encouraged to pursue their dreams now and worry about the consequences later. As Mr. Garner learned, this strategy is not always wise. Consider the earning potential of your desired degree based on a few factors:\n