How College Loans Can Turn into Bad Debt

Normally, taking college loans is a great way to both increase your earning potential in the future and build your credit score early in life. Since you will need to take mortgage loans and auto loans after school, taking and paying off a large installment loan can be helpful. However, college loans can quickly become a toxic debt if you do not work to pay them off fast enough. If you are not responsible with the debt, you can find that student loans plague your financial stability for years to come.

Missing Payments in School

While you are attending college, it is easy to lose track of your finances. Most college students do not contribute significant sums toward their student loans while attending school; interest-only payment options are popular during this period of time. Even if you are only responsible interest-only payments, though, missing a loan payment can result in a number of problems. First, there will be financing fees for the missed payment. Second, the missed payment will go against your credit score nearly immediately, and it can remain on your report for years into the future.

Electing Deferment and Grace Periods

Student lenders tend to be very flexible when it comes to grace periods on the debt. They will often allow you to continue to defer loan repayment if you cannot find a job or go to graduate school. While these options appear helpful, they can actually end up costing you thousands of dollars in excess interest. The longer you go without repaying your debts, the higher your debt balance will become. Many student borrowers find they are facing hundreds of thousands of dollars in debt when they are finally done with school and ready to start the process of repaying.

Defaulting on Student Debt

If you find you cannot meet your student debt obligation after graduation, you face defaulting on one of the few large installment debts you will likely take in your entire lifetime. Many students simply assume they will locate a high-paying job after they receive a college degree. Most do go on to earn stable salaries, but many will have different futures. You may choose to work for a non profit company and earn a low salary, or you may elect to go into public service. Federal student loan debts can be reduced in these situations, but private debts will not be. You can easily face default if your income does not cover your payment in a given month.

Carrying Debt for Too Long

Even if you make your payments on time and manage your debts well, taking such a large sum of debt at a young age can be detrimental to your ability to get new loans in the future. This is the biggest risk to those students who will pay back loans slowly through extended or income contingent options. They may carry their debts into midlife, when they are being considered for mortgage loans or other debts. If you have a big student debt balance, your mortgage limits can be reduced significantly.