Student loan debt is expected to rise even faster as tuition increases and federal financial aid options dwindle. Image: Flickr/grifray's photostream CC-BY-SA

More students are going to college, and most of them are going into debt. Student loan debt outpaced credit card debt in 2010 and is expected to pass $1 trillion in 2011. Student loans, long considered a “good debt,” may morph into a bad debt for graduates faced with decades of payments.

Student loan debt rises with tuition

In 1993, less than half of students earning a bachelor’s degree graduated with student loan debt. By 2008, the number of students graduating in debt had risen to two-thirds. In 2009, college graduates left school with an average of $24,000 in student loan debt. Total student loan debt is expected to reach $1 trillion this year and grow at at even faster rate. Republicans in Congress want to cut Pell grants, a form of federal financial aid for lower-income students. As cash-strapped states cut funding to universities and colleges, tuition increases will add to a mountain of debt that is expected to have a profound impact on the current generation of college students. As student loan debt grows, so does the rate of student loan default. Credit damage, as well as burdensome student loan payments for those who don’t default, will limit the range of options when it comes to buying a home or having children. Those who have children may have to choose between paying off their student loan debt or saving for their children’s college education.

Good debt versus bad debt

When it comes to debt, student loans have always been considered “good debt,” as opposed to “bad debt” such as credit cards, auto loans or payday loans. In the aftermath of the recession, any kind of debt has become undesirable. But even as the average cost for a four-year private education has reached more than $37,000 a year, according to the College Board, student loans can be good debt if the degree results in a salary that allows the debt to be paid in a reasonable amount of time. A simple rule of thumb among financial advisers is not to borrow more than you expect to make in the first year on the job after graduation. That rule of thumb, however, highlights the risk of taking on student loan debt. Finding a job that pays off the average cost of college with a degree in sociology or history is unlikely. The risk may be lower for fields such as engineering or medicine, but the costs, and the debt, will likely be higher.

Bottom line: debt is risky

When it comes to good debt versus bad debt, the bottom line these days is simple: all debt is bad if you can’t pay it off. Default rates are rising — to almost 50 percent — among students who attended for-profit colleges. Student loans usually can’t be discharged in bankruptcy. For federally guaranteed student loans, the government can garnish wages, withhold tax refunds or dock Social Security payments. The Obama administration did make it easier for student loan debtors stuck in low-paying jobs by forgiving the balance on debt for those who have dutifully paid 15 percent of their income toward their student loans for 25 years — or 10 years if they work in public service.

Sources

New York Times

Creditcards.com

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The word debt often carries negative connotations, but there are times when debt is considered a good thing. Student loans, for instance, can be considered good debts. It would, of course, be preferable not to have to borrow money to pay for college, but not everyone can finance a higher education with private funds, scholarships or grants. For many, student loans are the next best way to finance an education.

Perkins loan

There are several different kinds of student loans. One familiar type is the Perkins loan, which is funded by the federal government. This loan generally carries a low interest rate, but it also is one of the smaller loans. Perkins loans are small, low-interest loans available to students who demonstrate exceptional financial need.

Stafford loan

The Stafford loan is another popular student loan option. A Stafford loan is also variously known as a Federal Family Education Loan (FFEL), a direct loan, and a Ford loan. Stafford loans can be funded by banks, colleges, or the government. They may or may not be federally subsidized, depending upon a student’s individual circumstances.

PLUS loans

Parents’ Loans for Undergraduate Students (PLUS loans) are another common type of educational loan. PLUS loans are not made directly to students. Rather, as the name implies, PLUS loans are made to the parents of students. A PLUS loan carries a low interest rate and the loan amount is based directly on the student’s actual cost of attending school. Loans amounts are calculated based on the cost of tuition, books, supplies, fees, and transportation costs, after deducting the amount of any other financial aid obtained by the student. A PLUS loan helps bridge the gap between the actual costs of education and other available financial aid obtained by the student.

Student loans and bad credit

Students and their parents are sometimes hesitant to apply for educational financial aid because of bad credit histories. Often, however, student loans can be obtained even with poor credit. Generally speaking, bad credit does not automatically preclude an applicant from qualifying for financial aid so long as the credit history does not include previous defaults on student loans.

Basic lending requirements

• Basic lending requirements for a Perkins loan or a Stafford loan may  include:
• A valid social security number
• U.S. citizenship or be legal non-citizenship
• High school diploma or GED
• Enrollment in or acceptance to a college offering a degree or certificate
• Demonstrable financial need

Individual qualifications and financial need vary widely from person t person, and no one can guarantee that a loan request will be approved. However, students who meet these basic requirements are encouraged to apply for loans as needed.

Tax deductions

Student loans are considered to be good debts for a several reasons. Obviously, a student-loan borrower is investing in his or her own future. Additionally, the interest paid on student loans may be deductible for income tax purposes. To find out more about potential tax benefits, student-loan borrowers should get advice from a tax professional.

An investment in yourself

In the long run, there is no better investment than an education. Although most people work hard to avoid borrowing large amounts of money, some debts – and student loans in particular — are worth incurring. Even for people with bad credit, student loans are available to help those people who are interested in achieving high academic goals do exactly that.