As the cost of living is increasing, it is disheartening to accept that income has remained almost constant. We sometimes find ourselves in a situation where we are drained of all financial resources. This results in a lot of consumers considering loans as a means to survive or achieve goals in life.
A student loan is just one of the common debts made by many to get by. It is ironic that education (being a secondary need) is too expensive for most common workers. College expense – to add – is not a trifle. It has been very costly to send children to school. In fact, in 2017, student loan was considered as the second-highest consumer debt. But, are student loans good or bad debt? What is the drawing line between good and bad debt?
It is not a good feeling when we own somebody some money. However, we are often caught in a situation when we have no other choice but to borrow money as the need arises. It is taken as good debt when we borrow money to invest in ourselves and our future. This means we build value.
But, when we loan to catch up with the standard of living or to make ends meet, that is considered as bad debt. Student loans, business loans, and mortgage loans are good debts. Car loans, credit card loans, and unneeded loans are noted as bad debts. There are two significant reasons why Student loans have some good benefits in the future.
- Student loans offer lasting value. With the money that you will borrow, you can get into and finish schooling. This increases your self-worth and value. You get a higher chance of being employed, earning money, and paying off your debt. Your loaned money will be transformed as an investment for the future.
- Student loans build a credit history. If you are responsible for your loan payables, you will consequently build a good credit score that spells out good credit standing. If you want to get a mortgage loan in the future, loan companies will be more lenient in approving your loan because of this good-paying behavior.
But, there is a very high chance that student loans can turn into bad debts when not handled properly. Responsibility of paying debts is very important in any loan. As student loans can build a credit history, it can also be the reason of falling scores.
When we miss a payment or when the loan goes on default, our credit score falls down consequently. You may not be able to get loans in other forms like mortgage or business loans. Other supposed incomes will also be affected, like your tax return will be used to pay off the demanding debt.
In order not to turn student loans into bad debt, you must calculate your debt-to-income ratio. This ratio compares the number of payments to make versus the total income earned in a given period. It is like comparing the debt amount on a monthly basis with your monthly stable income.
If the debt ratio is higher than your salary, your capacity to pay becomes unstable. You would need another loan to pay the current debt. You should bear in mind also that student loans cannot be written off when we become bankrupt. Future wages will be utilized as payments for the loan, and this would sting your financial structure.
Many would agree that student loan is beneficial for the debtor in the future. The point is that we should manage the repayments to not let the debt go sour. Getting a loan that you can invest in is a right decision that you can make for you or your children.