There’s no secret that student loan debt is one of the biggest financial anchors ever.
At $1.6 trillion and counting, even if you’re out of work or lose your home, you still are saddled with student loans. Even bankruptcy can’t vanquish them, thanks to some effective lobbying by the banking industry.
There’s more. Student loans are such a massive deadweight, they are broadly hurting the U.S. economy, according to a slew of studies cited by The Washington Post:
— If you’re in debt, it’s highly unlikely you’ll start a business. “A 2015 study by economists at the Federal Reserve Bank of Philadelphia found `a significant and economically meaningful negative correlation’ between rising student loan debt and falling small-business formation.
— You’re unlikely to buy a home. “This year, the Federal Reserve issued a report showing that student loan debt prevented about 400,000 young families from purchasing homes, accounting for about a quarter of the drop in home-ownership rates in this demographic from 2005 to 2014.”
— You’re more likely to default on a loan and ruin your credit rating. “In addition to the obvious connection between loan payments and the ability to save for a down payment, researchers noted that the rise in education debt also increased those borrowers’ odds of default, which can adversely effect their credit scores and ability to qualify for a mortgage.”
— You’re less likely to save and accumulate wealth. “Households with student debt had a lower median net worth ($42,800) than those with no student debt ($117,700).
— Retirement savings are lower. “A 2018 study by the Center for Retirement Research at Boston College found that while student debt didn’t affect 401(k) participation rates, it did affect how much young workers were able to sock away. `Those with debt have only about half as much in assets by age 30 as those without debt,’ the report found.”
What do you do if you’re staring down student loans? There are a number of strategies.
1) Pay down the most expensive debt, i.e. private loans, first.
2) If you have federal loans — most do — look for the best repayment options.
3) Don’t get into debt in the first place. Consider low-cost community and commuter colleges and hunt aggressively for scholarships and schools that offer no-loan merit aid.
4) Save for retirement automatically. Sign up with your 401(k) or start your own plan.