If asked which amounts to more, credit card debt or student loan debt, the average person may mistakenly answer credit card debt. However, a recent FICO Labs report pokes holes in that assumption. Not only does the recent college graduate hold more debt than she can often repay, the amount of debt she has incurred threatens her future financial stability in staggering ways.
A 2013 FICO report found that student debt loads had increased substantially in a short period of time. For example, in 2005, the average student debt hovered at around $17,233. However, in less than 10 years, the average debt per student jumped by nearly 60 percent per student, to over $27,000. During the same time period, Forbes reported that the number of student loans in deferral or delinquent had increased by more than two-fold.
The bad economy caused by the recession of 2008 and rising school costs gets most of the blame for the inflation of these amounts, and an additional paradox bound these former students to even more debt. Many stayed in school to wait out the recession rather than going job hunting. This decision forced them to borrow even more money to sustain additional years in school.
Effects of Student Debt
The effects of student debt permeate all facets of a college graduate's life. After graduating, many students assume they'll buy a home and a car. However, they might no longer qualify for big-ticket items such as homes or cars because their debt-to-income ratio is too high. Additionally, Time reports that those who can't repay their student loans face further ramifications, including a drop in their credit scores if they go into default. Student loan delinquencies can drop a credit score 100 points, pushing these borrowers' interest rates for items such as cars up to 11 points higher than the average borrower's to secure a loan for the same item.
Students and college graduates struggling with student debt should talk with their loan service providers to learn about the different repayment plans available. Many plans exist, including some that require the borrower to make monthly payments based on income.
Student loan repayment reforms instituted by the Obama administration have further helped college graduates by capping the amount graduates repay to 10 percent of their monthly income, which in many cases results in a drop of several hundred dollars per month. Finally, borrowers should check into consolidating their loans. One cause of default stems from these graduates not realizing that more than one lender held their loans.