Student Loan Debt Crisis and Ways to Prevent It

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Student Loan Debt Crisis and Ways to Prevent It

Loans taken for the right reason and used efficiently are beneficial to students. Most loan debt crisis among students arises when the borrowed funds are taken for the wrong reasons and also because of poor financial planning. There are various reasons why students take loans, one being to cater for their living expenses. The cost of living in colleges and campuses has increased over the last few years. Students who study in big cities have to face the high cost of food, housing, and clothing (Powell, 2018). The amount of money provided the parents may not be enough, and hence the student will have to borrow to meet the extra costs. Another reason why students take loans is to meet emergencies. Emergencies such as accidents or diseases may force one to borrow to meet immediate medication costs. Other students borrow with the aim of investing. They may start-up businesses with hope that they will grow and be productive, but they may later fail and collapse, leading to debt crisis because the anticipated income will not be available to repay the loan (Powell, 2018).

Studies carried out show that some students borrow for peace of mind; for example, a student will borrow to be sure that he has rent for next month (Hillman, 2015). A high tuition fee is another reason why students borrow. Parents may fail to meet the full tuition fee, and hence one will borrow to pay the remaining amount. Low-interest rates on students loans attract them to borrow (Hillman, 2015). They are only repaid once a student starts to earn and the interest rates are lower compared to other loans. Most students deem student loans to be good debt as they get something good from it. With the loan, one gets college education that will forever be beneficial to him or her, and hence a good debt. Before taking a loan, students should first consider its cost, its purpose, and the terms of the loan.

A debt crisis arises when the student fails to repay the loan. There are various reasons why students fail to repay loans, and one of them is the difficulty in finding a well-paying job. After school, students secure graduate entry opportunities, and the amount of salary they receive is not enough to cater for their expenses and at the same time repay loans. This causes them to default their loans and hence a debt crisis arises. Students do not have any source of income, and this is the reason why most of them are unable to repay their loans. They accumulate loans from different sources, which later become difficult to repay.

Failure of businesses is another reason for a debt crisis. Some borrow with the aim of establishing businesses such as cosmetic shops, but the investment may not give positive returns as expected. When it fails to generate any income, the student will not have money to repay the loan, and hence he or she will default. Dropping out of college is another reason for a crisis. When a student drops out, it becomes difficult for him or her to secure a steady job in future, and hence he or she will not have enough money to repay the loan. Unforeseen contingencies may result in student loan debt crisis. Contingencies such as accidents or death may result in the student failing to repay loans. These causes can be avoided through repayment options that are favourable to students.

There are various strategies that students can use to avoid a crisis. As soon as the student realizes that he or she is at risk of loan default, he should speak to the lender to find out if there are any available options as they have solid advice on how one should proceed. The lender will be willing to help because he also needs his money back (Perna, Kvaal, & Ruiz, 2017). Alternate repayment plans may be provided, and one of them is the income-based repayment plan. With this plan, the student will peg his monthly income to his monthly payment. It will ensure that every month, the student repays a certain percentage of the loan and this minimizes the burden and hence reducing chances of a loan crisis.

A graduated repayment plan is the second alternative (Abraham, Filiz-Ozbay, Ozbay, & Turner, 2018). With this plan, the student will begin with lower monthly payments, which will increase gradually over time. This plan is effective because an employee earns little when he is just a graduate, but over time, ones earning potential increases after a few years of experience. With a small salary, the student will pay a smaller amount, but after a few years, the amount will increase. Although the repayment period for this plan will be long, the chances of a debt crisis are minimal.

The third alternative is an extended repayment plan. With this option, the student will make minimum monthly payments. Although the plan prolongs the life of the loan, it eases the financial burden. The extended life of the loan means that the student will end up paying a substantial amount due to accrued interest for the extra period (Perna et al., 2017). Compared to the other two alternatives, this plan is more expensive in terms of interest amount repaid. The plan is effective for student graduates who have not secured any job opportunities and hence their sources of income are limited.

Other alternatives available to avoid student loan debt crisis is loan consolidation, deferment, and refinancing (Abraham et al., 2018). For loan consolidation, the student can consolidate all his student loans, and this means that he will only have one payment amount to make. This plan minimizes the students chances of forgetting. Be for opting for this plan; the student should first ensure that the amount of interest is lower compared to the original interest rate. For the deferment option, the student can delay the payments for a period of one to three years. Before opting for this alternative, the students should first understand the repercussions, the terms and conditions, and the eligibility criteria (Abraham et al., 2018). For the refinancing option, the student can look for a lender who offers the best rates. For one to be eligible for refinancing, his payment history must be stellar.

In conclusion, the consequences of student loan default can adversely affect a students financial plans. Before taking a loan, the student should ensure that it would be used reproductively to prevent it from being a bad debt. In case of difficulty in repayment, repayment options such as a graduated payment plan, an income-based repayment plan, and an extended repayment plan. Loans taken for investment purposes should be well invested to avoid losses that will lead to debt crisis. The debt crisis can be avoided by taking loans for the right purposes and having a proper repayment plan.

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