The Department of Professional Employees shared an interesting article on student debt. They contend that it is a critical challenge facing professionals. As of 2021, there were over 42.9 million Americans with such debts.
The largest amount at 1.59 trillion dollars was in federal student loans. Banks and financial institutions funding private students were yet to recover over $138 billion.
With higher education becoming a critical qualifying factor for many jobs, students have no choice but to apply for such loans. Unfortunately, the cost of education has gone up over the years. It further exacerbates the problem due to high debt amounts that cripple recipients for a long time.
So what are some of the reasons why students cannot pay off debt? It is an interesting topic worthy of further discussion.
1. Financial Instability
Financial instability may very well be one of the top reasons why students struggle to pay their debts. They may be willing to do it, but whatever they have is not enough. Trying to navigate through financial obligations with limited income makes it easy to drop the ball when it comes to loan repayment.
For many, first-time jobs place them at lower income levels. Whatever they get barely covers all their day-to-day expenses.
2. Poor Financial Habits
Think back to the day that you got your first job. There is a level of excitement to having your own money. Let’s be honest; not many people will put debt repayment as one of the priorities.
The same applies to graduate students working in their first jobs. There is suddenly so much to do and so little money. Many people will admit to not living within a budget. The money seems to go out faster than it is coming in.
Financial prudence requires discipline and commitment. If you are in this situation of funds mismanagement, there are steps you can take.
Sign up to Chunk finance to get an overview of your finances. Tracking income and expenditure is the best way to gain control of finances. The platform will send notifications on spending thresholds, balance updates, overdraft charges, and much more. They also have some fantastic tips on debt paydown to minimize costs arising from interest charges.
Seek expert help on how to manage your finances. The experts can help come up with a financial plan for you. The aim is to ensure you can put something aside for debt repayment every month.
3. High-Interest Rates
A Business Insider Africa article talks about high-interest rates being a reason why some students find it challenging to pay off debt. You spend years making payments and barely make a dent in the overall amount.
One of the interviewees left college with $117,000 in student debt. At age 32, she still owes $98000, having paid off $70,000.
Now, let’s say she completed her undergraduate education at about age 24. It means that in 8 years, she is still at the very place, debt-wise, she was when leaving college. Indeed, the environment seems to favor lenders much more than the borrowers who need the money.
4. Poor Debt Repayment Strategies
It is easy to default on any loan without the right debt repayment strategies. Allocating sporadic amounts of money, when available, is not the way to get out of debt. This is especially true if the student is handling several loan balances.
Some workable debt repayment strategies include:-
- Snowball debt repayment is where you clear the lowest balances before moving on to the next.
- Avalanche debt repayment starts from the highest loan balance to the lowest.
- Debt consolidation brings together all loan balances into one amount. You then take a low-interest loan to clear all of them.
- Make additional payments to the principal amount anytime you have extra cash. Now would be an excellent time to consider a side job for that extra.
- Loan renegotiation or refinancing for one with better payment terms and interest rates.
When all else fails, you could always apply for loan forgiveness programs. Do find out what is applicable in your state. Some have strict eligibility criteria to qualify. Others are only available to public servants, teachers, and members of the Armed Forces.
Take the time to do some research to find out whether you could qualify for any of them.
5. Unwillingness to Pay Debts
Research shows that those who did not complete their degree programs find it hard to pay the loans. Delinquency rates amongst such groups are as high as 31%.
One reason for this could be lower earning power. A student who does not complete their college education will not be at the same income level as those who did.
There is also the psychological aspect to it. The motivation to pay for a loan whose benefit you’re not seeing can also be tricky.
Some borrowers may also defer payments due to financial issues. It can become challenging to resume payments after time has passed. Lack of repayments during the deferment period means that the loan balances continued to grow due to interest.
This will place additional stress on the borrower, who is already struggling to clear the existing amount. It becomes easier for them to keep on deferring payments until they no longer can.
6. Complicated Repayment Processes
The experience with lenders when repaying can impact whether they continue or not. A focus group discussion on the Pew Trusts website highlighted some key issues. Some lenders have complex processes that confuse borrowers.
Income-driven plans, for example, help borrowers maintain consistent payments. However, the complex application processes and annual recertification can be a deterrence. Such programs also seem to cater specifically to those who have stable income sources. By ignoring other expenses, the plans will not work for those with volatile incomes.
Final Thoughts
Student loans can be a lifesaver for those who want to pursue further education but cannot afford to do so. But, as many will attest, paying them back is not easy. The interest on the loans will significantly increase how much you need to pay. Payment could take years, especially if you do not have a well-paying job.
We have looked at some challenges students face when making repayments. In some instances, it is an individual problem that needs rectifying. It is possible to set aside an amount towards repaying the student loans with sound financial habits. The same applies to using the right debt repayment strategies.
