MoneyLife

Are Student Loans Bad?

By Lindsey Ryan
are student loans bad

There is often skepticism surrounding the idea of taking loans. Whether you’re considering standard non-educational loans or student loans, the fact of the matter is that all types of loans are serious financial commitments. 

This article aims to enlighten you on student loan facts and help you assess if student loans are as bad as they may sound. We will also highlight the benefits of student loans by explaining the low interest rates, federal programs that offer grants, the option of financial aid, and more. 

Student loans can be used as a means of getting a high-paying job someday. Taking out loans can also help you build credit with installment loans alongside MoneyLion products like Credit Builder Loans. However, the question remains: are student loans bad?

Student loan benefits

A student loan is often the better option for students who want to pursue higher education. Three of the many benefits of student loans include the way they help you build credit, pursue your academic endeavors, and gain the credentials necessary for high-paying positions.

Building Credit: A student loan is often the first major financial decision that students make. By staying up-to-date on repayment loans, students can build incredible credit history that sets them up for a lifetime of financial abundance.

Pursuing Career Goals: Student loans are an alternative financial aid option for students who cannot afford to pursue higher education on their own. 

Better Job and Salary Options: People who have degrees earn 65% more than high school graduates. Research has shown that college graduates with Bachelor’s degrees are nearly four times wealthier than people whose highest level of education is high school. With a student loan, students can afford to obtain higher education which results in much better opportunities later on in life. 

Low-interest rates

Unlike standard non-educational loans, student loans have a lower interest rate overall. Federal loans offer a fixed interest rate, while private lenders offer a variety of interest rates during the life of the loan depending on a variety of specific factors.

Financial aid 

Financial aid is the monetary aid prospective students receive for educational purposes. These monetary aids are used to pay for higher education.

The main criteria that students must meet in order to be eligible for financial aid revolve around financial standings, which are often based on their parents’ income levels. Applicants are also expected to already be enrolled in certain certificate programs prior to applying as well.

Students who receive financial loans are able to further their education. Typically, most student loans do not require students to start paying them back as soon as they receive them. Instead, students tend to start paying off their loans once they are hired for a job and begin earning money.

Federal student aid

Federal Student Aid is a government-level educational fund provider that awards students with assistance that allows them to pursue a degree or career path. They help students foot the bills for tuition, books, and education-related accommodations. 

Students who need federal aid must apply for the Free Application for Federal Student Aid (FAFSA). From there, their financial situation is assessed and their eligibility is determined based on how they align with the requirements of financial aid distribution.

There are four types of federal student aid that students can receive, including grants, student loans, work-study opportunities, and scholarships. Before students can qualify for federal student aid, they must uphold the following eligibility criteria:

  • A high school diploma certification or GED
  • Proof of citizenship in the U.S. or proof of eligibility as a non-U.S. citizen 
  • A valid social security number
  • Enrollment in a certificate program
  • Actively registered for the Selective Service 
  • Record of academic progress in the certificate or career course of their choice

Federal student loans offer additional benefits that may not be accessible for students who receive loans from private lenders. Here are some of these benefits:

  • Lower interest rates than private lenders
  • Fixed interest rates
  • Less interest on subsidized loans
  • No need to provide applicant’s credit history 
  • No co-signer required
  • Interest on loans begin post-graduation
  • A repayment grace period of six months post-graduation or after withdrawing
  • Possibility of payment deferment
  • Repayment is flexible depending on annual income 
  • A 90-day grace period before account is considered delinquent
  • Ability to nullify loans in the event of death or permanent disability
  • Forgivable based on program options

Grants

Grants are a form of financial aid that do not require repayment. Both the government and private establishments can offer loans to eligible students. Like most forms of financial aid, grants are given to students who cannot otherwise afford to pay for their tuition on their own.

Students interested in applying for grants must fill out the FAFSA. To maintain eligibility, students are required to submit a FAFSA form for every year they are enrolled in school. 

There are four grant programs available:

  • Federal Pell Grants
  • Federal Supplemental Educational Opportunity Grants (FSEOG)
  • Iraq and Afghanistan Service Grants
  • Teacher Education Assistance for College and Higher Education (TEACH) Grants

What’s the difference between student loan forgiveness, cancellation, and discharge?

Student loans can be forgiven, canceled, or discharged. Though the definitions differ, the overall outcome of forgiveness, cancellation, and discharge is that the borrower is not required to pay the remaining portion of their student loan.

Forgiveness

Forgiveness is when you are not required to pay back your student loan because of circumstances surrounding employment. Student loan forgiveness is not taxable, and there are three types of forgiveness.

Public Service Loan Forgiveness: This applies to people who are employed by the government, or work for a non-governmental organization, and applied for a direct loan. Loans are forgivable after 120 qualifying monthly payments in accordance with the repayment plan.

Teacher Loan Forgiveness: This is applicable for Direct Loans and FFEL loans. Up to $17,500 of student loan debt is forgivable if you work as a teacher in an education service agency, elementary school, or secondary school for five consecutive academic years.

Student Loan Forgiveness for Nurses: Several programs like the Public Service Loan Forgiveness Program, Nurse Corps Loan Repayment Program, and NHSC Loan Repayment Program contribute to cover 85% of nurse’s student loans.

Cancellation

Cancellation is another term for forgiveness, though it is slightly different. Cancellation might be taxable to the borrower depending on the specifics of the situation. 

Qualification for cancellation depends on the loan you applied for as well as your employer. A couple of popular cancellation programs include:

  • Perkins Loan Cancellation: applicable for students who received the Perkins Loan. 
  • Nurse Corps Loan Repayment Program: covers close to 85% of nurse student loan debt.

Discharge

A student loan is discharged when the borrower is unable to make repayment due to total and permanent disability, fraud, or closure of the school. Some but not all cases of discharged student loans are tax-free.

  • Closed School Discharge: relevant in situations where the school closes while you are enrolled or shortly after you dropped out.
  • Perkins Loan Cancellation: eligible for people with  a Perkins Loan.
  • Total/Permanent Disability Discharge: utilized in the event of total and permanent disability.
  • Discharge Due to Death: applied to situations where either the borrower or the recipient of the loan has died.
  • Borrower Defence Discharge: applies to circumstances where the school did something negligent or failed to uphold their end of the purpose of the loan.

Reasons why student loans are bad

Although several perks encourage students to take out loans, it is important that you are not careless with loans. Once you take them out, you are obligated to pay them back. Failure to do this can be very detrimental in the long run. In the following paragraphs, we’ll take a look at why student loans can be bad.

Garnished wages

Student loans predispose you to garnished wages. This means that the court instructs your employer to send 15% of your earnings to your creditor to offset your loan.

Missed payments can drop your credit score

Failure to make monthly repayments can negatively affect your credit score by up to 90 points. To help circumvent potential credit damage, consider using a Credit Builder Loan from MoneyLion. With no hard credit inquiry required, you can enhance your credit score while borrowing up to $1000.

More school, more debt

The more you stay in school, the more loans, and subsequently debts, you earn. It takes the average student about 20 years to pay off student loan debt, whereas loans for professional courses tend to take 46 years to repay. 

Job replacement

Predictions show that technological advancement will use automation to replace manual labor in the coming years. This puts job security into question for numerous industries which makes you wonder if taking out a student loan for a degree in an unstable industry is worthwhile.

Get up to $250 for school supplies with Instacash

So, are student loans bad? The answer to this question will depend on who’s asking.

If you’re a student with viable options to settle your tuition fee without taking out a student loan, it is more advisable to pay college fees out of pocket. However, if you have bright aspirations and no way of financially fulfilling them on your own, a student loan might be your only option.

While you wait for payday, you can use MoneyLion Instacash to get extra money so that you can pay for school supplies and other academic expenses. With the Instacash program, you can get up to $250 without any interest rates, monthly fees, or credit checks! 

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