In 2013, there was $18.2 billion in student loan debt owed by senior citizens. These were not loans taken out for their children or grandchildren – these were loans for their own college education several decades earlier. You may know that student loans cannot be discharged by bankruptcy and so federal government loan agencies are now garnishing retirement social security checks in order to pay these delinquent loans back.
When student loans are delinquent, the account balances continue to grow with interest charges. Over months and years, these balances accrue into amounts that are many multiples of the original loan. These financial calamities could have been avoided with some financial literacy before any loan is taken. For example, what kind of degree are you funding? What is the average starting salary for that type of degree? What is the average salary increase for new hires for the first few years? This information is needed to determine the maximum amount of student loan debt that you could comfortably payoff within 3-5 years. There are some specific rules in my book for affordability, but you must try to assess:
- How much money you’ll need to complete your education?
- How much you can contribute?
- How much do students earn from this school with this degree?
- How much student loan debt this salary can support?
- What are student loan rates and specific rules today?
- Are there more affordable education options for me?
Whenever there are horror stories about student loan debt, they all start with both the student and their parents having no financial literacy. The problem is never the loans but the financial illiteracy surrounding their decision-making. When you don’t understand money and start dealing with big numbers, particularly with interest-carrying debt, then a financial crisis is increasingly likely to occur.
You need financial literacy to make any significant financial decision; especially with potentially dire consequences, such as painful student-loan garnishments are for retirees today.