4 Ways Your Student Loans Are Hurting You
Student loan debt isn't a new trend. In fact, the average college graduate today has nearly $40,000 in student loan debt, while the total amount of student loan debt in the U.S. tops out at $1.48 trillion amongst 44 million borrowers.
But did you know that your student loans can have a negative impact on your future? They can prevent you from reaching major financial milestones, like buying a home, investing, or saving for retirement. In some cases, having too much student loan debt can even prevent you from being able to stick to your monthly budget and pay all your bills and living expenses.
Read on for five ways that your student loans are hurting you and what you can do to manage your student loans and plan for a better financial future.
Affects Your Debt to Income Ratio
Your student loans can affect your debt to income ratio. This is the ratio that determines how much your income is taken up by debt payments. Lenders will look at this to determine if you qualify for a car loan or for a mortgage. Most experts suggest staying at a 36% of less debt to income ratio. (Calculate your debt to income ratio here.)
If your ratio is too high you may not be able to qualify for a loan. Another possibility is that you may qualify for loans but at a much higher interest rate. Paying higher interest rates can negatively affect your finances in the long run, so keeping your debt to income ratio in the proper range is key.
Reduces Your Ability to Take Risks
Having a large monthly student loan payment can also prevent you from taking risks in your 20s. For example, you may end up choosing the more stable company instead of the startup with the bigger growth opportunities because you want the stability to help you cover your payments.
Or you may pass up a once-in-a-lifetime opportunity to travel or live overseas because of your student loan debt. When you have a student loan hanging above your head, you may pass up on opportunities that can help you build wealth or enrich your life.
Makes It Harder to Buy a Home
Many recent college graduates are putting off buying their first home because of their student debt. Some are hesitant to accumulate even more debt, while others may not be able to qualify for an affordable mortgage with a good interest rate because of their student loan debt.
It can also be more difficult to save up a down payment to put on the home, which affects how much you can afford to spend on a home, as well as your monthly mortgage payment. Additionally, with higher debt to income ratios, it can be difficult to qualify for a mortgage.
Hurts Your Retirement Savings
One of the primary ways your student loan debt can affect you is by limiting the amount you can save for retirement. If you can barely cover your student loan payments, then you may have a hard time contributing a lot to retirement. Not saving early for retirement can really hurt you financially. But if you put money in retirement accounts as soon as you start working, you will find that your savings begin to build faster, due to compound interest.
Not sure how much you should save for retirement? A good rule of thumb is to put away 15% of each paycheck to your IRA, 401(k), 403(b) or other savings vehicle.
Get Control of Your Student Loans
- Start by creating a budget that will help you prioritize your spending so that you can pay off your loans more quickly. A budget and a debt payment plan can help you focus and make it easier to work toward your financial goals. The sooner you get out of debt, the more quickly you can begin to work on your other life goals. A budget can help you identify areas where you can cut back. Worth noting: it's easier to cut back on expenses when you first graduate from college and you are used to living frugally.
- Work to find extra money to put toward your debt each month. This may mean taking on a second job so that you can pay down your loans more quickly. It may also mean cutting back on the things you do not need like a gym membership or vacations. Another way you can find money is to put your bonuses and tax refunds toward your student loans, which can accelerate the payoff process.
- Find programs that can help you manage your payments. If you find that you simply can't make your student loan payments, you may want to look into income-based payments or consider working in a program that offers help with your student loans.
Updated by Rachel Morgan Cautero.