How Paying Off Student Loans Works


Good Debt or Bad Debt?

Financial experts vary in their assessment of student loans when compared to other debt.

Bob Schumann, a financial planner, says student loan debt is good. Schumann's reasoning is that you can deduct the loan interest, the loan rates stay low and the debt "paves the way for you to make more money throughout your lifetime" [source: Anderson].

Mary Hunt, founder and publisher of the popular Cheapskate Monthly newsletter, argues that the debt is unsecured with "no escape route." Hunt reminds borrowers that there's no guarantee that the education will result in a job, and you're obligated to pay the debt regardless of the results.

Whether or not the debt is good or bad, student loan debt does affect your credit. A high credit rating allows you to borrow more at lower interest rates. To keep your credit rating high, make your scheduled payments on your student loans and look for deferment or forbearance options if you have trouble making payments.

School loan debt is also a risky business for the university itself. Students who default on their loans to for-profit institutions put those schools at risk of being shut out of the federal loan and grant programs. In 2007, 21 percent of students who started repayment to for-profit schools defaulted on their loans, while only 10 percent of students in four-year public schools defaulted on their loans. With 70 percent of their revenue coming from grants and loans, for-profit schools could suffer a financial blow if their enrolled students are denied financial aid because of their graduates' defaults [source: Marketplace].

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Sources

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  • Hunt, Mary. "Mary Hunt's Debt-Proof Living: The Complete Guide to Living Financially Free." p. 298. Broadman & Holman Publishers. 1999.
  • J.P. Morgan Chase & Co. "Chase Select Private Student Loans - FAQ." July 31, 2009. (Jan. 3, 2010)http://www.chasestudentloans.com/private-student-loan/ChaseSelectLoansFAQs.html
  • Marketplace. "Student loan defaults may hurt schools." American Public Media. Dec. 14, 2009. (Jan. 3, 2010)http://marketplace.publicradio.org/display/web/2009/12/14/pm-student-loans/
  • Project on Student Debt, The. "Student Debt and the Class of 2008." December 2009. (Jan. 2, 2010)http://projectonstudentdebt.org/files/pub/classof2008.pdf
  • Sallie Mae. "Sallie Mae Smart Option Student Loan." (Jan. 3, 2010)http://www.salliemae.com/get_student_loan/find_student_loan/smart-option-student-loan.htm
  • Student Lending Corp. "Private Student Loans FAQ." (Jan. 3, 2010)http://www.studentlendingcorp.com/college-loans/private-student-loans.htm#faq
  • U.S. Department of Education. "Federal Family Education Loan (FFEL) Program." Nov. 23, 2009. (Jan. 3, 2009)http://www.ed.gov/programs/ffel/index.html
  • U.S. Department of Education, Federal Student Aid (FSA). "Cancellation/Deferment Options for Teachers." Nov. 30, 2009. (Jan. 3, 2010)http://studentaid.ed.gov/PORTALSWebApp/students/english/teachercancel.jsp
  • U.S. Department of Education, Federal Student Aid (FSA). "Facing Loan Default." (Jan. 3, 2010)http://www.ed.gov/offices/OSFAP/DCS/default.html
  • U.S. Department of Education, Federal Student Aid (FSA). "Funding Education Beyond High School: The Guide to Federal Student Aid." 2009-10. (Jan. 3, 2010)http://studentaid.ed.gov/students/publications/student_guide/2009-2010/english/typesofFSA_loans.htm
  • ;Loan Forgiveness for Public Service Employees." February 2009. (Jan. 3, 2010)http://studentaid.ed.gov/students/attachments/siteresources/LoanForgivenessv4.pdf
  • U.S. Department of Education, Federal Student Aid (FSA). "Repayment Information." June 11, 2009. (Jan. 3, 2010)http://studentaid.ed.gov/PORTALSWebApp/students/english/repaying.jsp
  • U.S. Department of Education, Federal Student Aid (FSA). "Repayment Plans and Calculators." June 11, 2009. (Jan. 3, 2010)http://studentaid.ed.gov/PORTALSWebApp/students/english/OtherFormsOfRepay.jsp
  • U.S. Department of Education, National Center for Education Statistics (NCES). "Digest of Education Statistics." Tables 104, 188 and 198. 2008. (Jan. 2, 2010)http://nces.ed.gov/programs/digest/d08/tables/dt08_188.asp
  • U.S. Department of Education, National Center for Education Statistics (NCES). "Fast Facts: What are the trends in the cost of college education?" 2009. (Jan. 2, 2010)http://nces.ed.gov/FastFacts/display.asp?id=76
  • U.S. Department of Labor, Bureau of Labor Statistics. "Occupational Outlook Handbook, 2010-11 Edition." Dec. 17, 2009. (Jan. 2, 2010)http://www.bls.gov/oco/oco2003.htm
  • Wei, Christina Chang; Berkner, Lutz; He, Shirley; Lew, Stephen; Cominole, Melissa; Siegal, Peter; Griffith, James. "2007-08 National Postsecondary Student Aid Study (NPSAS:08): Student Financial Aid Estimates for 2007-09, First Look." April 2009. (Jan. 2, 2010)http://nces.ed.gov/pubs2009/2009166.pdf

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