You may tend to think about how people see the wisdom in taking out a student loan and how it affects their financial health and freedom. Well, truly it can be a real pain when the student loan repayment is concerned but there are several good reasons for people opting for a student loan.
There is a lot of debate on student loan debts and how it can inherently affect the financial health of the new batch of young adults entering the workforce. However, there is surely a silver lining to these loans which most of the people tend to forget about or ignore:
- It helps to build your credit history which further helps in availing loans in the future and in addition to that
- The fact that you gain a lot from your student loans make it a good debt to have and why most people crave for student lending.
In fact, lending money to students by different sources, both traditional, as well as non-traditional online sources such as Libertylending.com and others, is considered to be a lucrative business. As for the takers, there is a good side to these loans as long as you keep proper control of your debt.
The goodness of it
Just like any other borrowing is concerned, student loans are much similar to other loans such as mortgages in lots of ways such as:
- The fact that both are usually considered to be good debts
- Both involve large amounts of money and
- Both take a long time to pay the money back to the lender.
When you pay back the loan amount each month, you actually build your credit by showing your lender the ability to repay the loan. It adds to your creditworthiness which in turn raises your credit score.
In addition to that, you also get home in case of a mortgage the value of which usually appreciates over time. Similarly, when you avail of a student loan to gain higher education in a college, it increases your earning potential for your lifetime.
The concept of bad debt
It is or this reason that these two debts are considered to be good debts, rather than bad debts. Bad debt typically includes things such as:
- Credit card loans
- Personal loans even
- Auto loans.
This is because in none of these cases the value is added in the end, though in case of auto loan you do get something in return from the debt.
However, the value of a vehicle depreciates immediately as you drive off the showroom and it continues to decrease in value with each passing year, which is why auto loans to are considered to be bad debts. This is because it does not deliver anything that has lasting value and therefore rightfully considered to be negative instead of positive.
At this juncture, it is worth noting that a bad debt does not necessarily mean it is a type of debt that you must avoid every time and at all costs. There are lots of ways in which you can utilize a bad debt for gaining good results.
Student loan and building credit
Ideally, a good credit score will allow you to take on more debts often of higher amounts. These good debts will, in turn, help you to maintain a proper cycle of good credit, provided you continue to pay off these debts on time without falling behind the predetermined repayment schedule.
Yes, making the monthly payments for your student loan debts can be a real concern, and sometimes pressing as well but it will actually be helpful to you in the long run. It is found that several students do not start their life out of college with credit cards but do have student loans. It is because:
- These loans typically give them an immense opportunity to build up their credit history with the different credit bureaus and
- It also helps them to show a prospective money lender that they are all responsible borrowers.
However, these borrowers must make sure that they avoid hitting the usual snags while making their payments so that they can avoid the bevy of issues that late or non-payment leads to regarding credit and future loans.
Types of student loans
Taking out a student loan may be a great idea especially if you need income so as to attend school. However, it is very important at this point to understand the type of loan you will be choosing. This is because there are many different options you can choose from when student loans are concerned. These are:
Federal student loans:
- These are the student loans that are offered by the government
- The amounts of these loans are based on the yearly cost to attend after counting contributions of the parents and other aid and
- You do not have to begin repaying this type of student loan until you graduate.
Moreover, federal student loans usually come in two different variants such as subsidized and unsubsidized.
- Subsidized loans are those loans where the interest on it does not start to accumulate until after you graduate from college.
- The unsubsidized loans, on the other hand, accumulates the interest once the loan is given out each month on the initial lump sum.
This means you will have to start paying back an unsubsidized federal student loan as soon as you take it.
Federal student loans, however, are offered at a fixed interest rate which is much lower as compared to other types of student loans thereby making your repayment easier. Moreover, you can also ask for loan forgiveness depending on the career path. There are different options in which such loans can be forgiven such as the student loans that are under the Public Service Loan Program or the Teacher Loan Forgiveness Program. However, the amount forgiven may vary for each type of student loan.
On the other hand, you can also avail of private student loans that are offered privately by traditional banks and other money lenders having a higher interest rate and needs to be paid right away.