Costly College Loans as Bad Debt

With more than $1 billion loans, the college loan debt has recently exceeded the credit card debt. Since borrowers cannot get rid of college loans, even in bankruptcy, these can be carried to their Social Security. The following is an explanation of how college loans can be a bad debt.

At present, student borrowers tend to be immature in terms of loans so they take on too much debt than they can afford. Fortunately, the Obama administration created a program that encourages colleges to ask the students answer a “shopping sheet”, which shows the actual cost of the debt.

According to Dawn Lockhart, CEO of Family Foundations, this program is a great idea. Family Foundations is a nonprofit organization that offers good consumer services in relation to credit counseling and has a history of excellent community service.

Lockhart added that the proposed checklist of college costs will be much better if it includes options on possible careers that indicate the likely income the student can expect to earn. One of the factors that can help lenders in deciding what loan to give is the income of the profession the student is pursuing.

For the moment, President Barack Obama has suggested using federal funding as motivation to encourage colleges to cut down on their costs. The president will be declaring Race to the Top, a new contest that grants funding to colleges that minimizes their costs.

Based on figures from the Wall Street Journal, student loan rates begin at around 5 percent. Consequently, families rely on other means to pay for college expenses, for instance, installment plans, low interest loans from colleges, home equity loans, and insurance loans.

However, it’s sad to know that college loans are now considered as bad debt to the extent that the nation’s top financial newspaper is trying to find ways to avoid them.

401 (k) Too Expensive to Pay Off Current Debts

If you are 27 years old, married,and an expecting mother; you may have encountered a situation where you have a credit card debt of let’s say $20,000 that has a high interest rate, 9.5%. The amount is killing you and you would like to pay it off with your sitting 401 (k) deposit in the bank, but the question is should you withdraw all or a few amount of your 401 (k) savings to pay off the liability?

Well, the answer is “no”, here are the reasons why you should not touch your money in the 401 (k) to pay off your debts: first, there is an instant cost involved you pay income tax and a penalty of 10% if you withdraw an amount from your 401 (k) savings. So for example you have a $10,000 savings in your account, it could decrease your balance by 25% from $10,000 you might only have $7,500 dollars left, or less.

Another reason is, withdrawing from this account will affect you dearly in the future. If you withdraw the money, there is a chance that you might not be able to get the long-term growth of your 401 (k) amount. Your $10,000 is going to grow 6% every year for 35 years, and by the end of those years, your money would have grown into $76,861. If you withdraw $1,000 from your account, you will be losing $7,686 in the future.

So what should you do to pay off your excruciating debt? The best remedy is to sit it out with your partner. You and your husband must work out a plan and promise each other to handle your family’s finances more wisely and create a budget and think of ways to make your future financial problems manageable. Paying off all your credit card liabilities is just one of the many stages you must go through in this plan.

Less Debt More Uncollectable Accounts

The debt of Americans is continually decreasing these past few years. From an average of $16,383 two years ago, it has fallen to only $14,517 this year. This has nothing to do with financial discipline, and certainly this is not very good news for the industry.

The decrease in the rate in 2010 was due to the uncollectable amounts that were write-off by the companies, and this may be the case for 2012.

It has been nerve neither racking for consumers that the rate of debt is not going down nor showing signs at all. Credit rate has continued to stay stable in 2011 and has not made no signs of change ever since. The largest decline in credit occurred in 2010 but the two years that followed did not follow its trend.

The only hope for consumers is the fast recovering economy of the United States from the recession it suffered from in 2008, and the fact that more credit lending companies are more open to lend to customers even if they do not have a spotless credit history. Furthermore, the high employment rate continues to boost the confidence of lenders.

But this current trend in the lending business poses a threat in the future. The more the economy becomes progressive, the more these financial intermediaries will take on risky decisions. This will lead to the eventual rise in the debt rate again. It is an unavoidable cycle that once too much debt is made, and then the economy will surely fall again.

As all of you might now, the top three debts that American households endure are housing loan in first place, followed by student financial loans in second and credit card liabilities in third.

Debt occurred by student loans make out a total of $1 trillion. Though credit cards could be a very hard deal, student loans are imposing a very high threat in the economy. The US president Obama is trying to get legislators to sign a law to address this problem, and hopefully they succeed.

College Graduates in Danger of Not Getting Jobs Because of Student Debt

If you recently graduated from college, you more likely have a student debt of at least $25,000 and looking for a job. Those without a degree are instantly disqualified from the American job market. On the other hand, for those who have a degree, your hopes might be futile.

Ever since 2010, student loan debt has exceeded credit card loan debt and auto loan debt.

San Francisco State University students, who have federal student loans, have an average debt of $18,000. SFSU approximates its default rate to be over 5 percent for the next year. This default rate is lower than 8.8 percent which is the national average.

Failure in paying debts damages credit value, and job applicants with bankruptcy records are avoided by a few employers. Moreover, poor credit hinders a person to be able to get loans that can help put up a business or get loans for a car or house.

However, the sad truth is that federal student loans can be paid only after graduation and normally takes 20 years. This is why a few students stop pursuing their dreams because of the prospect that the unemployment rate for college graduates of this year will be 50 percent.

The country’s three richest people would have to give 4.5 percent of their respective incomes to maintain federal loan rates at their current point for all students. According to a recent study, 35 percent of the college expenses are paid by families. Thus, while higher education fees increase, household income decreases.

In addition, another problem is the country must have an education system that is appropriate with the economy and public welfare needs.

These issues must be solved as soon as possible because if not, the next generations of graduates will only end up overwhelmed with misery. There must be an improved educational system that is within the means of all income groups.

Not All Debt is Bad – Some Debt can Help Improve Your Financial Condition

All types of debt can be seen in a mortgage business. Debt payments for car loans, student loans and IRS payments, alimony, child support are made when you engage in a mortgage. Too much debt and having no debt can be both a big problem.

It sounds strange that having no debt can be a problem. It can be big problem because the lenders are looking at the borrower’s credit history before granting him mortgage. The lenders want to see the manner of your payment whether it is delayed or on time. If you have no debt then you can show no credit record to the lenders and more likely you will not be able to get a mortgage.

If you have never had a credit card or any payment for a loan then lenders have no way of checking your credit history and you just might end up keeping on renting instead of owning a property.

So what you should do is to apply for a credit card as soon as possible. You start with one credit card. It does not have to be an American Express Gold Card. It can be any card for a start that will allow you to purchase any item and to be charged to your account. Then pay on time when the bill comes. Do it consistently for several months and then apply for Visa or MasterCard later. When you have your Visa or MasterCard, do the same thing. Purchase small items and when your bill comes, pay your dues on time.

Do not apply for a bunch of credit cards at one time. Get a card one at a time in a couple of months and limit it to only three. Make sure that your payment is on time because one late payment can do damage to your credit score and it might be the reason for the disapproval of your application for mortgage in the future.

Having a debt has also its merits. It is not a problem at all times. Let me cite an example. Having a mortgage can provide you earnings. If you purchase a home at $350,000 and the home appreciates at a conservative rate of 2 percent per year then in one year the home is already worth $357,000 or in five years its value is $386,000. In addition to this you can reduce your federal tax liability. How does this work? If the home you purchased is worth $350,000 and you borrowed $315,000 at 4 percent interest, you can deduct $12,000 from your income which will result to a reduced federal tax liability. Debt can be a good investment. It can help you improve your financial situation.