Is There a Risk to NOT Borrowing Student Loans?

Michael Lux Paying for School, Student Loan Blog 2 Comments

Many students and families have wisely realized that borrowing student loans can be dangerous and that student debt carries many long-term financial risks.

However, avoiding student debt at all costs comes with its own set of concerns.

When paying for college, the ultimate goal should be paying for school in the most responsible way possible. In some cases, federal student loans may play a necessary part.

Don’t Focus on One Year: Think About the Total Cost of Collge

Earning a college degree usually takes four to five years. Don’t make the mistake of taking things one year or even one semester at a time.

Many students have access to college savings accounts like a 529. These resources can be a great tool to help pay for school. However, 529 plans often fall short of paying for the entire cost of college.

The families that will need additional outside help should identify their needs as soon as possible. If all resources are used after three years of school, a student may require significant student loan help for the fourth year.

The danger in waiting until the end for student loan help is the strict federal student loan borrowing limits imposed by the government. Students who need help beyond the federal limits often resort to borrowing private student loans.

Federal student loans are a superior option because of the many borrower protections they provide. These protections include student loan forgiveness and income-driven repayment.

If a student spreads student loan borrowing over four years, they may avoid needing the more risky private student loans.

Federal Subsidized Loans Carry Little Risk

The best student loan available is a federal subsidized student loan. This is because the government pays the interest the loan accrues during school.

Avoiding debt is still the preferred option, but if student loans are required, families should develop a plan to make sure that they maximize the potential benefit of subsidized aid.

Borrowers always have the option of repaying the debt early. There are no prepayment penalties with any federal student loans.

Avoid Desperate Financial Decisions

In an attempt to avoid student loans, some parents choose to raid their 401(k) account to pay for school.

While the motives behind the move are commendable, the decision is almost certainly a mistake.

Early withdrawals from 401(k)s come with huge penalties and tax consequences.

Further, even though borrowing for school isn’t ideal, it is still an option. Borrowing for retirement doesn’t exist. If the money saved for retirement isn’t enough, parents could be in an awful situation. They may even become financially dependant on their children.

Don’t prevent one problem by creating an even more severe problem.

Student Loans are a Bad Way to Build a Credit History

Some people might argue that student loans are useful because they help build up the borrower’s credit history.

This would be a lousy strategy.

Building up your credit history during college is a really smart idea. It may make buying a house in future years significantly easier. However, student loans are the wrong tool for accomplishing this job.

The first problem with this approach is that it is expensive. Outside of federally subsidized loans, the interest generated by student debt can be substantial. The price of the interest is not worth the marginal credit score benefits.

Once student loans are paid off, they fall off the credit report. If you are a responsible borrower and you wisely pay down your student loans, the credit score benefits will disappear with the debt.

Students worried about their credit score should open a no-fee credit card and pay down their balance in full each month. They can keep this card indefinitely, build up a credit profile, and not spend any money on interest.

There may be risks to avoiding student debt, but credit score building is not a concern.

Most Important Thing: Have a Plan to Repay Any Debt

If you fear a student loan nightmare, that is a good thing. Student loans should be a concern because they can be very dangerous.

However, in moderation, they can be a valuable tool to fund an education. Desperately avoiding borrowing student loans comes with its own risks.

The key to proper use of student loans is planning. Have a plan to repay the debt quickly. Have a backup plan if the unexpected happens.

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Jack Katler
Jack Katler

Thanks for such useful information

varunpatil
varunpatil

It’s a great blog about finance thanks for sharing