What College Students Should Know About Debt
The typical college student in the United States has a student loan just below $40,0001. On top of that, 65% of college students2 hold thousands of dollars in credit card debt and many college students are among the 40% of Americans with car payments3. Many people find relief with debt settlement companies like Freedom Debt Relief or National Debt Relief. But a lot of this can be avoided in the first place if you learn about debt in college.
No one wants this massive weight on their shoulders just as they’re beginning their professional lives. Though some debt may be unavoidable, that hole will grow with time if you’re not careful. Thankfully, there’s help to be had.
We rounded up everything you need to know about debt in college so you start post-grad life on the right foot.
What To Know About Debt in College
Debt is a financial obligation or liability that a debtor owes to a creditor. Most people have their first brush with debt not with student loans, but when they buy their first car or when they start using a credit card.
Most debts will involve interest rates, or a charge for the privilege of borrowing money. High rates mean it is more expensive to borrow money, low interest rates are less expensive. In any loan agreement, you should keep the interest rate in mind for calculating how much money you will owe in the long run.
While debt can take many forms, credit card bills, auto loans and student loans will be the main sources of debt for college students. While all three can cause problems, if you manage it correctly, debt in college can work in your favor.
Student Loans
Student loans have been in headlines for a few reasons. Millions feel anxiety or depression4 over the daunting task of paying back tens of thousands of dollars. Several American politicians have floated the idea of forgiving student loan debt, but unless that becomes a reality, student loan payments will continue. They even picked back up in 2023 after a three-year-long break due to the pandemic.
There are several ways to lower or avoid accruing student loans. You can apply for any scholarships you are eligible for or federal aid grants you don’t need to pay back, like Federal Pell Grants.
If you do find yourself with a hefty student loan, there are a few ways to handle it. First of all, while the loan provider may at first determine your monthly payment, every student loan holder has a right to apply for an Income-Driven Repayment Plan, or IDR.
IDR’s base your payments on your stated income and family size. For some people, this can lower your payment to as low as $0. It is important to remember that IDR’s will be reviewed annually for changes in income.
There are four IDR plans to consider, and each of them caps the payment between 10% and 20% of your income. The four plans are:
- Pay As You Earn (PAYE)
- Income-Based Repayment (IBR)
- Saving on a Valuable Education (Save)
- Income-Contingent Repayment (ICR)
Each plan has different qualifications for eligibility. The Federal Student Aid office has developed a simulator here to help determine what plan is right for you.
There are also several opportunities on the books for student loan forgiveness. If you work in public service as a teacher or certain government agencies for example, you may be eligible for the Public Service Loan Forgiveness program. That will forgive remaining loans after 120 qualifying monthly payments or 10 years of payment. All IDR plans will also forgive remaining loans after 20 to 25 years of qualifying payments.
Credit Card Debt
Most people get their first credit card shortly after high school. Having them is not only useful, but almost necessary. It’s one of the most common ways of establishing a line of credit, which you need to build your credit score.
Credit cards also can help with emergency purchases when you’re short on money. However, the best way to avoid credit card debt early on is to develop good spending habits and a solid budgeting plan.
However, debt in college often starts with credit cards, as companies go out of their way to target teens5. They often use sign-up bonuses and low requirements to entice students because they are an ideal customer. Many haven’t developed good spending habits, but often have family that will help them after racking up a huge bill (plus interest).
Keeping this in mind, be wary of offers from credit card companies. Many will pitch how useful a line of credit is, and while that can be true, falling into debt fresh out of college is the last thing you want.
Let’s say you have already spent yourself into substantial credit card debt. The most important step is to stay on top of payments. There are many methods for paying off credit card debt, but the principles remain the same. Curb your spending (we like budgeting apps like Cleo to help with this), always pay on time and try to pay above the minimum required payment. If you have multiple types of debts or credit cards, prioritize what has the highest interest rate first.
Also, do not be tempted to use money from your loans to pay for your credit card debt. At worst, that could be a violation of the agreement. At best, you are merely moving money from one debt to another.
Auto Loans
Learning to drive and getting your license at 16 is an American rite of passage. Your first car represents your first taste of real freedom and the ability to go wherever they want. It’s an alluring notion, but cars are expensive. They also are only getting more expensive with time. That’s why some debt in college comes from a car payment plan.
In fact, 56% of college students6 have their own vehicle with them on campus, and many of them will be paying car loan payments. First of all, it’s important to note there are car payment plans for students that are worth shopping around for. They are all specifically designed for students with bad or no credit in mind. Otherwise, car dealerships will allow you to have a co-signer with good credit, such as a parent or family member, to vouch for you on the plan.
However, car dealerships will view college students as ideal customers the same way that credit card companies do. They figure they will most likely have someone else to bail them out if the payments become too much. Avoid any plans or offers for financing a new vehicle if you are looking to save money.
Tips for Managing a Car Loan
Used cars often are more affordable, but buying a used car is not without its own perils. Checking out the history of any used car you may want to make sure it won’t cost you more money to repair or keep in drivable condition.
If you do accept a plan for a car, it’s important to budget for expenses that come with it, namely gas and repairs. Car loan payment rates are negotiable, and you can refinance lower monthly payments or establish a longer plan, but that will result in paying more money over time.
Just like credit card debt and student loans, the most effective way to handle auto loans is to keep your payments on time, make sure to budget your money and keep high interest payments as the top priority.
William Fewox has worked as a freelance writer since 2017, and his work is featured in literary magazines such as The Aquarian, The Navigator and The Historian.
