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Why College Students Take on Loans They Can’t Repay
Teddy is a former student loans writer with NerdWallet, where she covered topics around managing money before, during and after college. Her work has been featured by The Associated Press, USA Today, the Chicago Tribune and Reuters.
Des Toups Lead Assigning Editor | Student loans, repaying college debt, paying for college
Des Toups was a lead assigning editor who supported the student loans and auto loans teams. He had decades of experience in personal finance journalism, exploring everything from car insurance to bankruptcy to couponing to side hustles.
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Students take on college debt with the best of intentions. They’ve been told that a college degree is a ticket to success. That they should pursue their dreams. That student debt is good debt.
But how do smart students wind up with debt they can’t repay? Here are three reasons, plus ways to avoid these financial traps.
NerdWallet ratingNerdWallet's ratings are determined by our editorial team. The scoring formula for student loan products takes into account more than 50 data points across multiple categories, including repayment options, customer service, lender transparency, loan eligibility and underwriting criteria.
Fixed APR
3.99-17.99%
College Ave Student Loans products are made available through Firstrust Bank, member FDIC, First Citizens Community Bank, member FDIC, or M.Y. Safra Bank, FSB, member FDIC.. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply. As certified by your school and less any other financial aid you might receive. Minimum $1,000. Rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. If a payment is returned, you will lose this benefit. Variable rates may increase after consummation. This informational repayment example uses typical loan terms for a freshman borrower who selects the Flat Repayment Option with an 8-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 7.78% fixed Annual Percentage Rate (“APR”): 54 monthly payments of $25 while in school, followed by 96 monthly payments of $176.21 while in the repayment period, for a total amount of payments of $18,266.38. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary. This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary. Information advertised valid as of 7/10/2024. Variable interest rates may increase after consummation. Approved interest rate will depend on the creditworthiness of the applicant(s), lowest advertised rates only available to the most creditworthy applicants and require selection of full principal and interest payments with the shortest available loan term.
Variable APR
5.59-17.99%
College Ave Student Loans products are made available through Firstrust Bank, member FDIC, First Citizens Community Bank, member FDIC, or M.Y. Safra Bank, FSB, member FDIC.. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply. As certified by your school and less any other financial aid you might receive. Minimum $1,000. Rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. If a payment is returned, you will lose this benefit. Variable rates may increase after consummation. This informational repayment example uses typical loan terms for a freshman borrower who selects the Flat Repayment Option with an 8-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 7.78% fixed Annual Percentage Rate (“APR”): 54 monthly payments of $25 while in school, followed by 96 monthly payments of $176.21 while in the repayment period, for a total amount of payments of $18,266.38. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary. This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary. Information advertised valid as of 7/10/2024. Variable interest rates may increase after consummation. Approved interest rate will depend on the creditworthiness of the applicant(s), lowest advertised rates only available to the most creditworthy applicants and require selection of full principal and interest payments with the shortest available loan term.
Credible lets you check with multiple student loan lenders to get rates with no impact to your credit score. Visit their website to take the next steps.
NerdWallet ratingNerdWallet's ratings are determined by our editorial team. The scoring formula for student loan products takes into account more than 50 data points across multiple categories, including repayment options, customer service, lender transparency, loan eligibility and underwriting criteria.
Fixed APR
4.15-15.49%
Lowest rates shown include the auto debit. Advertised APRs for undergraduate students assume a $10,000 loan to a student who attends school for 4 years and has no prior Sallie Mae-serviced loans. Interest rates for variable rate loans may increase or decrease over the life of the loan based on changes to the 30-day Average Secured Overnight Financing Rate (SOFR) rounded up to the nearest one-eighth of one percent. Advertised variable rates are the starting range of rates and may vary outside of that range over the life of the loan. Interest is charged starting when funds are sent to the school. With the Fixed and Deferred Repayment Options, the interest rate is higher than with the Interest Repayment Option and Unpaid Interest is added to the loan’s Current Principal at the end of the grace/separation period. To receive a 0.25 percentage point interest rate discount, the borrower or cosigner must enroll in auto debit through Sallie Mae. The discount applies only during active repayment for as long as the Current Amount Due or Designated Amount is successfully withdrawn from the authorized bank account each month. It may be suspended during forbearance or deferment. Advertised APRs are valid as of 7/12/2024. Loan amounts: For applications submitted directly to Sallie Mae, loan amount cannot exceed the cost of attendance less financial aid received, as certified by the school. Applications submitted to Sallie Mae through a partner website will be subject to a lower maximum loan request amount. Miscellaneous personal expenses (such as a laptop) may be included in the cost of attendance for students enrolled at least half-time. Examples of typical costs for a $10,000 Smart Option Student Loan with the most common fixed rate, fixed repayment option, 6-month separation period, and two disbursements: For a borrower with no prior loans and a 4-year in-school period, it works out to a 10.28% fixed APR, 51 payments of $25.00, 119 payments of $182.67 and one payment of $121.71, for a Total Loan Cost of $23,134.44. For a borrower with $20,000 in prior loans and a 2-year in-school period, it works out to a 10.78% fixed APR, 27 payments of $25.00, 179 payments of $132.53 and one payment of $40.35 for a total loan cost of $24,438.22. Loans that are subject to a $50 minimum principal and interest payment amount may receive a loan term that is less than 10 years. A variable APR may increase over the life of the loan. A fixed APR will not.
Variable APR
5.37-15.70%
Lowest rates shown include the auto debit. Advertised APRs for undergraduate students assume a $10,000 loan to a student who attends school for 4 years and has no prior Sallie Mae-serviced loans. Interest rates for variable rate loans may increase or decrease over the life of the loan based on changes to the 30-day Average Secured Overnight Financing Rate (SOFR) rounded up to the nearest one-eighth of one percent. Advertised variable rates are the starting range of rates and may vary outside of that range over the life of the loan. Interest is charged starting when funds are sent to the school. With the Fixed and Deferred Repayment Options, the interest rate is higher than with the Interest Repayment Option and Unpaid Interest is added to the loan’s Current Principal at the end of the grace/separation period. To receive a 0.25 percentage point interest rate discount, the borrower or cosigner must enroll in auto debit through Sallie Mae. The discount applies only during active repayment for as long as the Current Amount Due or Designated Amount is successfully withdrawn from the authorized bank account each month. It may be suspended during forbearance or deferment. Advertised APRs are valid as of 7/12/2024. Loan amounts: For applications submitted directly to Sallie Mae, loan amount cannot exceed the cost of attendance less financial aid received, as certified by the school. Applications submitted to Sallie Mae through a partner website will be subject to a lower maximum loan request amount. Miscellaneous personal expenses (such as a laptop) may be included in the cost of attendance for students enrolled at least half-time. Examples of typical costs for a $10,000 Smart Option Student Loan with the most common fixed rate, fixed repayment option, 6-month separation period, and two disbursements: For a borrower with no prior loans and a 4-year in-school period, it works out to a 10.28% fixed APR, 51 payments of $25.00, 119 payments of $182.67 and one payment of $121.71, for a Total Loan Cost of $23,134.44. For a borrower with $20,000 in prior loans and a 2-year in-school period, it works out to a 10.78% fixed APR, 27 payments of $25.00, 179 payments of $132.53 and one payment of $40.35 for a total loan cost of $24,438.22. Loans that are subject to a $50 minimum principal and interest payment amount may receive a loan term that is less than 10 years. A variable APR may increase over the life of the loan. A fixed APR will not.
Credible lets you check with multiple student loan lenders to get rates with no impact to your credit score. Visit their website to take the next steps.
They're told it's 'good debt'
In high school, students hear that they should earn a college degree to have a well-paying, successful career.
“We as a society kind of have this compulsory higher education,” says Daniel T. Kirsch, author of “Sold My Soul for a Student Loan.” “We’re encouraging everyone to take out debt and calling it ‘good debt’.”
But student debt isn’t good when your degree doesn’t lead to a job that earns enough to repay it.
This is the case for 36-year-old Jennifer Atkins of Jacksonville, Florida. A first-generation college student, she believed a university diploma would help her get ahead.
“I had the mentality back then that I was doing what I was supposed to do in life,” says Atkins, who earned three degrees, including a master of nonprofit management in 2014.
Now, Atkins has two kids, over $100,000 in student loan debt and is unemployed. She quit her job in 2017 due to complications with her second pregnancy and hasn’t found a job lucrative enough to justify paying for child care.
Avoid this trap: Limit borrowing so that future monthly payments don’t consume over 10% of take-home pay. By that standard, someone expecting to earn $50,000 a year could afford a monthly payment of about $279, according to NerdWallet’s student loan affordability calculator. At the current undergraduate federal student loan interest rate of 4.53%, that payment would support college debt of about $26,800.
Some students are willing to take on large amounts of college debt because they don’t connect with the reality that they’ll eventually have to repay it with interest. This aligns with what behavioral economists call “present bias,” the idea that people often make choices that benefit them in the short term and overlook future consequences.
Atkins remembers accepting student loans in small increments throughout 10 years of higher education — $3,000 here, $5,000 there. She worked throughout school, but the loans were crucial to making ends meet.
“None of it was real to me back then,” Atkins says. “I had no problem clicking ‘accept’ on those student loans.”
In hindsight, Atkins says she wishes she had had a mandatory career counseling session to walk her through the numbers and understand her debt in the context of her future earnings and expenses.
Such counseling may have helped. Imagining our future selves can help us overcome present bias, says Jeff Kreisler, co-author of the behavioral economics book, “Dollars and Sense.”
“If you make the future more specific, then you can connect to it,” he says.
Avoid this trap: Do the math as you go. Every dollar you borrow will have to be repaid with interest. But you can choose to borrow less than you’re offered. It may be tempting to accept the full amount, but you’ll have a lower monthly payment in the future if you borrow only enough to cover tuition and basic living costs.
In many cases, students lack the financial education needed to make borrowing decisions.
Susan Dawson, 47, who has a Ph.D in history and works as a historian for a federal agency, can afford her student loan payments thanks to a second job teaching online classes and a federal repayment plan that caps her monthly payments at a percentage of her income. But she says if she had known the earning potential in her field, she would have chosen a different career.
“I feel stupid because I did not know what questions to ask,” says Dawson, who has a six-figure student loan balance, and lives and works in Washington, D.C.
Things she wishes she had asked about include:
Typical earnings in her field.
Her future monthly student loan payments.
How student loan interest works.
Avoid this trap: Check the Bureau of Labor Statistics’ Occupational Outlook Handbook to research wages and education requirements for various fields. Use a student loan calculator to estimate future monthly payments. Interest accrues while you’re in school — unless you have subsidized loans — but you can pay the interest during school to keep your balance from ballooning.
This article was written by NerdWallet and was originally published by The Associated Press.