Why do students take loans they can not repay?

Students contract a college debt with the best intentions in the world. They were told that a university degree was a guarantee of success. That they should pursue their dreams. This student debt is a good debt.

But how do smart students end up with a debt that they can not repay? Here are three reasons plus ways to avoid these financial pitfalls.

They are told that it is a "good debt"

In high school, students hear that they should earn a university degree to succeed in a well-paying career.

"As a society, we have this sort of compulsory higher education," says Daniel T. Kirsch, author of "Sold My Soul for a Student Loan". "We encourage everyone to take out a debt and call it" good debt ". "

But student debt is not good when your degree does not lead to a job that pays enough to pay it back.

This is the case of Jennifer Atkins, 36, of Jacksonville, Florida. A first generation student, she believed that a university degree would allow her to progress.

"At the time, I had the mentality of doing what I had to do in life," says Atkins, who has earned three degrees, including a nonprofit master's degree in management in 2014.

Atkins now has two children, a debt of over $ 100,000 and is unemployed. She left her job in 2017 because of complications related to her second pregnancy and did not find a job that was sufficiently lucrative to justify the payment of childcare.

Avoid this trap: Limit borrowing so that future monthly payments do not consume more than 10% of net salary. Under this standard, a person who expected to earn $ 50,000 a year could afford a monthly payment of about $ 279, according to the NerdWallet Student Loans Financial Capability Calculator. At the current interest rate of 5.05% of federal undergraduate student loans, this payment would support a debt of about $ 26,000 from colleges.

Loans do not feel real

Some students are willing to take on heavy academic debts because they are unaware that they will eventually have to repay them with interest. This is what behavior economists call "the present bias," which means that people often make choices that benefit them in the short term and ignore future consequences.

Atkins remembers accepting student loans in small increments throughout 10 years of higher education – $ 3,000 here, $ 5,000 there. She worked all her schooling, but loans were essential to make ends meet.

"At the time, none of that was real," Atkins says. "I had no problem clicking on" accept "on these student loans."

In hindsight, Atkins says she would have liked to go through a mandatory career counseling session to understand the numbers and understand her debt in the context of her future income and expenses.

These tips may have helped. Jeff Kreisler, co-author of the "Dollars and Sense" behavioral economics book, explains Jeff Kreisler.

"If you specify the future, 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 what is offered to you. It may be tempting to accept the full amount, but you will have a lower monthly payment if you borrow only enough to cover the tuition and basic cost of living.

They lack information

In many cases, students do not have the financial education to make loan decisions.

Susan Dawson, 47, holds a Ph.D. in history and works as a historian for a federal agency. She can afford to repay her student loan through a second job where she teaches online courses and a federal repayment plan that caps her monthly income payments. But she says that had she 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-digit student loan balance, and lives and works in Washington, D.C.

The things she would like to have asked relate to:

• Typical income in his field.
• His future monthly student loan payments.
• How does the interest of student loans work.

Avoid this trap: Consult the Bureau of Labor Statistics Occupational Outlook Handbook for salary and educational requirements in a variety of areas. 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 them during your studies so your balance does not get bigger.

The article Why students take loans they can not repay was originally published on NerdWallet.