6 Debt Traps That Students Fall Into That Shouldn’t Happen
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Lina Patel
5 min read
College students face many challenges when starting out. They may be far from home, adjusting to new living situations and roommates who may or may not become lifelong friends. Simultaneously, they must adjust to increased academic demands and navigate campus life. As they adjust to increased academic demands and the nuances of campus life, financial challenges may get overlooked.
Dr. Heidi MacVittie, a financial expert and founder of Moola Masters, points out that the daunting nature of student loans “can make other types of debt, like credit cards or payday loans, seem less intimidating by comparison.” Yet, the high-interest rates and complicated terms associated with these can rapidly escalate a seemingly manageable debt into an overwhelming burden. “Without a strong background in financial literacy, it’s easy for students to make poor financial choices,” said MacVittie.
MacVittie warns of predatory student loans characterized by “excessively high interest rates, misleading terms, aggressive and misleading marketing tactics, and a lack of transparency about loan terms.” Such loans are often marketed to low-income or otherwise vulnerable individuals, including those attending for-profit colleges or universities who lack access to conventional student loans. MacVittie highlights a particularly insidious aspect of these loans: The inability to discharge them through a declaration of bankruptcy, leaving borrowers ensnared by debts they may never be able to catch up on.
Students at traditional nonprofit colleges or universities may take on private loans to supplement a federal student loan. Private loans carry higher interest rates, and while banks or credit unions offer them, financial advisors suggest that they should only be considered after thoroughly exploring federal student aid and scholarships. If a student takes out a private loan, the student needs to understand the loan terms and conditions thoroughly.
Federal Student Loans
Most individuals find federal student loans relatively accessible. However, George Vogl, managing director at Stretto, a bankruptcy services and technology firm, points out that the trap often snaps shut upon graduation. Students may be unfamiliar with the repayment structuring options available under the Higher Education Act. Typically, after a six-month deferment period intended for job hunting, students are automatically placed on the standard repayment plan.
Vogl likens the standard ten-year amortization schedule to “a mortgage that comes through six months after they graduate.” George recommends consulting financial experts about income-driven repayment plans. He further highlights the SAVE Plan, introduced by the Biden administration in 2023, which provides an interest subsidy to prevent the borrower’s balance from increasing if their payments are lower than the accruing interest. As Vogl says the SAVE Plan is a “game-changer.”
Buy Now, Pay Later (BNPL)
MacVittie describes these plans as offering students a way to “keep up with the Joneses.” Buy Now, Pay Later (BNPL) plans provide immediate gratification by, for instance, allowing an individual to pay for an expensive spring break trip they see their friends planning, even though they can’t afford it.
MacVittie explains that these plans are not just a credit card feature but are made available through platforms like Affirm, which partners with giants like Walmart and Amazon, and Uplift, which specializes in the travel industry. Peer pressure and the prevalence of BNPLs make it easier for students to make poor financial decisions. Hence, MacVittie believes it’s super important for students to have some form of financial awareness of these kinds of debt traps.
Subscriptions and Tech Upgrades
With constant technological advancements and the proliferation of digital subscriptions, students find themselves facing recurring charges or feeling pressure to purchase the latest gadget. Marketing expert Deepak Shukla and founder of Pearl Lemon, advises a prudent assessment of these expenditures, advocating for a frank appraisal of the utility of each subscription. He also mentions cost-cutting measures such as shared accounts and taking advantage of student discounts. With consumer electronics, restraint is key, and students should resist the temptation of continual upgrades unless they are needed for academic pursuits.
College is an exhilarating time of learning and self-discovery. Taking advantage of professional and academic resources to improve your financial literacy is important. Implementing strict budgeting and financial tracking can help manage and prioritize expenses. Financial experts suggest using budgeting apps and attending financial literacy workshops offered by many colleges. Education is a foundational tool to empower students to make informed decisions.
Each of our experts emphasizes that students learn budgeting skills and critically study any financial products they take advantage of to understand the long-term costs associated with their financial decisions. Remember, many loans are cleverly marketed, and students lacking in financial literacy might view offers as exciting options that they can take advantage of. Before you do, seek out advice from financial aid counselors or a financial expert. You won’t regret it.
