Student Loan Debt is Not "Good" Debt

Contrary to the long-held assumption that student loans constitute "good debt" that will in time turn into an asset, the number of students who graduate with more than $25,000 in loan debt has tripled since the 1990s. Although the default rate on these loans dropped from the all time high of 22.4 percent in 1992, defaults are on the rise again with the rate standing at 5.1 percent in 2003.

Buoyed by promises of high wages and burgeoning careers, recent graduates find themselves working overtime for less than they anticipated and struggling on a daily basis with cash flow and budgeting for debt repayment. The two most direct answers to the dilemma are not ones that young people of today like to hear: live on a shoe string and pay the debt in the agreed upon ten year period or stretch the payments over 30 years. Option B means that graduates will carry indebtedness for education costs alone into their early 50s.

Contrary to popular belief, federal student loans cannot be discharged by a declaration of bankruptcy. In the case of private loans, the only way they can be erased by bankruptcy is by proving that making the payments would cause "undue hardship," an amorphous and difficult standard to meet.

Increasingly, however, graduates in debt can negotiate graduated repayment plans and some loan agreements have income-contingent options (payments are scheduled according to the debtor's current wage level and are adjusted annually.) In some instances a deferment can be gained, which amounts to a postponement of payments for an agreed upon period during which interest does not accrue.

Financial counselors agree that taking out additional loans to pay student loans only shifts the burden of indebtedness to another source. There is no such thing as "good" debt. While the student loans are outstanding, any extra money accrued, such as an inheritance, should go toward paying down the loans or they will simply hang over the debtor's head for years.