February 17, 2010

An Example of Student Loan Debt Out Of Control

Here is a story from the Wall Street Journal via Yahoo news about student loans:   The $555,000 Student Loan Burden.   The title eludes to an extreme example case where a Doctor has $555,000 in student loan debt.   The Dr. in question finished school in 2003 with $250,000 in total loans. 

How did it go from $250,000 to $555,000 in just 7 years?   The article says this: "It is the result of her deferring loan payments while she completed her residency, default charges and relentlessly compounding interest rates. Among the charges: a single $53,870 fee for when her loan was turned over to a collection agency."

Obviously this is an extreme, worst case kind of example.   But while its not common to start out with $250,000 in loans it is easy enough to have say $25,000.    If $250,000 can balloon to $555,000 then I could see $25,000 grow to $55,000 too.   

There are a few things that caused her loan to grow so high.

Deferring the loan.   This means she didn't make any payments on the loan while she was a resident.   When you defer loan payments the interest will accumulate. 

Default charges.   She missed loan payments and was charged for it.   I assume this refers to late fees and the like.   They also cite that $53k fee for handing the debt to a collection agency which seems a bit extreme.

Compound Interest.  All the while the interest on the loans has been piling up.  Its very easy for a loan to grow significantly in size if you aren't making payments.     With 7% interest your debt will approximately double in 10 years.

It may seem obvious but if you don't pay your student loans then the balances will go up.  Interest will pile up, you'll get charged fees and the debt will only get bigger.   But I guess the Doctor didn't understand this.   The Doctor in the story says : ""Maybe half of it was my fault because I didn't look at the fine print,..."   I don't know how realistic it is to lay the blame on "fine print".    The interest rates on your loans and consequences of not making payments should be pretty obvious.   I would say that most of the fault was hers for taking on a burdensome debt and then not making her loan payments.

She should count herself lucky that she's a doctor with a significant income potential so she has a realistic shot  to pay off the loans.

1 comment:

  1. I have read through your post. What you have written there is all true. Plenty of students do not take their loans seriously and do not it on time, so possibility of compounding charges, interest rates and more are a very common thing. Then, they would ask why their small loans reach that high. It's better if they'd follow some simple strategies that would help them out in due time.


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