The importance of financial literacy cannot be overstated, particularly in today's chaotic world. Financial literacy is crucial because it gives people a clear understanding of the essential financial concepts, thus informing their day-to-day financial decisions ( Henager & Wilmarth , 2018 ). When equipped with this knowledge, individuals become better at managing their money, making sound decisions, and maintaining healthy budgeting and spending habits. Ultimately, this results in long-term financial wellness ( Henager & Wilmarth , 2018 ). Financially literate people are more effective when saving, budgeting, investing and borrowing. Student loan debt forms a notable aspect of financial literary. This paper seeks to highlight the issue of student loan debts in the context of future credit score, future budget, spending habits/goals, personal financial growth and success, and career considerations.
The Effect of Student Loan Debt on one’s Credit Score, Future Budget, and Spending Habits/Goals
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Student loan debt is a huge problem, particularly for borrowers who are burdened with loans. According to Farrington (2019), the average graduate leaves school with a loan debt of about $31, 172, while the student loan debt currently surpasses $1.52 trillion. About 19% of students burdened by loans lag on their payments and are likely to default. This implies that at least one in five individuals is struggling to keep up with the loan repayments and is at risk of losing control of their finances. Having a student loan debt can improve or worsen a person's credit score (Farrington, 2019). Under the right circumstances, a person's student loan debt can help him or her improve the credit score. The most crucial factor with regard to credit score is the loan payment history. Missed, delayed, and defaulted student loan payments have a negative implication on one’s credit score. Conversely, diligently paying a student loan debt raises one’s credit score automatically.
A student loan debt can also help one improve his or her credit score in the long term in the context of his or her credit mix. In particular, a good credit mix is comprised of revolving credit accounts, such as installment and credit loans ( Farrington, 2019). Student loans are installment loans and thus have the potential to improve the holder's credit mix and add depth to their profile. Therefore, a student debt loan can only pose a risk to a person's credit score if repayment becomes a problem. Paying the loan on time or early every month is the key to ensuring that a student debt loan helps one in raising one’s credit score.
Student loan debt undoubtedly hurts one's future. This is because it may prevent an individual from meeting his or her financial milestones. Key milestones may include investing, buying a home, or making retirement savings. The burden of a student loan debt can deter an individual from adhering to his or her monthly budget (Caldwell, 2019). When burdened by a student loan debt, it may be impossible for the debt holder to pay his living expenses and bills. Those with moderate student loan debts have to spend less than those with little or no debt ( Zhang et al., 2020). However, those with high student loan debts often spend relative to individuals with moderate debt.
Management of Student Loans and Personal Financial Success and Growth
The cost of tuition is on the rise globally. Consequently, student loans continue to burden families and individuals. Having a student loan harms one's financial wellness, success, and growth. Financial success and growth is part of a household's and individual's daily life and is associated with the overall financial situation. Thus, it can be conceptualized as a multidimensional and comprehensive concept that comprises financial behavior and attitudes, financial satisfaction, and the objective status of one's financial situation (Henager & Wilmarth , 2018). Having a student loan has a negative impact on an individual's financial growth and success. The long-term financial repercussions of a student debt loan cannot be overstated, particularly in the context of the stress it generates. Thus, managing an existing student loan debt cannot be decoupled from the holder’s future financial success and growth.
Proper management of student debt loan lowers one's credit score. It makes it possible for the holder to achieve such feats as attending a graduate, buying a home, increasing one's net worth, following one's dreams, and getting a dream job. These feats, when combined, make future financial success and growth possible. Students must consider the consequences of student loans before taking them. They should also ensure that they borrow only when necessary.
How Debt Influences Career Choices
Most individuals desire to get jobs that can pay them top dollar. However, due to student debts, students are forced to prioritize money, leading to unsatisfying careers and, in some instances, unhappy lives. In a previous study, 47% of fresh graduates said they are likely to pursue careers influenced by their loan payments. Another 40% would take a job that offered higher pay and less satisfaction to pay off their student loan debt (Kadlec, 2011). Before hiring, companies have to do thorough background checks. This is especially the case when a job seeker is pursuing a position in the financial industry.
Those delaying or defaulting student loan repayments are likely to miss lucrative opportunities. Student loan debts thus lower a graduate's negotiating power, implying that he or she may end up settling for less or embracing a job whose geographical location is undesirable. At the societal level, student loan debt is likely to distort the labor market with more graduates pursuing careers in banking and law than teaching and science. Ultimately, student loan debts are likely to create a stressed, unfulfilled, and unhealthy workforce.
References
Caldwell, M. (2019, June 25). 4 Ways Your Student Loans Are Hurting You. https://www.thebalance.com/ways-your-student-loans-hurt-you-4026671
Farrington, R. (2019, December 18). How Student Loans Impact Your Credit Score . https://www.forbes.com/sites/robertfarrington/2019/12/18/how-student-loans-impact-your-credit-score/#59932f5c5752
Henager, R., & Wilmarth, M. J. (2018). The relationship between student loan debt and financial wellness. Family and Consumer Sciences Research Journal , 46 (4), 381-395.
Kadlec, D. (2011, March 17). Student Loans: How Excessive Debt Limits Career Options . https://www.cbsnews.com/news/student-loans-how-excessive-debt-limits-career-options/#:~:text=According%20to%20one%20study%2C%20here%27s,to%20pay%20off%20their%20loans .
Zhang, Y., Wilcox, R. T., & Cheema, A. (2020). The Effect of Student Loan Debt on Spending: The Role of Repayment Format. Journal of Public Policy & Marketing , 39 (3), 305-318.
