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Student Loans Can Ensnare You in a Debt Trap

How to avoid or escape the debt trap of student loans.

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Student loans are often classified as "good" rather than "bad" debt because they serve as an investment in a borrower's future. Even relatively massive loans in the tens or hundreds of thousands of dollars are still viewed as savvy investments if they enhance your future earning potential. One example: The median annual wage for young workers with a college degree is more than $45,000; young workers without a degree only earn roughly $28,000 annually.

Extrapolate these differences over a lifetime's earnings, and you have a huge gap. So even though tuition has risen astronomically, college is still a good bet -- unless, of course, you fall into the student loan debt trap.

Let's take a look at how students assume more debt than they can comfortably handle, and the best strategy for managing such debts.

The Student Loan Debt Trap

Federal student loans are unusual in that the qualifications are much lower than those seen with a traditional private lender. While an 18-year-old college freshman might need a good credit score or a co-signer to secure a car loan, financing a college education is often much easier. To make college more equally accessible, the federal government offers student loans to borrowers regardless of credit qualifications.

While this has lowered the barriers to getting a college education, it also presents a real challenge to young students, many of whom lack the financial savvy to make long-term financial decisions. For example, if you plan on pursuing a career that's relatively low paying, taking out maximum-level students loans every year is probably not a good decision. Additionally, students often decide to enter the private student loan market when federal loans don't cover the whole cost of attendance. Many of these students also fail to realize that private loans don't carry the same protections.

Once we're a little older, it's easy to say I should have taken only the loans I could afford, or I should have opted for a less expensive state university or community college. By then, however, it's often too late -- we've already been ensnared by the debt trap.

Escaping the Trap

There's one reason why the student loan debt trap is arguably the most difficult of all such traps to escape: student debt is generally non-dischargeable in bankruptcy, except in cases of extreme hardship. This means that you can't simply ignore it, as default will have potentially ruinous effects on your credit, and your wages may also be garnished in the event of non-payment.

This doesn't mean you don't have options, however. If you can't manage your current debt load, you can always choose to apply for a deferral or forbearance period. While this won't reduce your debt, it can buy you much-needed time to make financial adjustments.

More importantly, if you have monthly payments you simply cannot afford, you can also opt for the Income-Based Repayment Program. This program, available since 2009, caps the maximum monthly payment borrowers must make according to their income. Generally, borrowers agree to put about 10-percent of their income each month toward their outstanding balance. While this program can be a lifeline for those struggling with large loan payments, it should be noted that it only applies to federal loans. Non-federal loans, loans in default and Parent PLUS loans do not qualify.

The Takeaway

The student loan debt trap is one of the trickiest to negotiate. By taking advantage of the information listed above, you can get your debt under control and eliminate the stress and anxiety associated with missed or late payments.