How Student Loans Lead to High Debt-to-Equity Ratios

A high debt to equity ratio simply means you owe too much for your asset base. In some extreme cases, you may even have negative net worth if you owe more than you have in assets. Unfortunately, this is the case with many young people who have a lot of student debt. Because these young people have low incomes and no large assets, their student loan debt becomes even more detrimental than the same amount would be to a more established person.

Cost of Attending College

The main reason for this inequity between the debt incurred at school and the equity that person has is the huge cost of going to college today. While there are some affordable options, like trade schools or other public universities, private colleges can leave a student with debt in the hundreds of thousands of dollars. A student should be able to realize how large the sum truly is, and how long it will take the average person to repay the debt.

"Free Money" Attitude

Unfortunately, too many students do not make this realization until it is too late. They have the attitude that their salaries will cover the loan cost in the future. Since few of these students have actually earned a full time income and paid full time living expenses, it is hard for them to comprehend what a $300 monthly payment truly means to their ability to provide for themselves. Lenders do not help the situation, willingly handing out thousands of dollars with no repayment requirement until after a student graduates.

High Interest Rates

Interest rates are typically low in the beginning of most debts. However, those rates can rise a year or two after graduation. Federal loans have lower interest rates, and most students who qualify for these loan options will have an easier time managing their debt. However, not everyone will qualify for the need based loans, forcing students into private loan programs. Private lenders want to make a profit off of the loans, and they use a student's lack of credit history as justification for a higher loan rate.

Slow Repayment Options

Lenders are very smart to allow students to opt for grace periods, deferment and forbearance on their loans. When a student does not start repaying loans immediately, the interest builds, resulting in a greater profit for the lender. Many students elect income contingent payment plans or graduated payment plans, meaning they are paying little down on the principal for the first few years after they have graduated. It may take 10 to 15 years to pay off student loan debt. These students will have a hard time amassing large assets with the burden of this debt, meaning they will have a high debt to equity ratio long into adulthood.


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