Both traditional and decentralised finance (DeFi) provide good benefits to individuals, professionals, and businesses. The market for financial services, of course, extends to students. In a conventional financial system, financial institutions allow students to take out loans for educational purposes. In the US, for example, around 44. 7 million Americans have outstanding student loans.
Although this might seem like a great opportunity for students who don’t have enough money to send themselves to schools, there is a bigger challenge waiting after the students graduate from their universities: repaying the loan with interest. Given the fact that financial institutions allow students to repay their debt, the interest would not be small. This is probably one reason why students can’t earn enough money to live a comfortable life even after graduating.
So, what can DeFi do to help students get out of their loans?
Overview of Decentralised Finance
Decentralised finance has been around since 2018. It’s a fairly new system that was established together with other developments in the blockchain. What’s recognisable about DeFi is that it disposes of centralisation to maximise the benefits to users. So, instead of relying on what Central Banks say, for example, decentralised finance relies on what the larger community approves.
Relating DeFi to student loans, students may find freedom in paying their debts with DeFi. With decentralisation, students may plan their payment schemes better. The interest rates they have to pay can also be optimised, and they may have the chance to choose the more affordable rates for them.
How to Pay Your Student Loan With DeFi?
There are several existing DeFi projects that you can check out to help you with your student loans. The best option that is currently in the market today is Aave. Aave is a DeFi lending protocol that allows users to earn, lend, and borrow crypto assets. Users who participate in lending and borrowing cryptocurrencies also receive AAVE tokens as extra incentives.
For many students, especially those who have just entered college, it’s such great news to sign a loan agreement that could pay their entire tuition fees. For the first years, you will have the freedom to enjoy studying with financial assistance. But, as soon as you graduate and start working, you are going to suffer from paying the principal and high-interest rates of your debts.
With DeFi, you have many options to pay your outstanding debt and, at the same time, make money from the crypto market. Some people who own cryptocurrencies have thought of selling their holdings to pay their student debts. It’s an option, but it might incur a huge loss over time. How? If you believe that cryptocurrencies like BTC and ETH would go up as high as your student loan interest per year, then selling them off would incur an opportunity cost. So, the better option would be to hold your cryptocurrencies as long as you can.
One of the benefits of decentralisation is that you can enjoy both worlds–paying your student loans without delay and holding your cryptocurrencies for more earnings. With DeFi, you don’t have to choose between holding and selling your cryptocurrencies just because you need money to pay off your loans.
Borrow in USDC Then Convert to USD
USDC is a stablecoin pegged to the US dollar. This is more stable than cryptocurrencies like Bitcoin and Ether which suffer from too much volatility. Even if the market is down, the price of stablecoins should remain at a dollar, which makes it safer for both lenders and borrowers in DeFi. In light of recent events, it’s safer to put your money on collateralised stablecoins such as USDC or DAI. The process of paying off your student debt with Aave is easy. Borrow in USDC, convert your USDC to USD using a crypto exchange wallet, and then pay off your debt.
Now, you might be thinking–” I didn’t get rid of my debt totally. I just transferred my student loan to DeFi. How does that help me?”
Benefits of DeFi for Students With Loans
The difference between CeFi (centralised finance) and DeFi is huge. If you’re looking for DeFi use cases, then student loans are the best examples. Here are some benefits of using a DeFi protocol to pay your loans:
No Payment Due Date
DeFi protocols don’t give fixed dates of when you should pay your debts. This means that you can pay your loans at any time you want. You don’t have to adhere to payment dates. In CeFi, you are pressured to follow your payment dates to avoid excessive interest and late charges. In DeFi, there are no such things as late charges. The interest charges are nothing compared to the pressure you experience in adhering to what banks and financial institutions say about your payment schedule.
Earn While You Borrow
Some people term this as “subsidised borrowing.” You earn cryptocurrencies over time when you borrow from certain DeFi protocols. The longer you have an outstanding loan, the higher your earnings are. Your earnings somehow help minimise the amount you have to pay later on. It subsidises your debts. With Aave, for example, you can earn up to 1.47% APR for borrowing DAI with 6.26% borrow APR. Note that the percentage changes with the market. You might want to check the main platform for updated rates.
Many platforms other than Aave provide lending services. Check out DeFi Rate’s loan rate comparison to find what works best for you.
Choose Your Rewards
With Aave, you can earn its native token when you borrow using the protocol. But, if you have other preferences, such as MATIC, you can switch. This option also allows you to pay cheaper borrowing APR. If you believe in the future of MATIC, you may even find this option even more rewarding.
Having outstanding student loans is a huge responsibility. You don’t have a choice but to pay them off to keep your credit records clean. With decentralised finance, you don’t have to suffer from paying thousands of dollars every month when you graduate. You can transfer your student loans from CeFi to DeFi to minimise the interest rates and eliminate the fixed-period payments.