A college degree or vocational training can be a good investment in your future. Everyone has heard this before. But the flip side of the coin is heard less often: sometimes taking a student loan out is not a good investment. The number of people realizing this is increasing almost as fast as the cost of education itself. The problem with this realization, in most cases, is that it happens when it is too late.
Too late may be a stretch- it’s not too late to crush student debt, even if it is too late to avoid it. There are several strategies to reduce and eliminate your debt.
Why do we Have Student Debt?
Debt is not the end-all of evils. It actually serves a very practical purpose if it is used responsibly. Debt has allowed America to grow into the financial behemoth that it is today. By mortgaging our financial future, we can have a better financial footing today. Investing that footing into something that boosts your finances beyond the cost of the debt can be a profitable decision. Understanding the break-even point can be difficult for a young adult, and expectations can cloud judgment.
In 1927, John Rockefeller Jr proposed that learning institution costs should be raised and that loans should be offered to students in need with a payback period of ten years. Nothing came of his proposal, but it was one of the first suggestions related to the modern student debt system in America.
After World War II, student enrollment soared with the use of the GI Bill. Competition with Russia in our space race prompted the National Defense Education Act, where students were loaned money to complete education related to science, math, and foreign language. About 8 years later, in 1965, the Higher Education Act would allow private lenders to lend to students known as Stafford Loans. These two programs evolved over the years to what they are today:
- $1,560,000,000,000 in student loan debt
- 45,000,000 borrowers
- 3 times the amount of all credit card debt combined
As you can see, the size and scope have grown over the years. The problem is that student debt isn’t some big bad thing where we all need to grab pitchforks and go after it. Student debt is a tool that has been presented and used irresponsibly.
The part of student debt that has become a problem for society is not always a problem for individuals.
Student loans have helped plenty of students achieve their dreams and get the jobs they want. Students just need to be sure they understand the true cost.
The True Cost of Student Debt
A student loan can be a cost or a benefit when combined with education. Adults with a bachelor’s degree earn around $23,000 more per year than those that do not. The unemployment rate for those with bachelor’s degrees is almost half of those without one as well. Both of these benefits are meant to offset the cost of the debt. This can be done if:
- You consider the costs of tuition and fees for various schools and programs.
- You earn a degree or training in a field that increases your pay substantially.
- You complete your education on time and actually complete your education (half of students that enroll in college or community college dropout).
- You student loan is at a reasonable interest rate.
- You make timely payments to pay off the loan.
If one of these conditions isn’t met, you may end up paying much more than you anticipated.
For many, taking on debt is a big decision when you have your whole life ahead of you. Student loans are often called ‘good debt’ that pays good dividends, but that is not always a guarantee.
Seventy percent of college graduates leave school with close to $30,000 in student debt. The average salary for those same graduates exiting campus is $45,000. Paying the loans can take up to 25 years, with deferments, and can affect your life plans and goals.
A student that takes out $80,000 in student loans can owe as much as $888 per month for 10 years with a modest 6% interest rate. That is a significant impact on a new graduate’s cash flow and could postpone homeownership goals and many other life decisions, such as getting married or starting a family.
The ‘good debt’ that a student loan is referred to is talking about the opportunity an education can provide. The dismal part of this equation is the interest rate. Compounding interest does beautiful things for investments and terrible things for debt. A small change in percentage to a student loan interest rate may not seem like a big deal, but it can either cost or save you tens of thousands of dollars over the life of the loan.
Education Debt Can Become a Financial Disease
Compound interest can be ugly when it is working against you. Education debt is unique in that:
- repayment is delayed usually until graduation
- bankruptcy does not clear it
- it does not become marital property (in most states)
Sure, there are some benefits to student loans. You can delay payment in several situations, including financial hardship. This payment deferment still gains interest, however, and is more of a financial crutch that compounds other financial issues.
The Best Course of Action? Pay it Off.
The best debt is no debt when it comes to preparedness. Debt doesn’t just burden you financially, but it can affect your mental state, emotions, and decision-making. Student debt is unique in that it passes off the risk burden to you, the debtor rather than the government: the debtee.
Typically, interest payments are a reward for a risk tradeoff. With student loans, this is less the case since they are unforgivable loans that cannot be lowered- even by bankruptcy! There are calls for student loan forgiveness in the political sphere, but these are lip-service campaigns with a very low probability of ever happening.
The way out of student debt is through either paying it or dying- and one of those is incompatible with a survival mindset.
There are three major ways to pay off your student debt:
1. Refinance Your Student Loans
You can combine all of your smaller high-rate loans into a single lower rate loan by refinancing your student loan. Sometimes the rate differences can be significant, saving tens of thousands of dollars over the life of the loan. This is what I have done, and we opted to use the interest savings to cut the payment period in half. SOFI had the best rate and benefits when I was researching and saved me over five figures.
2. Pay More Every Month
If you take out a $100,000 student loan at 8% for 10 years, paying an extra $500 a month can net you $18,500 in savings and pay your loan off in 6 years rather than 10.
3. Make a Lump Payment to the Principal
This is a great idea to consider during tax season or when you receive a one-time bonus. Paying down your principal lowers the interest that you pay over the life of the loan. You can even think of it as an investment with a guaranteed rate of what your student loan interest is set to. If you pay your $2,000 tax return into your 6% student loan that still has 12 years left- that $2,000 is effectively earning 6% for the next twelve years!
Paying off your debt lets you eliminate some financial risk. The guaranteed return of your loan interest rate over the life of the loan is usually worth the reduction in risk.
Random musings without research to back it up is rarely helpful. That’s where our research and references come in. Here are some good resources with historical data and repayment calculators that you can check out on your own. Research is helpful when making life-altering financial decisions, and when writing a prepping blog.
Make Lemonade Repayment Calculator https://www.makelemonade.co/calculators/student-loan-prepayment-calculator
The Final Word
Student loans are definitely not as bad as credit card loans or your local loan shark- but they can be presented in a light that makes them sound less negative. Weighing financial decisions should come down to numbers that make sense and how you want to live your life- not any set of preconceived expectations.
Learn about the risks you could encounter every day with our TrueRisk index to make sure you are on top of every likely and plausible threat, including financial threat.
Keep exploring, stay prepared, and be safe.
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