Student Loans, Getting Rid of Them

I’ve been stewing on this one for a bit to gather my thoughts, collect my information and share truth and reality of the situation. Let me start off by saying if you are one of those that are set to receive the 10k to 20K relief based on income level, then I am truly happy for you. While I 100% agree if you borrowed money you owe it back, in this situation I believe there are realities to it, that need to be uncovered for those that may not understand. The below picture is a current state of interest on these loan that I just pulled from the federal student aid website.

(Credit above to studentaid.gov)

Based on these rates and the amounts, I’m sure the forgiveness being granted is helping to adjust the principal, but the government has also made millions off the interest from these loans to date. So in my opinion the forgiveness is warranted.

Now that that is out of the way, let’s talk Student loans, what to know about them and how to get rid of them. First off, these are not your typical loans. They are not tied to any kind of asset. An education is not an asset, the individual and how they apply their education is an asset to a company. Getting, maintaining and continuing the loan has nothing to do with your grades, or anything. If you qualify for the loan based on income you can get it. You are not required to do anything more than apply for it to continue your education.

The next thing that makes these loans non-standard is that you cannot pay principle on them until you have caught up on interest AND it is possible (depending on your repayment plan) to accumulate more interest than you actually are paying on the loan (reverse amortization). Under a normal loan, each payment includes a portion of principle, plus interest for the month. If you make your payment, you can then tack on some additional money towards the principle, thus reducing your future interest payment until you have paid down your loan. This is not the case with a student loan. If you went to a school that you could not afford, let’s say 25K per year. At the end of 4 years, you have 100K loan (plus interest, which you have not been paying on the whole time). Now you get a job and you are making 40K a year. After you guard your 4 walls (Home, Food, Utilities, Transportation), you may have a small sum amount left over to start paying on your loan. Now you have options of what type of payment plan you would like (Standard, Graduated, Extended, Pay As you Earn, Income Based), the payoff for these types of plans, range from 10 years to over 30 years…so by the time you have graduated (let’s assume age 22) you could be in your 50s and sending your kids off to college (if you have any). Here is a quick breakdown of each of the plans.

​Payment	Plan Payment	Time to Repay	Comments
Standard	Principle + Interest	~10 Years	Works like a standard loan payment
Graduated	Principle + Interest	~10 Years	Increases overtime with salary, salary reporting required
Extended	Principle + Interest	~20-25 Years	Same as above, but for loans >30K
Pay As You Earn	10% of Your Discretionary Income	~20-25 Years	If you have not paid it off in 20-25 years it is forgiven. NOTE: this will still cost you more than a 10 year standard
Income Based	10-15% of Discretionary Income	~20-25 Years	Same as above, and you may owe income tax on amount forgiven

I would run some schedules based on interest, but it will take me some time. If you are not familiar with creating these in Excel, subscribe to my list and send a note to brian@coachbw.com and I’d be happy to share with you a schedule so you can see the amount of interest you are paying over the life of your loan. If that does not get you mad I’m not sure what will.

So let me bring this all together for you. Number 1, if you meet the income thresholds for the relief, GO GET IT!!! You deserve and most of these are targeted towards lower incomes and those that have been paying for close to 10 years or more (studentaid.gov has all the details). Paying off your student loans, means every little bit helps, and in the grand scheme of things, this truly is only a little bit.

Today the total Student Loan problem (yes it is a problem) is $1.7 TRILLION, yes I’ll say it again 1.7 TRILLION. If you do not understand what that looks like, here you go.

$1,700,000,000,000

That is a lot of zeros…The average payment according to the college investor is $393 per month (https://thecollegeinvestor.com/33643/average-student-loan-monthly-payment). To Put that in perspective, a $100,000 mortgage at a current 5% interest rate, for a 30 year period, would cost you about $535 a month, if you didn’t have that student loan payment and could use all of that towards a mortgage payment you could afford a $173,000 mortgage v. $100,000 mortgage. In today’s housing market that is a big difference. On the other hand, following my principles, you could even afford a $117,000 mortgage, on a 15-year term and be on the road to being debt free from everything.

I hope that was a help to give you a run down of what is going on, my thoughts on it and what you should know. If I missed something, let me know in the comments, happy to help clarify. My recommendation to all of you is two-fold. (1) Watch for October on the site above to apply for your debt relief. Listen to the podcast below for some great insight on student loans and getting them paid off.. (2) Take the relief and keep after it to pay that loan off. Do whatever it takes, figure out a side hustle you can do, throw bonus money at it and stay on a budget to up those payments. It will help you get control of your wealth and better set you up for retirement long-term. You do not want to be in your 40s/50s and still carrying the burden of that degree you got over 20 years ago.

When my wife and I married, not long after college we took on her student loans together, I believe the payment was around $200 a month (She was really good, went to in-state, worked her way through college and took only the minimum she needed). While my memory is not perfect on this one, i know it was only about 3 years or so before we paid these off. If you have the opportunity to consolidate these and bring the payment/interest down, DO IT. Most of the time you must do this That was the first step we took, since I believe she had 2 separate ones. Once we had them consolidated, just seeing the bill every month started to irritate me. So after receiving my work bonus one year, we talked it over and threw a large chunk at the loan just to finish it off. We never regretted that decision. It freed up some income for us and allowed us to buy our first home. Something we probably could not have done had we had that extra payment.

Finally, one last perspective to provide. The total cost of this relief is going to cost the US about $400 Billon, leaving our total student loan debt still up to $1.3 Trillion. It is only going to impact about 29% of those that have borrowed money for loans. Leaving many to still carry the load. Within about another 3-4 years we are going to continue to be back to where we started this year. Why? Because there needs to be larger action, bigger changes. The crisis is because of the way the loans are given out, the colleges are milking you and your children because they know the payments are guaranteed. We need to stop the unnecessary borrowing. There are billions of dollars of scholarships that go unclaimed every year and even though you may make good money, you are unable to save for your kids because of the loans, or unable to buy/save for a house because of loans. We need to shift our perspective on colleges. Go to those schools that are affordable, if the demand for those high priced schools go down, the tuitions will start to come down. Stop our kids from going to big schools because of sports or other programs, but go for the education that they actually need, not the experience. No experience is worth 10-25 years or more of payments. In many cases you just do not need a degree to get into a field. Get to work and get after it.

I’d love to hear your thoughts on this or anything else. Give me a comment or shoot me an email, would love to hear from you. Here are some great Student loan resources for your pleasure.

RECOMMENDATIONS:

Borrowed Future: You can find this on Amazon, AppleTV, Roku, Google or anywhere else. It was rated as a top documentary this year and is all based on the Student Loan Crisis. It is worth the watch for $5, and even better with your kids.

Choose FI: The Student Loan Reset. Lots of great information in here to help you get those loans paid off and on you path to financial freedom.