Days away from her 40th birthday, Anna is struggling to make ends meet. With her finances strapped, she is driving a 10-year-old Toyota, living in a studio apartment, and limiting every expense—from groceries to entertainment to her cell phone and streaming plans. She had not anticipated penny-pinching at this point in her life.
How did she get here? She invested in a coveted advanced degree at a top-notch design school. While it seemed like a great idea at the time, it never occurred to her that her student loan of $32,000 would ever, or could ever, become an albatross in the form of a $90,000+ loan balance that is dragging her down today. Even more alarming is how quickly Anna’s student loan balance compounded to become her financial nemesis. Twelve years after receiving her degree, her debt has nearly tripled.
If you or your children are drowning in student loan debt, you know just how overwhelming it can be. And you have plenty of company in your misery. In the 1990s, the average college student graduated with about $10,000 in student loan debt. Today, that number has risen to more than $30,000, outpacing both credit card debt and auto debt. It’s no wonder that managing student loan debt has been a hot topic during the democratic primary debates. Senator Sanders has proposed forgiving every penny of the $1.6 trillion of outstanding student loans. Senator Warren has introduced the Student Loan Debt Relief Act to forgive a portion of student loans for more than 95% of borrowers.
Back in the late 1960s, our rallying cry was “the personal is political.” Today, student loan debt is a massive personal problem. During prime earning years, when one needs to be saving, investing, and compounding returns for retirement, many are doing the exact opposite. And like any debt, the longer you carry it, the more it snowballs—and the bigger that snowball becomes, the more difficult it is to get back to a place of financial stability and confidence. Until society accepts that our collective accumulated education debt is a burden on the economic health of our nation, there will not be the political will to create global, sustainable solutions. Until then, it’s on you to address it as a personal problem. Here are a few ways to get started:
- Pay as much as you can, as soon as you can.
Five years after graduation, 50% of student loan recipients are only paying interest on their student loan debt. Why is that a problem? Because interest accrues on your principal balance every day, so even though it feels like you’re paying toward your loan when you pay the minimum amount, the balance is growing rather than shrinking. (Just ask Anna!) Student loans have no prepayment penalties, so there is no downside to paying off your debt as fast as possible. Paying even $100 extra each month can help lighten your load. Remember: today’s miser is tomorrow’s millionaire.
- Apply for an income-driven repayment plan.
Income-driven repayment plans adjust your payments based on a percentage of your discretionary income for 20 to 25 years and then forgive your remaining loan balances. There are different plans, including Income-Contingent Repayment (ICR), Income-Based Repayment (IBR), and Pay-As-You-Earn (PAYE). Do the research to determine which plan is best for your needs. One word of caution: each of these plans requires you to pay income taxes on the amount of debt forgiven. While paying taxes alone is certainly better than paying the full loan amount, careful tax planning is needed to avoid major tax headaches in the future.
- Refinance your loans.
One of the easiest ways to reduce your total payment amount is to refinance any and all outstanding loans. While the interest rates for federal student loans aren’t bad with subsidized loans for undergraduates sitting at 4.53%, the rate for unsubsidized graduate student loans is 6.08%, and parent loans are even higher at a rate of 7.08%. No matter which type of loan you have, it’s likely that you can reduce your rate by refinancing. Student loan refinancing rates start at just 1.99%. This article on NerdWallet offers a nice breakdown of lenders as well as a refinancing calculator to show you just how much you can save—no matter how much you owe.
- Look (carefully) into the Public Service Loan Forgiveness (PSLF) program.
This option sounds almost too good to be true and, sadly, it often is. While it was designed to forgive student loans for those who work in public service for at least ten years, the program has been highly problematic, with less than 1% of applicants approved since the program’s inception in 2007. That makes counting on PSLF a pretty risky proposition, especially knowing that loan debt will continue to snowball during that decade-long period of working, waiting, and wondering. If public service is your passion, it may be a good fit, but be sure you know the rules well before choosing this option.
- Contact the Consumer Financial Protection Bureau.
Unless you earned your degree in finance, trying to learn the language of student loans can make you feel like you’re back in your old college dorm—even as you struggle to pay the bills! One great resource (for this and all other types of debt) is the Consumer Financial Protection Bureau. Whether you are deciding how and how much to borrow for school, or you’re creating a payoff plan that works for you, the CFPB can help.
If you’re a student or a parent considering taking on new college debt, look carefully at your options and make a choice that will give you the optimum return on your education investment. When you don’t have the financial resources to pay the price of a private or public university, consider alternatives such as attending a community college for two years and then transferring to a UC or private college to complete your degree. Learn all you can about student aid eligibility and Expected Family Contribution (EFC). Choose a program that offers financial support to reduce what you’ll owe down the road. (For more on this, see my blog post from way back in 2015: Money lessons from a recent high school grad.)
If you have student loan debt and are looking for the light at the end of the tunnel, I recommend asking a financial advisor to help you navigate student loans. In Anna’s case, we worked together to explore all aspects of her financial situation and analyze her options. We began by looking at her loans to understand what was subsidized, what could be refinanced, and how to apportion funds to each loan balance. Then we created a spending plan that gives her an exact date that she’ll be debt-free. She’s not out of the tunnel yet, but she has the confidence to know she’s on the right track. And she smiles because her personal albatross is shrinking every single month. What a great way to begin a new decade!