Student Loan Debt and Options for Dealing With it
- Carter Hodgson
- Nov 27, 2023
- 3 min read
Ah, the beloved topic of student loan debt. Something that more and more students are accumulating as tuition rates at universities have skyrocketed in the past 50 years.
In fact, tuition has risen every single year since 1981 and has shot up over 20% in just the last decade.
Check out this link to see a graphical representation of the changes since the 1960’s. And to make matters worse, top universities in the US – like Emory – charge in excess of $75,000 before aid. That is an extremely large number, but Emory “only” costs about $23,000 on average after financial aid.
So, either way, you are likely going to leave college with a hefty amount of Federal student loan debt – but don’t worry, you are NOT alone as 34% of 18-29 years old report having student loan debt and the average bachelor's degree holder has over $30,000 in debt.
It is perfectly normal and OK to have student loan debt.
The most important thing is that you deal with it and create a plan to tackle the debt rather than let it perpetually accrue interest.
So, now you may be wondering what your options are to combat this pile of debt? Well, some of the most common avenues to improve your debt situation include paying it off with extra income, investing your money, refinancing your loan, and waiting for cancellation or forgiveness of the loans.
Paying it Off:
The most common method for repayment is simply by sticking to the scheduled payment plan and by paying more than the minimum amount due. Yes, sometimes you must do the hard work and keep track of your income and expenses, cut out any unnecessary expenditures, and allocate as much as you can to pay off your loans. Don’t underestimate the impact that paying off more than the required amount can have! For example, if you paid off an extra $100 on a $10,000 loan at a 4.5% interest, you would shave off over 5 years on a 10-year repayment plan!
Investing:
Rather than using your hard-earned cash to pay off student loans, you could put that money to work in an index fund, specifically one following the S&P 500. It has averaged a 10% return since inception in 1957, and significantly benefits from the power of compounding – money building on itself year after year. Considering that the average interest rate on student loans is between 5-7%, it may be wiser to try to earn a 10% return on your money via the S&P 500.
Similarly, if you invested $10,000 in the market, compounding at 10% per year for 25 years, you would end up with $120,569. Alternatively, if your $10,000 student loans compound at 6% over a 25-year period, you would only end up at $44,560. This is a huge discrepancy and should be heavily considered when thinking about your student loans. However, you must realize that investing does not mean that any returns are guaranteed and there are several confounding factors like taxes, time horizon, and forbearance/deferral of payments that may affect your decision.
Refinancing:
Moving your Federal or private student loans to a provider with a lower interest rate could save you $100s to $1,000s of dollars over the length of your loan. For example, moving from an 8% annual interest rate to 6% could save you $1,000 a year on a $50,000 loan. And these savings are just over a 1-year period. It is prudent to consider looking at private providers like SoFi, LendKey, or CollegeAve and see what interest rates they offer if your current interest rate is rather high (7% and up).
However, be aware that many companies will require credit scores in excess of 700, steady income, and other pre-requisites to qualify for a good rate. Additionally, switching from Federal loans to private loans disqualifies you from participating in many Federal relief programs like PLSF (mentioned below) and other Federal debt forgiveness policies.
Cancellation/Forgiveness:
This method is mainly based on having faith in the government. Biden recently proposed a bill that would have wiped out up to $20,000 of student loan debt per borrower. Unfortunately, this bill has been struck down by several courts and is currently being adjudicated on. However, even if Biden’s bill does not go through, this is a major win for the student loan forgiveness movement as the issue has drawn much needed attention to the subject. Additionally, there are other programs like the PSLF that allow for the forgiveness of debt if you work in a qualifying government or non-profit organization for 10+ years. There is also the IDR plan that puts limits on how much discretionary income you must put towards student loan payments (5-10%) where a certain amount is discharged after enough years of payment.
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