Get Smart about Student Loan Debt

Million DollarsThere are a lot of very intelligent, well-educated people who are complete ignoramuses when it comes to student debt.  Note being an ignoramus just means that you’re ignorant, which is curable with a little knowledge.  Unfortunately all the knowledge you normally get from the financial aid office is that you qualify for a certain amount of debt.  You don’t find out about the effects of debt on your life until later when you’re starting your first job.  You then start a blog about how sad your life is because of your student debt.   There are plenty of blogs about that, so let’s see if we can avoid you getting into that situation in the first place.

Things to understand about student debt (and loans in general):

The larger the loan compared to your payment, the more interest you’ll pay.

  If you have $250,000 in loan debt and you are only paying $1000 per month,  probably $820 of that is interest on the loan.  This means that you’re only reducing your debt by about $180 per month for the first few years.  To understand why this is the case, realize that the interest added each month is just your rate divided by 12 times the amount you owe.  So a $250,000 loan at 4% would have 0.04/12*250,000 = $833 added to the loan each month.  The rate at which you pay it off will increase with time, but don’t think when you’ve paid for twenty years on a 40 year loan that you’re anywhere close to halfway done.

You’ll pay twice for each thing you buy on student debt for each 15 years you take to pay the loan off.

Decide to buy a latte with your student loan money?  That will be $21 please.  Need to get away for Spring break and airline tickets are $500?  That will be $2000 please.  Because you’re paying interest for so long, even at a relatively low rate you’ll be paying a lot of interest on those purchases.

Before you sign on the line, do a payback analysis.

Often when you go to college, money becomes no object.  Well, it should be, especially given that for most majors where you went to school will mean far less than what you come out knowing.  The only exception might be that some snooty law firm might only hire Ivy League graduates.  So before you decide to go the $120,000 per year private school instead of the $20,000 per year state school, look at the time to repay.  Just divide five times the yearly loan amount (assume you’ll take five years) by expected yearly salary, then multiply by four ( this assumes you’ll use 1/4 of your salary to pay off the loan).  For example, if you’re getting a degree that will cost $100,000 per year and you’ll get a job paying $50,000 per year, that would take ($500,000)/$12,500) = 40 years to repay!

If you’re looking at debt forgiveness, realize that you’re asking taxpayers to pay for your college.

Recently the government enacted programs where student loans will be forgiven after a certain period of time for people who go into careers like teaching and non-profits.  Realize if you do this, however, it is you and everyone else around you who is paying taxes that is paying for your college education.  You are taking welfare for your education.  If that doesn’t sit well, maybe look at a different path (like a cheaper school).

Keeping your student debt down

There are certainly lots of ways that you can minimize your student debt, or even go without student debt entirely.  These include:

  1.  Minimize your tuition by going to a state school.
  2. Look at community colleges for the first year or two, where the teachers are generally better for the basic classes and you can live at home and avoid room and board (plus you get to avoid dorm living).
  3. Go into research careers, like science and engineering, if you want to go to graduate school since you can generally get your tuition paid if you do research that people are willing to pay you to do (sorry sociology majors).
  4. Pay for your own room and board through a part-time job, summer jobs, money from parents, or work-study programs instead of adding these costs to your loans.
  5. Take a big load and get done fast.  If you can get done in four years or less by taking 21 credits per semester, do so.  It costs the same after 12 hours, so the extra hours are free.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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