In the winter of 2011, I learned that the love of my life had over six figures of student loan debt. She was starting her MBA holding a bachelor’s and a master’s degree in engineering and entering the professional workforce. Both degrees came at a price. In the process of earning her degrees, she had racked up nearly $120,000 in student loan debt by the age of twenty-three. Fortunately for us, I graduated with identical credentials and had only accumulated a mere $10,000 of student loan debt, mostly due to scholarships. While we both earned our MBAs, our interest continued to accrue and our total burden of debt peaked in May 2013 to almost $150,000 – essentially the average American mortgage loan, without the house!
Not so shockingly, my now wife joined the growing echelons of students saddled with enormous debts after earning their degrees. Our story of student loan debt is not unique. In 2016, 70% of college graduates exited school with student debt – totaling 43 million student loan borrowers in the United States. All of this debt in the U.S. totals $1.4 trillion dollars in loans, and it is growing at a rate of about $3,000 per second! The average 2017 graduate will leave school with over $37,000 in debt and an average payment of almost $400 per month! Of the students that graduate with secondary or professional degrees (such as doctors), more than half have over $100,000 in student loan debt and more than 30% have over $200,000 in debt. Year-after-year, these statistics continue to rise, making a frightening situation for most young professionals trying to start their careers. It is no wonder in the recent Princeton Hopes & Worry survey, for the fifth year and a row, parents and student say debt is their biggest concern about going to college. (https://www.princetonreview.com/college-rankings/college-hopes-worries)
Fast forward 5 years and as of May of 2018, we are now debt free and decided to share our story in a book with the world! When I first found out about my wife’s debt issues, I went into full on panic mode and started drilling her with questions. After about fifteen minutes, it was obvious she had her head in the sand about her loan situation. This is by far the most important step to getting your situation under control – figure out your state of affairs.
The first thing we did was spend an entire weekend combing through her eight different loans to figure out loan sources, principle and unpaid interest, interest rates, fixed vs. variable loans, and general repayments terms. Only with this knowledge were we able to assess the situation and create a plan.
The second thing that we did was to create an old fashioned budget. Except in this version of a budget, there was one ginormous line item under expenses labeled ‘minimum student loan payment.’ This served two purposes: it forced us to look hard at our spending habits and it showed how much money we had at the end of each month after all expenses including student loan minimums. This magic number was the amount of money we could pay extra each month to aggressively crush our student loan problem.
The third part of our strategy was to set a goal. One that was tough, but realistic. For us, that meant eliminating nearly $150,000 in less than 5 years while getting married, buying a house, and living our lives the way we want. This was an extremely lofty goal, but one that we were fortunate to accomplish by following these steps.
Using publicly available calculator tools (or ours http://student.byeloandebt.com/calculators), you can determine the monthly payments required to meet your goals. This is called an amortization table. Before executing on this plan, you have to tilt the odds in your favor by any means possible. The main way to do this is through a beautiful tool called loan consolidation. Once you have graduated and have a job, showing an income and having credit will do amazing things towards your loan terms. For public loans, you can automatically consolidate all loans into a monthly automatic payment and get a 0.25% reduction on interest. For private borrowers, showing your income and credit could dramatically reduce your interest rates. My wife had some private loans that were over 10% and she was paying $10,000 a year in interest alone. After graduating and consolidating her loans through Wells Fargo, we reduced this interest rate to 5%, a huge savings. Lastly, you can even re-consolidate some public loans into private loans at a lower interest rate. We used a company called SOFI to take my wife’s 6.5% public loans down to 5.1%. These changes might not sound huge, but it means the difference of paying thousands less in interest every year. It could be the difference between meeting your goal and not.
The last part of our plan was to take action. Once you have determined your loan and budget situation, reduced your interest rates as low as possible, created a budget, and determined how much extra you can pay a month, you finally are able to execute on a plan. If the monthly payment goal you established creates a mismatch from the net income your budget allows, you have four choices: 1) You can increase your income (side hustle) 2) cut expenses 3) reset your goals to be in line with your situation or 4) employ alternative solutions.
The last option includes forbearance, flexible repayment plans, or forgiveness options, such as the Public Service Loan Forgiveness (PSFL) plan. Depending on your life choices, there are numerous options to employ to lessen or eliminate your loan burden. My sister for example, is a pathologist who is employing the Public Service Loan Forgiveness (PSFL) program. This program will forgive all public student loans for those doctors that work for a qualified employer (most non-private practice facilities). Since she will be spending 6 years in residency and fellowship, she just has to be sure to commit to being employed by a hospital, rather than private practice, for her first four years of practice. In addition, by pairing this strategy with the Pay As You Earn (PAYE) program, it allows lower income workers to cap their loan payments at just 10% of their discretionary income and never more than the minimum 10 year repayment plan. This is generally a fraction of the overall payment for high debt borrowers. Most residents will qualify for this program if they have significant debt levels. After 10 years of very low payments relative to the borrowers overall debt burden, the remaining loan balance will be completely forgiven! This is one of many forbearance, flexible repayment plans, or forgiveness options that can be employed to lessen or eliminate your loan burden. If you are yet to complete your degree, alternative schooling options, scholarship opportunities, and a host of other methods can also help you avoid debt before you get into it in the first place!
While student loans can be a significant burden for many graduates, if you understand your goals and your entire loan situation you have numerous options at your disposal. Eliminating this burden will allow you to live your life that you sacrificed years to have!