| Jonathan G. Cameron, CFP® |
According to CNBC, there is more than $1.2 trillion in outstanding student loan debt, owed by 40 million borrowers, who have an average balance of $29,000.
Do You Have Student Loan Stress?
Large student loan balances can be a significant cause of stress. Stress over loans can lead to resignation. “I’ll have student debt forever” is a refrain I hear from some clients. Resignation leads to denial and even inaction. Are you in this progression? Does this sound like you or someone you know? Are you a number of years out of college or graduate school, yet it doesn’t seem like your loan balance is coming down?
Student Loan Stress: Don’t Deny it; Own it
Your mindset about student loans is crucial. Most importantly, own it. The loans are yours. You chose to make a strategic investment in yourself by taking on student loans. Accept this fact, and make a plan of attack to repay the loans.
The #1 piece of advice I give clients who have student loans is, “Don’t allow your debt to oppress you.” Self-oppression will hinder you not only from paying down debt faster, but it causes stress that adversely affects other areas of life. By making a plan, you’ve addressed one of the most significant causes of student loan stress – not knowing.
Be in control of your student loans, rather than letting loans control you. Even if it takes 20-30 years to pay your balance off, just work the plan. Leave it boxed up on the top closet shelf. Don’t revisit it until you get a raise (or your cash flow has increased in some other way) or you’re rid of it. You may have no option but to live with your loan for many years, but you’re either in control or you’re not.
Paying $150 More Per Month Lops off 11 Years of Payments!
For example, say you’re 24 years old and have a loan balance of $100,000 at a rate of 4.53%. This is the rate for new undergraduate subsidized lending in 2020. If you paid $500 per month you’d pay off the loan in approximately 29 years. Maybe that’s all you can afford for now. Maybe you’ll get a pay raise next year, or you change jobs. But if you can pay $650/month, you pay off in under 18 years. That $150 difference just lopped off 11 years of payments! That’s huge!
Remember that interest is assessed on the unpaid balance. The larger the payment you make, the larger proportion of each payment going to principal reduction. Even if you are on an income-based repayment plan, the interest still accrues at the stated rate. Using the example above, the interest on the loan will be $4530 on an annual basis. So if you only pay $200/month, that’s $2130 short on the interest alone. What happens? The unpaid interest gets capitalized, meaning it gets added to the loan balance. So next year your loan balance is $104,530. You haven’t made any headway! In fact, it all got worse!
The word to the wise, then: pay at least the interest each year to keep the loan balance from growing, even if it is more than the income based repayment plan calls for.
Should You Consolidate Loans?
Be careful here. Maybe some types of loans are able to be forgiven after a number of years, and others, notably private loans, are not. If you have, say, 3 loans, we like the victory achieved by paying the smallest balance loan first, and then rolling that payment amount into the next smallest loan, and so on. That psychological victory is powerful!
The other caveat I’d mention here is that generally the amount of loan forgiven becomes a taxable event in that year. This begs the question: do you want to owe your loan servicer or the IRS?
If you need help, meet with someone who can guide you to develop a plan of attack. You’ll find answers to many of your Frequently Asked Questions here. Also you may find Student Loan Forgiveness Programs helpful.
