On a recent Money Mastermind Show we had on an interesting guest, Zina Kumok of debtfreeafterthree.com. Zina's claim to fame is paying off $28,000 worth of student loans within 3 years of graduating college.
On the show we discussed quite a few topics surrounding student loan debt, including just how accepted it is these days to take on a mountain of student debt and how too many students go to school without a plan for their future career or how to pay off their student loans.
I think we all agreed on the show that how you pay off your student loans is a pretty personal decision based both off of math and psychology. For Zina, she wanted to pay off her loans as fast as possible, to get rid of the near 7% interest loans she had taken out. Miranda Marquit, a regular on the show and a contributor to this site, was on the other end of the spectrum. Her loans were sub 2% in interest, and she plans on paying the minimums until it's paid off – investing her extra money instead.
Today I thought it might be interesting to take a look at some facts surrounding student debt, talk about the pros and cons of paying off your student loans as fast as you can, and then look at what some of the options that people have when it comes to their student debt.
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Student Loan Facts & Figures
Student debt has been growing over the years, faster than the inflation rate. According to the economist, since 1983 college costs have risen at a pace almost five times the rate of inflation.
..the cost of university per student has risen by almost five times the rate of inflation since 1983, and graduate salaries have been flat for much of the past decade. Student debt has grown so large that it stops many young people from buying houses, starting businesses or having children.
Not only has the cost of college risen, but more people are having a hard time keeping current on their student loans, in part because graduate salaries have been so stagnant.
The Project on Student Debt, a non-profit, says that 15% of borrowers default within three years of entering repayment. At for-profit colleges the rate is 22%. (source)
Here are a few more factoids about student loans and student debt.
- Costs to attend college have more than doubled in the past decade.
- Average debt of 2014 U.S. four-year grad $33,000.
- Average debt of 2014 Canada four year grad. $26,000
- According to the College Board, 4 years of tuition and fees at a private college will cost about $129,700. In 18 years it will be around $312,200.
- Tuition and fees at a public university (in-state resident) currently costs about $38,300. In 18 years it will be closer to $92,200 (source).
- A Discover Loans study found that 47% of parents said that their kids should pay part of their own way. Some said their child should be solely responsible for paying for school (15%), while other said their kids should foot most of the bill (32%) for their college education.
College costs more than ever, and on top of that more parents are saying that their kids should have at least some part in paying for their own education. Since most students aren't independently wealthy, that means that many are having to pursue alternate methods of financing their education including scholarships, grants and (shudder) student loans.
Should You Pay Off Your Student Loans?
When you talk about whether or not you should pay off your student loans, people usually come down in one of two camps. “Yes, you should pay them off quickly” or “no – you should take your time”. Some things to consider when deciding whether or not to pay off your loans:
- Interest rate: If your loan as an extremely high interest rate, you're likely better off doing your best to pay it of fast as quickly as you can.
- Opportunity cost: What is the opportunity cost of not investing when you're younger? Are you missing out on compound returns you might otherwise have had by investing earlier?
- Personal debt tolerance: Are you allergic to debt like me? Or are you OK with carrying some low interest student loan debt?
- Psychological boost given by paying it off: Many people will get a psychological
Yes you should pay them off quickly
Those in favor of paying off the loans argue that any debt is dragging you down and holding you back, even if the interest rate isn't that high. It's a constant weight on your shoulders and a psychological drain. You're better off paying it off as quickly as you can so that you can feel the freedom of not having that debt anymore.
No, you should pay the loans off over time
Those in favor of just paying the minimums on student loans often argue that it's the lowest interest debt you're likely to have, and you can probably make more in the stock market by investing. Pay the minimums, and invest the rest. If you have a higher tolerance for carrying debt than others, it might be something to consider.
Get Your Finances In Order – Before & While You're In School
For me, the idea of taking out a ton of student loans is abhorent, and I think most people would be best served by planning out their future – at least to some degree – before they go to school.
Have a plan before you go to school
Think about what you want to do for a career, and choose a school, major and cost that is suitable. If you're getting a liberal arts degree like I did, you don't need to go to an ivy league school. Just go to an in state school with lower tuition. If you're going to school for a STEM degree – you may want to consider a better school, but still remember to do your research and find the best school for your money. The most expensive school is not always the best.
Have a budget and don't overspend when you're in school
Once you're in school, you'd be best served by making sure you have your finances in order. Most students are not keeping a budget and tend to overspend when it comes to discretionary spending (40% of student income goes to discretionary items such as entertainment, apparel, services, travel, vacation). The result is they take out too many loans and spend too much money that they'll have a hard time paying back once they graduate and find the job market is tougher than they thought.
Here are some things you can do when you're in school.
- Get a basic no-fee checking and savings account.
- Figure out how to do a budget.
- Track your income and expenses when you first start school. (YNAB4 budget software is free for students!)
- Figure out how much you’ll need for the basics. Set aside a little for fun. Don't allow yourself to go overboard.
- Don't overspend – and do your best not spend “extra loan money” if you have it.
Strategies For Getting Rid Of Student Loan Debt
So what are some things you can do to get rid of your student loans as fast as you can?
- Take extra money and put it towards debt payoff: If you get extra windfalls of unexpected money like a bonus or a tax refund.
- Get a short term part time job to help pay it off: If you're extremely motivated to pay off a loan, you might consider getting a part time job on the weekends or evenings, and putting the money towards debt payoff. Or start a blog!
- Make it a line item in your budget: Make debt payoff a line item in your budget, and budget for an amount that is larger than the minimum payment, even if only a little bit larger.
- Make it a game: Turn paying off your student loans into a game, trying to figure out when you'll pay it off, finding ways to get extra money to put towards the debt and then having a reward once you finally do pay it off.
- Consolidate loans: If you have multiple loans you might want to consider consolidating your loans with a service like SoFi, especially if you can get a lower rate on all of the loans. Be wary of just wrapping all the loans up into one for convenience, however, if they don't all have a lower rate afterwards. Check out recommended service SoFi for student loan refinancing here.
- Loan forgiveness programs: If you meet the qualifications for certain programs you can have portions of your student loans forgiven. For example, one program for teachers will forgive up to $17,500 in loans if they teach at certain schools for a full 5 years.
Be creative and you'll find ways to make the loan payoff happen sooner!
Have your own strategies for paying off student loans? Tell us what they are in the comments.