There is No Student Loan Crisis
The reality of college debt and steps to address it.
It seems like everyone is talking about the student loan crisis…
“Here’s why America’s $1.5 trillion student-loan crisis has spiralled out of control” - MarketWatch
“Overcoming the Student Loan Crisis” - Dave Ramsey
…who is to blame for it…
Parents are largely to blame for the student loan crisis - New York Post
Colleges Shouldn’t Escape Blame for the Student-Debt Crisis - National Review
…and how they will solve it if they become President
The 2020 Presidential Candidates’ Proposals For Student Loan Debt - Forbes
What everyone seems to be missing is that there is no student loan crisis. Some individual borrowers are certainly hurting, but the country as a whole is not at risk from these loans. Quite the opposite. The percent of college educated Millennials is higher than any other previous generation, which generally indicates much higher lifetime earnings, especially as they advance in their careers.
Why the Crisis is Overblown
Everyone loves to throw around the fact that the total student loan debt in the U.S. is $1.6 trillion. This number seems very big and scary when shown by itself and out of context, but let’s put it up so some other numbers that help contribute to the $70 trillion in total debt in the United States.
As of June 2019, there is currently $22 trillion in federal debt, with over $16 trillion “held by the public”. Federal debt has equaled or exceeded GDP since 2012. This is up from the mid-60% range just prior to the Great Recession. The highest it has ever hit was 121% in 1946, when were dealing with the effects of financing World War II.
Businesses have $9 trillion in corporate debt, which has helped fuel the stock market rally and economic expansion due to leveraged stock buybacks. Corporate debt to GDP is now significantly higher than its former peak before the 2001 dot com bust.
American families have a total of $12.2 trillion in non-student loan household debt, including
- $9.65 trillion in total US mortgage debt
- $1.28 trillion in auto debt
- $850 billion in credit card debt
Mortgage and auto debt are funding depreciating assets, with no value creation. Credit card debt can fund a variety of items, but the interest rates are extremely high.
Lastly, states, cities, and towns owe a total of $3 trillion in municipal debt. Sure, this is oftentimes used to build bridges and roads, but when a interest rates rise, a recession hits, and the tax base dries up, how will they pay it back?
One thing to remember is that the financial crisis during 2008–2009 wasn’t caused by subprime mortgages. It started there, but it was caused by the derivatives that financial institutions took out on those subprime mortgages.
No one is slicing up student loans, like they did with shitbag mortgages, creating mortgage backed securities, putting them into CDO’s, lying about the credit rating, selling them at a premium, then betting against them by taking the opposite position.
If you really want something to worry about, check out what Wall Street is doing with collateralized loan obligations. These are basically the same thing as a CDO, but using corporate debt instead of mortgage backed securities.
Ponder the following questions.
Q: What happens when you can’t pay your mortgage?
A: You lose your house, your family hates you, and your credit gets jacked.
Q: What happens when you can’t pay your car loan?
A: You lose your car, may not be able to work, and your credit gets jacked.
Q: What happens when you can’t pay your credit card debt?
A: Your wages get garnished, your interest rate skyrockets, and your credit gets jacked.
Q: What happens when corporations can’t pay their debt?
A: The stock and bond markets go down, people lose their jobs, investors lose their retirement, and suicides rise. Oh, and after you get fired, your credit gets jacked.
Now as yourself:
Q: What happens when you can’t pay your student loans?
A: You call up Sallie Mae, explain your situation, fill out some paperwork, and get an Economic Hardship Deferment, for up to 3 years. Nothing immediately happens, and you have 3 years to figure things out! You know what else? You still get to keep the thing you bought, i.e. your education.
Once the $1.5 trillion in outstanding balances gets you interested, the next number people like to use is that the average student loan debt for recent graduates is almost $33,000.
I call bullshit.
Here’s the thing. Stats lie, all the time.
The article linked above shows that while the average student loan balance is $32,731, the median student loan balance is merely $17,000. The high debtors (like myself, with $134,000) are skewing the average to the high end.
The $17,000 median is the price of a new car, and not even a great new car. That’s less than a baseline 2019 Kia Forte. (My apologies to Kia, but my wife and I drive Subarus). Plus, your education stays with you forever and gives you a lifetime of benefits. Damn good deal, don’t you think?
Or take this one. “The average monthly payment among those currently in repayment is $393…” Wow, that sucks. I mean, everyone with student loans is paying $400, plus or minus?
NO! Not at all. The second half of that sentence is “…with a median monthly payment of $222.” Ah, that’s a lot better. That means half of everyone repaying their student loans is paying $222 or less.
Those are huge differences. Again, it’s all clickbait. Don’t believe the hype.
For the sake of argument, let’s assume that you’re an average student and graduate with the average student loan balance of $35,000 and receive an average starting salary of just shy of $51,000. Assuming you’re single and childless, your monthly payments look something like this.
- Standard 10-year Repayment: $403
- Old Income-Based Repayment (IBR): $312
- New IBR/Pay-As-You-Earn (PAYE): $208
By comparison, with a 5-year, 5% interest auto loan, your Kia Forte will put you back $336 per month.
If you are thinking about starting a family, check out this article about starting a family even with high loan debt. Long story, short, it’s not the insurmountable obstacle you might think it is. Nothing really is. Don’t say, “I can’t afford it.” Ask yourself, “How can I afford it?”
You need to start thinking of your student loan repayment situation as just one long game. There are two important takeaways from this viewpoint.
1. Learn about the system to fully understand your options.
2. Take the long-term view of a long-term investment.
Learn the Rules
scientia potentia est (knowledge is power) - Thomas Hobbes, Leviathan
First, this is a game. Sure, it has a huge impact on your life, but in reality, it’s just like any other game you might play, be it Spades or Fortnite.
My suggestion is to follow the second Marine Corps leadership principle, “Be technically and tactically proficient.” Both are saying the same thing: to win the game, you need to be well-versed in the rules and how to play.
You can’t just wander willy-nilly into a battlefield without training and expect to live. Likewise, you can’t expect to arrive on the other side of your student loan repayment and come out financially unscathed unless you know how to use the policies to your advantage.
Now, you’re reading this article or posting your questions on Reddit, which is great. But go deeper. Learn more. Know your options better than the CSRs at the loan servicers so you get the best outcome possible.
I’ve corrected both Nelnet and FedLoan about my monthly payment calculation half a dozen times, and it has saved me thousands in payments that I didn’t need to make.
Take the Long View
Second, you need to be in this for the long haul. Humans aren’t wired to think long-term, but you need to start. The financial benefits of a college education last a lifetime, so break the expectation that your student loans should be paid off within a few years of graduation.
Chris Rock said is best:
You know, some people say life is short and that you could get hit by a bus at any moment and that you have to live each day like it’s your last. Bullshit. Life is long. You’re probably not gonna get hit by a bus. And you’re gonna have to live with the choices you make for the next fifty years.
Just like the difference between carpe diem and YOLO, this long-term viewpoint is not a ticket for laziness. Rather, you need to actively plan for the high probability that will need to deal with your student loans for a significant portion of your life.
The standard repayment plan is 10 years. As mentioned above, that’s twice as long as the standard auto loan for the same price and similar interest rate. If you are fortunate enough to have some extra money (after establishing your emergency fund and maxing out your 401k match) and want to pay ahead, great! Just be aware of how the extra payments are applied, as the loan servicers are notorious for misallocating your extra payments.
You might be interested in refinancing to a lower interest rate with a private lender. While that sounds appealing, I steer people away from that for several reasons, but mostly because you lose several protections by being in the federal loan repayment system, such as access to Income Driven Repayment (IDR) plans, forgiveness programs, and overall flexibility.
Life doesn’t always go exactly as planned, and private lenders are much less forgiving than the federal government. The federal loan servicers are just inept.
If you are on an IDR plan, then you should pay the minimum, figure out how to get that minimum even lower, and plan for forgiveness after 20 or 25 years.
With this option, your loans are going to be a part of your life for a very long time. It’s best to just get used to them sticking around, but you should make them as painless as possible (i.e. lowest possible payment).
Make a plan. Execute the plan. Optimize the plan. Automate the plan.
Once you have done these four items, just be sure to certify your IDR plan annually and update any pertinent information that may be beneficial, like adding another family member. Don’t forget to save for the “tax bomb” upon forgiveness, as your forgiven student loan balance is treated as income the year it is forgiven.
PSLF or Other Forgiveness
For Public Service Loan Forgiveness (PSLF) or other non-IDR forgiveness programs, I want you to do the math before plowing ahead. Most people go into PSLF with a low-paying job right out of college, with no clue as to their future potential earnings. The assumption is that the entry-level pay is the best they can do, with only 2% annual raises for the rest of their career.
That couldn’t be further from the truth.
It might be best to start in PSLF, making sure that you actually qualify. However, if there is an opportunity in the private sector that would double your income, then it may be time to just suck it up, pay the 10-year payment, and move forward with your career.
A high student loan balance with a large payment and low income can be truly disastrous for a few people. However, I would wager that to most people, it only feels like a crisis, especially those first few years out of college.
If you are truly looking for a crisis to fight against, try some of these.
- The abysmal public school system that either pushes parents to enroll their kids at private school, or creates automatons that will just have their jobs eliminated by robots in a few years.
- The increase in medical insurance premiums, even in the age of the Affordable Care Act. This is effectively a tax on employees, reducing their purchasing power every year.
- The effect of processed foods on American public health since the early 1970’s shift in agricultural production, which has resulted in a national emergency due to obesity.
Meanwhile, take a deep breath a realize that you are probably going to be okay. Get all your info together, learn the rules of the game, and execute your plan.
Yes, student loans are a pain, but one you can cure with a little bit of patience and the application of a lifetime of higher income potential.
Don’t take my word for it. The Social Security Administration calculated the net present value (NPV) of the lifetime earnings one can expect with a bachelor’s degree. The result? An additional $260,000 for men and $180,000 for women. That pales in comparison to the NPV of just under $40,000 for the average loan.
Remember, this is NPV, so it is in today’s value of money. It is the equivalent of giving a stockbroker $40k in the morning and getting $260,000 later that afternoon. That’s a trade I’ll make all day.
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