The Student Loan Curse

student loan curseDebt is a terrible burden to carry around, it can be harmful both financially and psychologically. Student loan debt is especially corrosive since it acts as a significant inhibitor to wealth accumulation.

The Max Your Freedom household graduated with over $100K in student loan debt about 15 years ago. It didn’t take too many student loan payments to realize that this type of debt had to get kicked to the curb, and quickly!

One of the first actions we took was to refinance the loans to a more reasonable interest rate. This helped to cut down our loan payment, and helped us pay off our loans within 5 years.

Since our loan payments accounted for ~20% of our total monthly budget at the time, this freed up quite a bit of cash flow to help us accelerate our net worth growth. But only because we saved that extra  cash over the years, and didn’t squander it.

Student Loan Debt Facts

Unless you came from money, or your parents were wise enough to save for your education, the odds are high that you’re one of the roughly 42 Million Americans with student loan debt, according to this Huffington Post article.

That debt adds up to $1.3 Trillion, which is an average of ~$30,000 per student. In fact the Median Debt is $31,941 per student.

student loan debt average

That debt has been increasing, while median wages have effectively stagnated during the same period.

Taking on a student loan to position yourself for a decent paying job used to be a pretty good bet. The debt itself accounted for only 29% of your yearly wage back in 1990, so you had a fairly decent chance of paying it off in a reasonable amount of time.

Flash forward 25 years, and that proportion increased to 74%, with many people well north of that value. This puts the value of some college degrees, and the associated student loan debt in question.

College Degree Value

Unfortunately for some, not all college degrees are created equal. I’m not going to debate the merits of one degree vs. another, it’s too subjective of a topic when people’s interests and passions are taken into consideration.

I can however make a very objective observation as to the monetary value of one degree vs. another.

I’ll use my own household as an example, since Mrs. Max and I took different paths with respect to our college education. This is not meant as criticism of one path vs. another, only a pragmatic analysis to help demonstrate a point.

Student Loan 1:  Student Loan Debt @ $20,000 / First Yearly Wage @ $48,000

Student Loan 2:  Student Loan Debt @ $80,000 / First Yearly Wage @ $34,000

To keep things simple, we’ll run the numbers ignoring taxes, expenses, and other annoying details.

Student Loan 1 Value Proposition:  @ $4K/Month Earnings. Student Loan 1 can be paid off in 5 months.

Student Loan 2 Value Proposition:  @$2.8K/Month Earning. Student Loan 2 can be paid off in 28 months.

The value or investment potential of one student loan vs. another can vary drastically. In the example above, one loan is ~6X more valuable than the other. Or viewed another way, Student Loan 2 inhibits wealth at a 6X factor.

Student Loan Debt Opportunity Cost

Imagine a foot race, with three competitors. One competitor has no chains and weights attached to their ankles, they can take off running out of the gate.

The other two competitors both have a ball and chain around their ankles, except one of them is at a 6X disadvantage.

They can each potentially catch up or beat the debt free competitor, but the odds are stacked against them. They’ll need to be financially aggressive, and committed to eliminating the debt ball and chain as quickly as possible.

Let me quantify the opportunity cost for our household, as a result of student loan debt.

Our combined monthly payment was $800/Month during the 5 years it took us to pay off both loans. Had we started our careers debt free, we could have invested that cash instead during those 5 years. This would have earned us close to $60,000, using the returns from that period.

If we had taken that $60,000 after 5 years, and parked it until full retirement, our net worth advantage would be over $1,000,000. That’s a significant opportunity cost!!

Minimize the Student Loan Curse

A past discussion with a Max Your Freedom blog reader made me wonder about opportunity costs relative to student loan debt. That discussion is what inspired me to write this post. Just like our household 15 years ago, this reader’s household carries a substantial amount of student loan debt.

It’s their single largest obstacle to financial freedom. The only way to remove the curse completely is to pay off the loans, or hope for some type of loan forgiveness. In the meantime however, there are some deliberate actions similar households can take to minimize the impact.

The two specific strategies I’ll be referencing are student loan consolidation and student loan refinancing. The latter is a strategy I used to reduce our monthly payments during the 5 years it took us to pay off those loans.

Both strategies basically involve lowering your student loan interest rates. Every penny saved on interest rates, reduces your opportunity cost, and minimizes the impact of the dreaded student loan curse.

With interest rates set to start rising again, locking in a lower rate now can make a big difference.

Student Loan Debt Hack

Lucky for those 42 Million individuals, there are online platforms today that can be leveraged to easily refinance or consolidate student loan debt. This is much easier than when I had to call various institutions to take care of ours.

Much like online savings rates, interest rates can vary from one place to another, so it’s worth doing some homework to see if you can save some money.

One of the new platforms available to make your life easier is LendEDU. They offer a FREE personalized student loan interest rate comparison tool, which has saved people $13,948 on average.

The way they accomplish this is by partnering up with some of the biggest names in student loan refinancing:

You fill out a free application, with no obligation, and let their partners compete for your business.

The application process itself is very simple, and consists of a questionnaire which asks some basic questions about your personal situation, starting with the type of degree and loan amount…

lendEDU review

lendEDU review

You’ll need the following information to complete the comparison:

  • Zip Code
  • Legal First & Last Name
  • Home Address
  • An E-mail & Password for Access

They’ll do what’s called a “soft credit check” using your name and address to verify your credit score, which has no adverse impact on your actual credit rating. It’s similar to what’s done during a background check when you start a new job, or applying for a rental.

And that’s it! It takes less than 5 minutes to potentially save thousands of dollars!

If I use their average savings of $13,948, that would translate to an opportunity cost of over $600,000 in net worth over a 40 year period.

If you’re still hacking away at your student loan debt, you should really look into LendEDU or do your own negotiating.

Final Thoughts

I have to admit that running that opportunity cost analysis on our student loan debt was sobering. I don’t like dwelling on the past, and once our student loans were paid off I never looked back. But this exercise was an eye opener for me. A $1M potential net worth disadvantage is a pretty big deal. I’m glad our savings rate helped to boost our net worth and ultimately overcome the deficit.

It’s crazy to think that there’s over 40 Million people still dealing with student loan debt.

Some of the loan amounts I’ve come across during casual discussions are quite humbling. There are no easy ways to combat the student loan curse, but there are plenty of ways to minimize the damage. If you’re carrying large student loan debts, you should investigate all available options to lower your burden.

Anything you can do to increase your cash flow is worth looking into.

I added LendEDU to my list of recommended services since their platform was one of the simplest I’ve come across, and since student loan debt is likely an issue for many readers of this blog.

** Updated for 2018

Readers, are you still struggling with student loan debt? Have you tried to consolidate or refinance your loans to lower the burden? Do you feel like student loan debt puts people at a disadvantage relative to FIRE? Any other tips on removing the curse? Share your thoughts and comments below! – Max 

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One thought on “The Student Loan Curse

  1. I was blessed with parents who felt an obligation to pay for their childrens’ college costs. In return, I paid for mine. A nice “pay it forward” approach that worked for me. I realize most aren’t so lucky, and I really do worry about what the student debt crisis will lead to economically. Major issue.

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