You may have read articles blaming many factors for the disappearing middle class in the United States. While automation, outsourcing, high executive pay, low middle-income pay and taxes are all reasons cited for this problem, I believe the single biggest factor is debt. I can think of no better way to give the middle class a boost than helping people save by minimizing their debt. Making the right choice about student loan repayments is one of the best ways I know to do that.
As I posted recently, we have hit a new record debt level in the United States. And while that spending helps to propel the economy and increase shareholder value, it does so to the detriment of household balance sheets.
One of the largest debt markets now in our country is student loan debt, which today stands at over $1 trillion.
I help make up that market. When I graduated from law school I owed roughly $250,000. This included debt for my undergraduate and law degrees.
I am happy to say that in about three more years, if not sooner, it will all be paid off. With interest, I will have likely paid in the range of $350,000 to $400,000 for my college education.
While the education has helped my earning power immensely, it would be great to have a house with no mortgage, or to have an investment portfolio I plowed those payments into that would be worth maybe a quarter of a million dollars by now.
With all that being said, I still feel lucky. I am happy that I can still earn enough over my lifetime to pay off my loans, save for retirement, and have enough left over for some of life’s luxuries. Many of my classmates haven’t been as fortunate.
The Case for Borrower Education
First and foremost, we need better borrower education. Right now schools counsel students before they graduate about the debt they have. These meetings are not well run and having spoken with students who recently went through the process, they don’t seem to understand their debt any better.
I believe we need to be sitting down with parents and students BEFORE they borrow and continue to educate the students about personal finance throughout their time in school.
Here is just one example I use in my undergraduate financial planning classes.
You can see from the monthly payment that a student left on their own will more than likely choose the extended repayment plan with the payment that is almost half of the standard plan. Making this choice, though, at 22 or 23 years old, and not having the financial acumen to know to pay more as you earn more, will leave this student paying about three times more interest over the life of the loan.
The Choice That Could Cost You 30%
We need to encourage students to choose the standard repayment plan even if they have to struggle to make the monthly payment, or at least take a graduated repayment option where you pay less in the beginning, but much larger payments later on. Twenty five years is too long to be paying back student loans and at too high of a cost.
When looking at the total cost of the education in dollars, it is easy to see how much more we are paying for the luxury of a lower monthly payment; $60,746.40 for the standard plan vs. $79,173.00 for the extended – that’s a difference of more than 30%.
More difficult choices when borrowing, and more difficult choices when paying back loans are two remedies that can help stop the disappearance of the middle class.
Making the right choice will save you thousands in student loan costs.
If you haven’t recently reviewed your financial plan you should contact your CERTIFIED FINANCIAL PLANNER™ Practitioner.
If you aren’t currently working with a CERTIFIED FINANCIAL PLANNER™ Practitioner you can learn more about my practice HERE or you can find other CFP® Practitioners HERE
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