The Student Loan Debt Problem, My Perspective

The Student Loan Debt Problem, My Perspective

Today’s post is a special post for a couple of reasons.  

First, this is my 50th blog post.  It’s hard to believe I’ve written about that many things.  I started with about a dozen or so posts when the site launched and have been adding a post every week since then, and now it’s up to 50!  Thanks to all those who have been reading and following along.  58 of you have subscribed to the blog and receive an email update every time I publish a post.  I would love to grow that number to 100 subscribers by the blog’s 1-year anniversary at the end of May.  If you enjoy the content, you could really help me reach this number by sharing my posts on your social media accounts.  All you have to do is click on one of the social media icons right under the picture that I always put at the end of every post.

Second, I have been wanting to write about this topic ever since I started the blog.  However, I wanted to wait until I had finished paying off my own student loans before writing it, not only as a goal, but I also wanted to feel like I had some credibility when talking about this subject.  And since I am publishing this post today, you can probably guess what that means.  WE FINISHED PAYING OFF OUR STUDENT LOANS!  This was the last debt that we had other than our home mortgage, so it’s an exciting milestone for us on our journey towards financial independence.

With that, let’s start talking a little more about student loans.  The goal of this post is NOT to be a comprehensive review of the past, present, and future student loan debt situation in our country.  Likewise, I don’t pretend to have the answer to this complex, multifactorial problem.  However, having had student loans, having paid off student loans, and having counseled people with student loans, I have developed some thoughts on this important subject that I want to share since it is such a key part of many people’s financial lives.  Likewise, having a plan to deal with student loans will be a crucial part of becoming financially independent for many people.  

The Problem

To begin, here are some statistics pertinent to student loan debt in the United States:

• Over the last 30 years, the cost of college tuition has been increasing at an average of 7 to 8% per year, double the average rate of inflation of 3 to 4% per year (Source: www.edvisors.com)

• From 1989 to 2016 the price of college has been increasing 8 times faster than wages (Source: www.forbes.com)

• At the end of 2019 the total student loan debt burden in this country was estimated at $1.56 trillion distributed among 45 million Americans (Source: www.forbes.com)

• The average student loan debt per borrower in 2016 was $31,172 (Source: www.credit.com)

• The average student loan debt of those graduating with graduate degrees in 2016 was $82,800.  This is an average of all advanced degrees and also includes undergraduate debt.  Here are the averages for specific advanced degrees (Source: www.nerdwallet.com):
  • Average dental school debt: $292,169
  • Average medical school debt: $196,520
  • Average veterinary school debt: $183,014 (graduate degree only)
  • Average pharmacy school debt: $172,329 (graduate degree only)
  • Average law school debt: $145,500
  • Average MBA debt: $66,300

These are some sobering statistics.  

With regards to student loans, I had it relatively easy compared to many.  I had full tuition scholarships to both college and medical school.  Yet, we still ended up with more than $220,000 in student loan debt.  How does that happen?  

Well, even though I had my tuition paid for, we borrowed $40-45K per year for living expenses during my four years of medical school.  Then, during my seven year residency we put our student loans in deferment and forbearance without making any payments.  Over those seven years they grew (compound interest working against us), and that ultimately resulted in more than $220,000 in student loan debt.  If you want to read more details about my journey, check out my My Path to FI posts.

Fortunately, my education resulted in a job with a higher salary, which has significantly helped us dig ourselves out of that student loan debt hole.  But what about those that are six figures plus in student loan debt and only make $50,000 a year?  What about those that have significant student loan debt and don’t even finish their degrees?  

Over the last several years as I’ve focused a significant amount of energy and money into paying off our student loans, I’ve thought a lot about our country’s student loan situation.  Many people feel it is a crisis that could quite possibly lead to the next major economic recession.

If you do internet searches about our county’s student loan debt problem, you will most likely come across the statistics I have listed above.  While these are all large sums of money, it can be hard to understand how this translates into every day life.  I think it is much more helpful to break things down and consider how these debt burdens affect people in their daily lives.  Let’s use my student loan experience as a benchmark and starting point.  

My minimum payments were ~$1150 per month.  At an interest rate of 5%, that would have taken us 30 years to pay off my loans completely if we never made any extra payments (the average term of student loans is 10-30 years).  And I don’t care how much money you make, $1,150 per month is not an inconsequential amount by any means.  That’s more than our home cost us each month when we lived in Rochester, MN.  

What if someone had $220,000 in debt but only made $60,000 per year after taxes (which is a pretty good salary and above the U.S. median since we are looking at an after tax amount)?  You may think this is extremely unlikely, only doctors and other high income professionals have this much student loan debt.  Let me assure you this is not the case.  

Consider a young woman that attended a private university, borrowing $25,000 per year for the 4 years of college.  She wishes to further her education and borrows $40,000 per year for a 3 year graduate degree program.  This adds up to $220,000. Finally, she takes a job she loves working for a school district making $60,000 per year.  We have a family friend in a very similar situation.  

If she makes $60,000 per year after taxes, this breaks down to a take home pay of $5,000 per month.  If she had to pay $1,150 per month, that would be more than 20% of her take home pay (23% to be exact)!  

This type of debt burden can limit every financial choice she has in her life.  What house she can buy (can she even buy a house?), what car she can afford, what vacations she can take, her ability to save for her own kids college some day, her ability to save for retirement, and ultimately her ability to become financially independent.  And this struggle will go on for 30 years if she only makes the minimum payments.  And given that it is already 23% of  her take home income, it would be understandably difficult to pay any more.

 And there are many situations much worse than this.  Just this last week I saw a YouTube segment from Dave Ramsey about someone that had $385,000 in student loan debt and only made $50,000 per year.  These are numbers that are unfortunately becoming increasingly more common.  To pay that amount off in 30 years with a 5% interest rate would take a minimum monthly payment of $2,066, which would be more than 40% of her take home pay.  Hopefully you can see how crippling this amount of debt can be.  

This piece of paper they receive at graduation is not a ticket to a better life, but rather a contract for indentured servitude masquerading as a diploma

Now, there is even a million dollar club (not the kind you want to be in, these are individuals with $1,000,000 or more in student loan debt) with more than 100 members.  Episode #59 of the White Coat Investor podcast talks about one of them, Dr. Mike Meru, who is an orthodontist with more than $1,000,000 in student loan debt.  He was featured in an article in the Wall Street Journal.  At a 5% interest rate, he would have to make payments of more than $5,000 a month for more than 30 years to pay off this much debt.  

And these problems only seem to be getting worse. 

False Beliefs

At the root of this worsening problem are what I think are a set of false beliefs.  There are certain attitudes and ideas surrounding education and student loans that have evolved over the last several decades in our country that simply aren’t true, at least not anymore.  These false beliefs dictate our collective behavior, which in turn propagates this ever growing problem.

Here are three false beliefs that I feel lie at the heart of our student loan crisis in this country:

False Belief #1: Get the best education you can, no matter the cost

For generations we have been taught to get the best education we can.  Go to college.  Get a degree.  Become a teacher, an engineer, a doctor, a lawyer.  Education is so important that is should be obtained by any means necessary.  It will not only better yourself, but our society.  Education has essentially become deified.   

This school of thought has been dubbed the education gospel by economist W. Norton Grubb and historian Marvin Lazerson.

I admit that I had subscribed to this educational philosophy as well.  This is what I grew up believing.  I thought I had to get into the best schools possible in order to be successful, no matter the cost.  But as I have increased my financial literacy and counseled with people about their finances, my eyes have been opened to the crushing weight of overwhelming student loan debt for so many Americans.  

This is a point that actually really frustrates me and breaks my heart.  I see so many people that want to better their lives and try to do so by obtaining an education.  They believe in their heart of hearts they are doing a good thing.  But they are so focused on the end goal, subscribing to the doctrines of the education gospel, that they blindly push forward selling their souls in the process.  They fall prey to the marketing of higher education institutions.  They believe they need to go to the most prestigious college or university based on its ranking on some list.  Or worse, they enroll in a for-profit university based on an internet marketing campaign and end up paying two to three times more for their education.  And of course it is all possible through obtaining student loans.  In the end, despite these pure intentions, many of them find that this piece of paper they receive at graduation is not a ticket to a better life, but rather a contract for indentured servitude masquerading as a diploma.  

At my stage of life, having gone through 15 years of post-secondary education and training, working as a full time neurosurgeon for nearly 6 years, and now having paid off almost a quarter of a million dollars in student loan debt, I have come to two conclusions that refute this false belief.  

First, COST DOES MATTER.  We can no longer as a society blindly advocate for education without considering the long term financial consequences of its cost.  

I am still very pro-education.  I strongly believe that improving ourselves through both formal and informal education is a key part to being self reliant, living a full life, and ultimately becoming financially independent.  However, education cannot come at any cost.  You wouldn’t buy a house or a car or make any other large purchase without considering the cost of what you are buying.  Education should be no different.  But because we believe we are bettering our future and doing “what we are supposed to do” this critical aspect of the decision is too commonly overlooked.

Second, we place too much emphasis on where the education comes from.  I will readily admit I used to think this way.  I thought that the better the reputation of the school, the better the education and the more likely you were to succeed.  I thought that where you did your schooling and trained would somehow define you, that it would dictate how people identify you and see you.

I can’t speak for other fields, but in medicine I can tell you that my experience has been the exact opposite.  Can you guess how many patients have asked me where I went to college or medical school?  Zero.  Can you guess how many times I have walked into the operating room and the anesthesiologist asks me where I did my residency?  Zero.  No one cares.  As long as you are properly credentialed to do your job, that is all you need.  And this is because there are accrediting bodies that insure the training we receive at any accredited institution adequately prepares you to do your job.

So this obviously begs the question of why we spend so much money on “name brand” schools.  Most proponents of this cite the networking opportunities these schools provide.  I would argue that with the exception of a handful of top tier universities in the country, no amount of networking justifies the astronomical price tag.  

False Belief #2:  Student loans are the normal way/only way to pay for higher education

This false belief is perhaps best summarized by a Dave Ramsey quote: 

“Debt is so ingrained into our culture that most Americans can’t even envision a car without a payment, a house without a mortgage, a student without a loan, and credit without a card.”

Debt has unfortunately become so normal that most of us don’t even think twice about it.  This is especially true if we believe we are going into debt for a worthy cause.  Most people would agree they feel some degree of guilt or admit they aren’t being wise with their money when they go into debt for a luxury car or a vacation they can’t afford.  These are consumer purchases.  However, taking out student loans is “investing in my future.”  After all, student loans are considered “good debt,” right?

It seems to have become the cultural norm to assume you have to take out student loans to go to college or receive a graduate degree.  I am guilty of this to some degree as well.  This way of thinking was part of my financial paradigm when I started medical school.  Although I had a scholarship to cover tuition, we simply defaulted to taking out student loans for our living expenses.  I don’t remember even looking for other ways to help meet our expenses in an effort to reduce the amount we would have to take out in student loans.  It was so easy to take out the loans.  Just sign a few papers and you don’t have to think about money anymore.  At least that’s what I thought.  

The truth is that there are many other ways to fund higher education:

1. Grants
2. Scholarships
3. College savings from parents/grandparents
4. College savings as a kid growing up
5. Money from working a part time job as a student
6. Money from parents’ current income
7. Student loans

I believe the right way to fund higher education is by tapping into as many of these sources as possible, in roughly this order when possible.  This means turning to student loans last and in the smallest amount needed, rather than first and as the primary source.  

When pressed, I think most people would agree with this line of thinking.  Then why do so many people rely primarily on student loans to fund their higher education?  There are likely many reasons. 

First, it is certainly easier to just get student loans.  You do a little bit of paperwork, sign in a few places, and POOF! you get the money.  It goes along with the attitude I see in too many people today, especially the up and coming generation: get what I want now with minimal effort, worry about the consequences later.  Applying for scholarships is much harder.  You have to write essays, get transcripts, and obtain letters of recommendation.  Who wants to do that kind of work?  I did.  And I can tell you that even though it took hours upon hours of work, it was definitely more money per hour than I could have earned any other way with my skills at the time.  And in the long run it has saved me hundreds of thousands of dollars.

Second, people don’t believe they qualify for any scholarships.  If they aren’t a super athlete or national merit scholar, they don’t believe any scholarship money is available to them.  This couldn’t be further from the truth.  How many times have you heard about the millions of dollars of unclaimed scholarships every year?  Does it take some work to find them.  Absolutely.  But if you apply to enough of them, you are bound to get some scholarship money, which I am willing to bet pays off more per hour in effort than flipping burgers.  

Third, parents haven’t been planning ahead for college.  They haven’t been saving to help with their kids’ higher education expenses in savings accounts or 529 plans.  

Fourth, parents haven’t encouraged their kids to save some of their own money for college either.  This not only leaves kids without some of their own money to contribute, but also cheats them out of the financial lessons they could have learned by saving for a future goal.  

Fifth, such a large percentage of our country is living paycheck to paycheck and sinking further into debt.  These parents likely aren’t saving enough for retirement (which should come first), let alone have enough money left over to contribute to their kids’ education.

Sixth, many parents and students argue that there isn’t enough time to have a part time job and go to school full time.  They say things like “I want my student to focus on school and not have to worry about a job.”  I couldn’t disagree more.  College should be a training ground for life.  When students have to learn to balance school and work, they learn how to find balance later in life.  And contributing income from a part time job to their education forces them to have some skin in the game.  I consistently worked part time jobs while in college and believe the skills I learned in prioritization and time management were every bit as important as what I learned in my classes.  

There are likely many more reasons people default to student loans that we haven’t discussed here, but the bottom line is that we shouldn’t believe that student loans are the normal way or the only way to pay for higher education.

False Belief #3:  Once I finish my education and get a job, everything will be fine

This might be the most dangerous false belief.  Many students believe there is a happy ending, regardless of the school they attend, the amount of debt they take on, and the career they choose.  And I get it, they are full of youthful optimism, as they should be.  They believe they are working hard, doing the right things, and everything will work out.  They believe they will all be successful.  And many will.  Unfortunately, however, this is not always the case.  The harsh reality is that each of these decisions are extremely important with long lasting consequences.  

If you choose to attend a small liberal arts college or expensive private university because you liked their brochure, thought the campus had pretty trees, or liked the football team, instead of your local state school where tuition is subsidized, you could end up with a bill for the cost of attendance tens of thousands, or even $100,000, more.  

If you choose to take on an excessive amount of student loan debt rather than tapping into multiple ways to fund college like I’ve listed above, it could burden you financially for decades.  It could prevent you from purchasing a home, traveling the world, and becoming financially independent.

If you choose a career in a field you love, but it is extremely difficult to find a job or earn enough money to make a living, you may be forced into a completely unrelated career and be miserable.

And if you make poor choices across the board here, choosing a degree in a field where you can’t find work, at an extremely high priced institution, and fund the entire thing with student loans, it could be financially devastating.

I don’t want to seem all doom and gloom here, but these decisions are really important and not enough thought goes into them on the front end.  Part of the problem is that teenagers are not mature enough yet at age 17 or 18 to make these major financial decisions.  They have little life experience living independently and can’t possibly be expected to fully understand the consequences of these choices.  They are used to struggling to find loose change for gas money and Taco Bell, not making $50,000 or $100,000 decisions.  It all seems like Monopoly money.  I know, I was there once too.  But let me assure you, it is real money and lenders expect to be paid back.

Another problem is with the student loan system.  No consideration is given to future earning potential, resulting in graduates with student loans that are multiple times their future annual salaries.  If you apply for a mortgage or car loan, you better believe they are going to want proof of income.  Then why not student loans?  Again, everyone assumes they will be successful and be able to pay the loans back.  No one expects to be the person in financial ruin because they can never get out of student loan debt.  Just like no one takes out a small business loan expecting to fail. 

What Can We Do?

Now that we’ve discussed some of the basics of the student loan debt problem, as well as some commonly held misbeliefs, what can we do?  I don’t mean at a societal level, like forgiving all student loan debt, expanding the public service loan forgiveness program, or instituting income share agreement plans (ISAs).  I’ll leave those discussions to the politicians. 

I’m asking what we can do as individuals. Here are some action items that each one of us can do today to help address the student loan problem in our own personal spheres.

#1 Pay off your own student loans

Most of my readers are already finished with their schooling and the decisions about choosing a college, a career, and whether or not to take out student loans are far in the past.  

If you have already paid off your student loans, congratulations.  If you currently have student loans, then I believe the best thing you can do is develop an aggressive debt repayment plan and get rid of them.  JUST DO IT!  It will require discipline, sacrifice, and hard work, but it will be worth it.  I will be publishing a post on strategies to help pay off debt very soon.  

If you have federal student loans and work for the government or a 501(c)(3) not-for-profit organization , then you may qualify for the Public Service Loan Forgiveness (PSLF) program.  I don’t know much about PSLF since I have not pursued it, but in a nutshell you have to make 120 consecutive income based monthly payments and then the remainder of your federal student loan debt is forgiven.  While there are many technicalities and hoops to jump through, as well as uncertainty about the future of this program, if you potentially qualify I think it is worth checking out.  

#2 Strive to be responsible as parents

While the decision to take out student loans for ourselves is water under the bridge for most of us, we can certainly strive to be responsible as parents so we can help our kids as they reach this stage of their lives.  

We need to have our financial houses in order to be able to help our kids with the cost of their education.  As I’ve written about before in my post Please Secure Your Own Oxygen Mask First, it is important to be on track in your own retirement saving before you start helping your kids financially.  Make this one of your goals as you create and modify your own financial plan.  

Don’t get overwhelmed by the increasing costs of higher education.  Of course it is intimidating to think about having to save $50,000 or more for each child for college.  Many parents see figures like that and don’t even bother to try.  But whoever said you had to pay for the whole thing?  Every little bit helps.  So start getting your financial house in order today, so you can help with the cost of college for your kids tomorrow.

#3 Shift our paradigm of educational success

Another thing we can begin doing today is shifting our paradigm of educational success.   What do I mean by this?  We can stop putting so much emphasis on the prestige and reputation of a school, and more emphasis on the value you get.

For many, being able to say you or your kids go to a “name brand” school is just another way of keeping up with the Jones’s, and it comes at a significant price.  And the sad part is, as I discussed above, in the long run no one really cares.

As we discuss college with our kids, I think it is important to talk about the cost of the education, and the value you get for the price.  I have started to try and emphasize this with my kids.  I want them to know that the reputation of the school is not the most important thing, which is what society may tell us, and what I mistakenly used to think.  

There is nothing wrong with going to community college for a couple of years and then transferring to a university.  There is nothing wrong with getting a huge tuition break by going to your in-state public university.  These students will have a huge financial head start since they won’t be burdened with excessive student loans for the next 10-30 years.  

Conversely, I don’t think there is anything wrong with going to a more expensive private university, but it should be done with eyes wide open, understanding the long term potential financial consequences.

#4 Expect more of our kids

Finally, I think we should expect more of our kids.  Why do so many parents feel like it is doctrine that they have to pay the entire cost of a college education for their kids?  For many, this may financially be out of reach.  And for those that can, if they pay the entire bill in full, I feel like it could actually hurt their kids in the long run.

I strongly believe our kids should be involved in the process.  Like I said above, they should have some skin in the game.  It gives them some ownership over their own education and future.  It teaches them to be more responsible and self-reliant.

I would recommend starting young by teaching our kids to save a percentage of the money they earn and putting it towards future goals like college.  Even if it is only a small amount over many years, you are teaching them how to save money and keeping them involved in preparing for their own future.

As they are getting ready for college they should be applying for scholarships.  Enduring the pain of writing personal statements and essays can really pay off.  Remember, this is a numbers game, meaning they will likely have to send in many applications if they expect to be awarded a scholarship.  But a scholarship or two will not only likely pay more per hour for the work put in than an entry level job, it will also be a way to build their resumé.

Finally, we should expect them to work while a part time job while in college.  Even if this is just so they can earn “fun money,” it teaches them so many important life lessons.  

Conclusion

Student loan debt is a major problem in this country for millions of Americans.  Odds are that they are or were a significant part of your financial story as well.  They have certainly been a part of mine.  

I am worried about the trickle down effects for those that are overly burdened with student loans.  They can’t save for retirement, can’t save for their own kids college, and can’t reach FI while this monkey is on their back.

As you look at how student loans affect your own finances, and the future of your kids, here are some take home points to consider:

• If you currently have student loans, make it an aggressive part of your financial plan to pay them off and get them out of your life.  You will never reach financial independence with this noose around your neck.

• Recognize that their are some widely held false beliefs surrounding student loans that lead to poor financial decisions.  Let’s teach our kids to see things as they really are.

• There are many ways to pay for higher education, and some combination of those ways is probably the best plan.  If we plan our finances years in advance for both ourselves and our kids, exercising discipline and hard work, we can help them to have little or no student loan debt like so many in our generation.  

Thanks for reading.  I hope you are doing well in your progress towards reaching FI.  If you have any questions or comments that might help other readers, please list them below.  In the meantime, keeping working towards Freedom Through FI!

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