A Personal Perspective on the Next Financial Crisis
It’s been said that excessive unpaid student loan debt will lead to the next financial crisis, on the heels of the still faltering housing market and the mortgage crisis. When I examine my own struggles with educational loans over the last 15 years (and counting), it’s hard not to agree with these speculations.
I was the first person in my immediate family to go to college. Growing up, my parents instilled in me their dream that I would pursue higher education, find a rewarding career that would allow me to live independently, and ultimately have an easier life than they did. I was often told by my mother that a college education is something that no one would ever be able to take away from me.
I was very fortunate to have graduated from a public university with a bachelor’s degree and no real debt. Along with a small scholarship I had earned, my parents paid my tuition and a good deal of my room and board. I also worked part time during college waiting tables to contribute to my living expenses, car insurance, books and spending money.
During my graduate school years, I accumulated a master’s degree, an MBA, and over $90,000 of student loan debt. At the time, I was still too inexperienced with money to understand fully the impact that this would have on the rest of my life. When I finally got into the job market, I realized quickly that I needed to consolidate all the loans if I had any hope of making even the minimum monthly payments. Once I did that, I was locked into an interest rate of over 7% over the 30-year term of the loan. There were periods of time in my early career when I wasn’t able to make the payments, so I would arrange a deferment or forbearance to temporarily reduce or suspend payments. This only made things worse, since depending on the terms, the accumulating interest continues to add up and is added to the loan principle. After the end of my last forbearance, my total debt had climbed to just over $100,000.
Fortunately, the degrees I earned were in marketable fields, and I have enjoyed a stable career where my income has gradually increased. I haven’t missed a payment in ten years, but until very recently, the principle on the loan only decreased by a few dollars each month. The other kicker is that if you are fortunate enough to be enjoying a nice return on your student loan investment in the form of good income, you will likely not be able to deduct any of the interest from your federal income taxes. You are also unable to refinance the loan, as you can with a mortgage, in order to take advantage of lower interest rates. Once you consolidate, you are locked into that rate.
Recently, I was able to leverage the equity in our home to help provide some much-needed hope. I transferred almost half the outstanding debt to our equity line of credit. Lowering the interest on that portion by 4% and also allowing us to take advantage of some tax deductions means I can chip away at the principle much faster.
There is simply no magic bullet to eliminating this debt. I am currently paying a total of $2500 each month. Part of it goes to the equity line of credit, and the rest goes to the oppressive student loan lender. I have figured out that if nothing goes wrong, I will have it completely paid off in five more years.
When I see today’s young people fighting tooth and nail to get into prestigious liberal arts colleges that can cost upward of $50,000 per year to attend, I have to fight to not give them a lecture about the school of hard knocks. Unless you’re going to school for a degree that is likely to result in a high-paying job, it’s simply not worth it. Sometimes, I even see parents going into debt rather than tell their child to attend an affordable public university. I wonder if their kids will then turn around and fund their parents retirement.
As for me, I have mixed feelings. I earned the degrees because I wanted a nice career. Now, I am stuck working long hours, commuting long distances to an office everyday, and still not living high on the hog because a significant portion of my pay is going towards debt. However, I have been intellectually challenged, seen parts of the world I never thought possible, and had the chance to work with some world-class people. I am respected at my job and feel valued knowing that I have opportunities for growth in the future. I got married recently because I really wanted to be with my husband, not because I needed another income or health insurance. One day, hopefully in five years, I’ll be able to step back and find out what it is I’d really like to do with the rest of my life.