Debt Repayment


Last November, I ran a marathon. Specifically, I ran the New York City Marathon.

For those of you thinking “she’s a lunatic,” I can only respond that running a marathon is much like paying off debt. Unless you’re trying to be Paula Radcliffe, there’s a lot to be said for the slow and steady approach. I reached the finish line in under five hours, but it took six months of training and some tedious long runs.

Unless you inherit a pile of cash, paying off a large pile of debt takes a lot longer than six month. This is why everyone should approach education loans with caution.

Because unlike a marathon, you can’t drop out. Student loans are almost never wiped away in bankruptcy filings. They must be paid before you put food in your mouth (or your child’s mouth) or shelter over your head. Sometimes you can take a vacation from paying your loans through forbearance, but guess what? That costs you too. Interest continues to accumulate on those loans until you decide to get serious about them.

If you’ve taken private loans to pay for college, you may forfeit the ability to take a vacation from paying them. If you do, you’re likely to end up paying a lot more than you originally signed up for.

So evaluate those private loans carefully, and make sure that the end result is worth taking the risk. If you’re going to come out of school making $40,000 a year in annual salary, you should not be taking on twice that amount in loans. Doing a little math can save you a lot of heartache down the road.

If you’ve already taken those loans, though, there’s no choice but to tough it out. Or leave the country. According to CNN.com,

To date, there is about $60 billion in defaulted student loan debt according to Chris Lang of the New York-based debt collection agency, ConServe. But while skipping town to avoid paying student loans isn’t very common – Lang estimates that only about 2% to 4% of delinquent student loan debt is owed from students abroad – for some, it seems like the only way out.

Honestly, for “Chris,” the guy interviewed for this article, staying abroad is probably the best option.

Chris (who doesn’t want his last name used) graduated with about $160,000 in student loan debt with a master’s degree in music.

“At the time I thought I could handle it. I thought the most I’d be paying was $600 a month,” he says.

But his payments were $2,400 a month. So Chris started looking for jobs overseas. He thought he’d be able to earn more and pay off his loans. But it didn’t turn out that way. His salary was even less than what he was making back home.”

Chris’s payments for his education are far beyond what most music grad students make in a single month, much less leaving anything for food or rent. Now, Chris doesn’t appear to have been particularly analytical about the amount of debt he was taking on or the returns he could expect on is education investment. This was not smart. But neither is a system that penalizes students for seeking degrees with no chance of escape the debt they incur along the way.

For many people, the amount of debt taken on during college or grad school determines their options for the rest of their lives.

For most of us, paying down student debt is going to be more time-consuming than running a marathon. Trust me – paying down $12,681 in student loan debt has taken a lot longer than it took me to train for and run a marathon. And I still have over $18,000 to go. But having done the marathon, I know I can pay this off.

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I read a lot about personal finance. Ever since taking a class as a high school student about personal finance, I’ve been one of those weirdos who actually enjoys budgeting. When you don’t have a lot of money it’s a challenge; when you do, it’s even more of a challenge. (More on this in a later post.)

The best personal finance writer in existence is Liz Pulliam Weston, hands down. You don’t have to agree with me, but I’ve read her work for years now and I think that she has a wonderful ability to balance deep analysis of complex problems with compassion for fallible human nature. But her real talent lies in her ability to do both of those things and still pick readers up by the collar and give them a swat in the behind to get moving – in articles of two pages or less.

She’s a genius.

Anyone – students, parents, would-be grad students – thinking about student loans should first read Liz’s article, “How Much College Debt is Too Much?”. I wish I had before making my college selection,¬† especially since I didn’t have a very good sense of what it was going to cost me to attend that “experiential” school.

Had I known I would wind up $31,000 in debt, I might have reconsidered.

As Liz shows, going into serious debt for college degrees that don’t pay well make life pretty difficult long after that last keg-stand.

At 8%, each $1,000 you borrow will cost you about $12 a month to repay, assuming a 10-year loan. If you’re a student and you borrow the maximum allowed under current federal student loan programs […] your monthly payments will be around $276.

That payment level should be manageable if you’re making at least $33,000, which means you’d better be an accounting or business major. Starting salaries in those fields range from about $36,000 for business administration types to $43,000 for management-information-systems graduates.

Liberal arts grads, on the other hand, generally have to settle for salaries under $30,000 to start.

Beginning pay for psychology majors is about $26,000, while English majors are getting about $28,000. At those pay levels, you’re better off borrowing no more than about $18,000 over your college career. [emphasis mine]

Did ya get that? Tech jobs pay. Business administration and accounting pay less well. Forget psychology; even English grads do better. And I had $31,000 in student debt and was very lucky to find a job paying exactly that starting salary. In the most expensive city in the country. Was I an idiot or what?

Don’t be like me.

If you’re looking at attending one of the most expensive colleges in the country, you are going to need either a substantial trust fund or a financial aid package offering something close to a free ride to pay for it. Before you sign on the dotted line, ask yourself this: am I willing to spend the next twenty years paying for four years of self-discovery?

What if you want to go to grad school? What if you want to buy a home? Even if those ambitions aren’t on your radar yet, how about having the flexibility to quit your job and travel? What if you can’t find a job or get laid off?

Come hell or high water, those student loans must be repaid.

Education is a product that schools compete to sell to you. Rather than approaching school with some arty notion of experiences and developing self, think about choosing a college in terms of buying a car. You want the very best model you can afford, one that will last you a long time. One that won’t cost you a fortune in repairs. One that looks nice is preferable, of course, but you want a car that’s going to get you places. Which means that you really shouldn’t be shopping for a Porsche when a Honda best fits your budget.

If a college really wants you, it will provide its services at no or at reasonable cost to you. If it’s the other way around, you’d better make the experience so good¬† that the sacrifices you’ll have to make for the rest of your life seem still seem worth it in twenty years.

Having BTDT, I would not recommend that path. There are many experiences in life. Why limit yourself to a life of debt slavery when there’s so much more to experience?

This isn’t to say that you shouldn’t take out loans ever. My point is that if you are looking at an associate’s or bachelor’s degree, you shouldn’t be taking on $30,000 or $50,000 in debt. When student debt is used judiciously, it dramatically increases your standard of living. When abused, it becomes an anchor preventing you from living a full life.

Student loans are often called good debt, but no debt is good if it consigns you to debt slavery. I see a lot of students who gamble heavily on the value of their degrees. If you’re going to gamble, know your chances of winning and bet accordingly.