The $2 Million Dollar Mistake

Listen. Can you hear it? It’s that time of year again. Hallmark has filled the shelves with “congrats” cards and “Pomp and Circumstance” will be played thousands upon thousands of times over the next few weeks. Break out the cap and gowns; it’s graduation season.

In the spirit of the season, I’m dedicating the next few blog posts to sharing advice for high school graduates. If you know any soon-to-be graduates, make sure they tune in. And, much of the advice will be useful for us old folks too.

In the last post, I discussed how to go to college debt free. After posting, I realized I neglected to explain why it is so important to avoid student loans. I bet many of you could give me an earful of reasons based on personal experience. But the reasons may not be so obvious to a 17 or 18 year old. So, let’s talk about it about now.

Let’s look at one reason a teenager may think student loans are no big deal. “Everybody takes out student loans. You can’t go to college without them”. Well, that’s almost right. According to The Project on Student Debt, seven in 10 college seniors (71%) who graduated last year had student loan debt, with an average of $29,400 per borrower. So, yes, most students have student loans, but that doesn’t make it a good idea; we’ll see why in a minute.   And you certainly can go to college without them; my last post touched on how.

Let’s look at some math. The average student loan is $29,400, current federal student loan interest rate is 3.86%, and typical term is 10 years. So, this means the average student will pay roughly $300 per month for 10 years to pay off the loan.

Hmm, but what if this same student had zero in student loans after college. Same degree, same earning power, no debt.   Let’s call him “weird” student. What if he took that same $300 per month and, instead of paying back a loan, he invested it in a mutual fund. Let’s assume this mutual fund has an average rate of return of 12%. Guess how much he would have after 10 years? About $65,000. To sum it up, “average” student gave away $300 a month and after 10 years had $0 to show for it. “Weird” student invested $300 a month for 10 years and ended up with $65,000.

Guess what happens if “weird guy” never adds another dime to the $65,000 but keeps it invested at 12%? In another 30 years when he’s ready to retire he’ll have almost $2 million. Who’s ready to be weird?

Here’s another common excuse. “It’ll be easy to pay off once I’m making the big bucks after college. It’s an investment in my future.” Oh, really? Then why did more than 600,000 federal student loan borrowers who entered repayment in 2010 default on their loans by 2012, according to The Project on Student Debt?  I bet every one of them thought it would be easy to pay off too.

Why so many defaults? I don’t know the exact reasons, but here are just two possibilities. First, maybe the big bucks job wasn’t as easy to find as they thought. According to a CNN article, recent college grads face a 36% “mal-employment” rate, meaning they were in jobs that don’t require a college degree. News Flash: Having a college degree doesn’t guarantee you a high paying job, especially in the short run. Having a degree in a marketable field certainly improves your chances, but there are no guarantees.

Here’s another possibility. Student loans weren’t the only debt this student had. Maybe he added credit card debt and a new car payment into the mix, because, hey, he’ll be rolling in dough after graduation. Time to look at the math again, dough boy. The average starting salary for a new grad is $45,000; let’s assume his monthly take home pay after taxes is $3000. Let’s assume a $200 minimum monthly credit card payment and a $500 car payment to go along with the $300 student loan payment. That leaves $2000 for rent ($800), utilities ($200), groceries ($300), gas ($200), smart phone ($100), car insurance ($200). So now we’re down to $200 for things like clothing, eating out, entertainment, vacation, haircuts, hobbies, etc. Not a lot of wiggle room. If this new grad isn’t doing a monthly budget, he probably doesn’t realize how little wiggle room he has and even if he does, one little “emergency” and wiggle room is gone. Suddenly, when the monthly student loan payment is due, there’s no money in the checking account to pay it.

Proverbs 22:7 says “the borrower is slave to the lender.” When you’re a slave, your freedom is limited; you don’t get to make your own choices. This is indeed true for student loans.   You are stuck with a payment for 10 years, more if you miss payments or only make partial payments.   The book Smart Money Smart Kids states “In a survey of recent graduates with school debt, 47 percent say they are putting off buying a house or car, 76 percent are putting off saving for the future, and 35 percent are putting off starting a family.” Many college graduates feel called to the mission field but can’t go because of student loan payments. Others want to be a stay at home mom but just can’t afford to. Slaves to debt.

If you’re about to enter college or are in college, please don’t become a slave to debt. Let me help you find ways to go to school debt free. If you’ve graduated and are struggling to pay off student loans, it’s time to find freedom. Let’s get you on a plan to get those loans paid off as quickly as possible.

Know a graduating high school or college senior? Need a gift idea? How about a financial coaching session? Contact me for details!

Let’s hear your student loan stories!