Student Debt and You.

If you are younger than 35 years old in 2015, in another word if you are a Millennial, probability is high that you are still paying off your student debt. We are often told that aside from a mortgage student debt is the only good debt to have. Why is that? Having a student loan means that you made an investment in yourself. You trust yourself for taking full advantage of the opportunities that this costly education offers and that the return on investment -ROI- cannot simply be calculated by considering only your potential salary. Furthering your education is 100% worth it. One could think that if education is so worth it, who cares about about the amount of money you borrow? Wrong. There is no such thing as good debt. Debt is debt. Stop fooling yourself and pay it off ASAP.

What student loans truly means.

Few years back I made the acquaintances a young colleague fresh out of college. After a couple of times we went out to lunch, the topic of personal finance and debt came out. She told me that she and her husband had a student loan debt of $90,000 and this was just for their bachelor’s program. Her husband was now pursuing an online master, which would add an extra $30,000 to the debt. Although she was happy that both of them had finished their degree at good universities, she kinda of wished she would have gone to a cheaper university as she would have probably had the same professional opportunities. In other terms she said that they had bought into the student loan lie and now they had some serious money to reimburse. She admitted at the same time that it was hard to not splurge into the young professional’s life and go out to dinner, buy electronic toys -like a big fat flat screen and a couple of iPads. That’s when I told her that they might want to reconsider that life style they could not afford. I did not know how much they were contributing to their debt reduction but probably not as much as they should or could. She should probably project how long it would take them to repay their student date.

The Plan.

I guess our lunch discussion worried her because the following day she came with a tupperware of left overs for lunch and asked me if we could sit down. She started straight on and told me that after doing more than 3 hours of numbers crunching and online search the previous night, she came up to the conclusion that it would take them more than 15 years to pay off their student debt. She was livid at the idea. So I told her that if she was ok with me looking at the numbers with her I could certainly help her – I warned her I was no professional but I was a debtfree guy, any kind of debt. She accepted and after work  we sat in a booth of a coffee shop with a computer and crunched numbers. In less than 2 hours we came up with a plan that seemed to fair to her. She and her husband had to say goodbye to quite few splurges. Below are the changes they had to make if they wanted to reimburse their debt in 5 to 8 years instead of 15:

• eating out: from 2-3 times a week to once a month. Saving about $300 a month.
• clothing: shopping at TJmax or Nordstrom Rack instead of expensive department stores like Bloomingdales. Saving $100 a month average.
• shoes: only 2 pairs of shoes per year instead of the 5 or 6 she was currently buying. Saving $40 a month.
• lunch: no more eating out for lunch. Cooking on Sundays and refrigerating or freezing was the way to go. Saving $25 per week each and healthier.
• rent: moving to a smaller apartment. As they were not planning to have kids right away, they did not need a 3-bedroom apartment. A smaller two bedroom one was enough (they still needed a home office for her husband to study quietly at night). Saving $300 a month.
• transportation: they did not need to have a small SUV and a sport car. I suggested they exchange those for Civic size car. Saving $400 a month.
• cable: who needs cable nowadays? Netflix+Amazon Prime+ Hulu = $40/month. Saving $70 a month.
• Vacation: what about going to central America instead of the West Coast or Europe? Saving $2 to 4,000 a year.
• insurances: I suggested she gets with a professional to see if she could shop around for similar or better coverages at smaller cost.

If they were willing to follow those guidelines, the simulation we had just made showed that they would be able to pay their student loan in 7 years instead of 15 years while saving money for retirement and saving money for a downpayment for a house. Our calculations did not even take into account salary increase and promotions, which would enable them to reimburse even faster and save more.

The Pain.

She was not able to implement everything at once. One does not easily change its habits. It is difficult to let go of what you are used to, no matter if you are rich, middle class, or poor. When she told her husband he was quite resistant in the first few months but as she was the one bringing the money in and he was still studying, he realized that he could not/should not spend what he did not earn. I am sure it was hard, no one wants to say:

We cannot afford that.

Do we really need this or is it just a luxury?

We went over budget last month, we need to be more careful.

Did you cut the coupons before we go shopping?

But all those sacrifices were not in vain. After the first 6 months of budgeting she invited me to lunch. First I raised an eyebrow as I thought she was falling off the wagon. But it was to thank me for the help I had provided – still I only ordered an appetizer and water. She told me that her husband was fully on board now that he was seeing how quickly the debt was decreasing. Looking at the number going down every time they made a payment was so rewarding and satisfying that they had found new and creative ways to spend even less money every month. If they continued that way, they would be able to reimburse the debt in 4 to 5 years once he would work full time. They felt energized by this red number shrinking quickly. It is what financial freedom feels like.

The notion, “everyone’s doing it, so why don’t you?” couldn’t be more appropriate here. Just because everyone is in debt from their student loans and are making the minimum payments doesn’t mean you have to do the same. Get rid of it. Don’t be a sheep. Throw as much money at your student debts as you can. Treat it like a 401K; invest in it until it hurts.

The reward.

As a result of paying off your student debts, you will be able to save a lot more money toward what really matters to you. House downpayment. Retirement Savings. Saving for a comfortable cushion and emergency fund. Vacation. Non-profit giving. Yet continue budgeting, never stop budgeting. The moment you stop is the moment you are going to create an undesirable financial situation.

Thank you

Oliver