Breaking Free from the Shackles of Student Loans

By Tammy Trenta, MBA, CFP, CTC, CEXP, Founder and CEO - Family Financial

“I really thought this student loan thing would sort itself out. Now, I’m in trouble.” 

As a financial planner, I’ll receive the occasional S.O.S. from a friend-of-a-friend-of-a-client. This particular call came from a young woman (we’ll call her Amanda) who was feeling incredibly worried about her current finances - let alone her financial future.

Roughly 44 million Americans will feel the pinch in a few short weeks when student loan payments - which have been on hiatus for nearly four years - resume. Amanda is one of them. 

“I suppose I hadn’t considered that I’d eventually have to pay all this money back,” she said.

On the surface, the idea of taking a huge loan out on the assumption that it would never need to be paid sounds irresponsible, and maybe even downright crazy. But the past several years have given this idea legs; as student loans entered forbearance again and again, and stories of Biden’s plans to bail out student borrowers hit the news, it is unsurprising that some put their faith in a safety net the Supreme Court later struck down. Now, many borrowers are feeling overwhelmed, wondering how on earth they will afford the massive payments they thought would never materialize. 

Fortunately for some, the income-driven S.A.V.E. repayment program offers a Hail Mary - albeit a complicated one. In short, when participants earn less than $32,800 a year as single taxpayers, or fall below 225% of the poverty line, they won’t have to make any payments. S.A.V.E.’s repayment calculations also do not factor in spousal income, presuming they file separately. And participants are promised their balances will not rise because of unpaid interest. For many borrowers above the poverty line, S.A.V.E.’s calculations may provide healthier breaks than other repayment programs.

But S.A.V.E.’s existence begs a bigger question: Why are so many people in this situation in the first place? I spent years paying off my own student loans. Managing the expense was rough, but in the end it was worth it; my degrees have allowed me to embark on a career path where I earned an income that far outweighed the loan expense.

Had I met Amanda earlier, we would have had the same conversation that I have with my own clients: when you make the decision to pursue higher education, do so with a return-on-investment (ROI) mindset. 

Too many high school graduates jump into expensive degrees without taking ROI into consideration. And some end up making complex financial decisions that set them up for hardship down the line - like taking on multiple loans with no real understanding of how much income they need to earn to ensure the loans can be paid back.

I encountered another client that had just finished his degree; while he earned a respectable $60,000 a year, he was working a grueling 60 hours a week to get there. He owed $50,000 across 7 different student loans, at different rates, and at different amortization schedules. Although I helped him consolidate those loans, the $300 monthly bill was still a lot to manage; in the meantime, he also accumulated another $20,000 in credit card debt. 

Exhausted and living paycheck-to-paycheck - thanks to what he says was a dangerous combination of FOMO, and a “bailout mindset” - he’s now considering moving to a less expensive state, or switching jobs so he will earn less, and not have to pay the loan back. 

This is an example of why current legislation does students a great disservice - especially when the magic fails to materialize. They become paralyzed because they didn’t receive proper guidance in the first place, allowing the dark cloud of debt to overshadow their financial progress longer than necessary.

Those pursuing higher education need to know exactly how that education is going to serve them and have an income plan to pay back the debt incurred; if loan forgiveness happens at some point, let it be the cherry on top. Don’t expect it. If the election goes in a different direction next year, we can be all but certain student loan relief will be a thing of the past.

While we can't control government policies or the whims of the economy, we can take charge of our financial futures by shifting from a disempowering “bailout” mindset to a forward thinking, empowered one. By taking proactive steps, borrowers can break free from the shackles of student debt to build a more predictable financial future.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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