As I was leaving the grocery store last month, a headline from USA Today jumped off the page: “College Student Loans: Debt hits a new high in 2018.”
Last year, college seniors graduated with a diploma, a well-paying job (we hope), and an average student loan debt of $29,200, according to a new study by the Institute for College Access and Success.
Almost two in three college seniors, or about 65% who graduated from public and private nonprofit colleges in 2018, carried college debt into their post-graduate world.
Connecticut held the dubious honor of the largest debt load—$38,669, while Utah had the lowest burden at $19,728. Click on this link to see averages from your specific state.
If there is any good news, it’s that debt levels were up “just” 2% from 2017.
I don’t believe anyone is surprised by the high debt burden. Soaring college costs have been well documented.
In 1985, the annual tuition, fees, and room and board rates charged to full-time undergraduate students at a four-year public university ran $3,859. By 2015, the cost had ballooned to $19,189, according to the National Center for Education Statistics. For private schools over the same period: $9,228 to $39,529. And the total 2018-2019 cost of attending Harvard University without financial aid is $46,340 for tuition and $67,580 for tuition, room, board, and fees combined.
The increase in costs is sobering. No wonder so many kids today graduate with both a degree and a heavy debt burden. It’s a far cry from when I attended school.
These are averages and costs will vary, but they paint an unsettling picture.
While we believe a college education is a worthy investment, $30,000 in debt is a heavy burden for someone who is 22 or 23 years old.
Unfortunately, many students underestimate the time it will take to pay back their loans. According to a survey of 2,500 recent and soon-to-be graduates, respondents believe they are six years away from being debt free. If only.
In May, I reviewed 529 plans. This month, I’ll offer several ideas that can help bring your student debt loans (or any debt burden) under control.
Before we get started, let me say that there is no magic formula. Debt is debt. It accrues interest, and lenders expect to be repaid.
But if you set a goal, map out a plan, and stick to the blueprint, you’ll be surprised at the ground you can cover.
That said, typical rates run from 4.5%–7%, with a term of about 10 years. That’s a monthly payment of $324 and $9,702 in interest on the average debt of $29,200, assuming 6% interest.
The 8 ways that I have found can help quickly whittle down college debt include:
Apply for student loan forgiveness. You can try, but odds are very low you’ll have any success.
The U.S. Department of Education rejected 99% of the applicants who applied for relief between May 2018 and May 2019, according to the Government Accountability Office (GAO). Therefore, let’s look at more realistic ideas.
Make more than the minimum payment. By adding just $100 per month to your payment, you’ll pay the average debt off three years early and shave a cool $3,000 off your interest payments (data taken from Bankrate.com loan calculator).
Be sure to confirm the extra payments are correctly applied to the principal. This step is important, especially as it relates to the method you use to pay down your debt—see steps 3 and 4.
Pay off high-rate loans first—the avalanche method. If you have more than one loan, make the minimum payment on lower-rate loans, but apply that extra payment to the highest rate loan first. There’s no reason to pay more in interest than necessary.
Pay off the smallest loan first—the snowball method. This loan may not be your most expensive loan, but you may feel a sense of accomplishment from “checking the box,” or “wiping out” one loan. It’s visible, tangible progress when a loan fades into oblivion.
Plus, by knocking one loan out, you can improve your credit score and lower your debt-to-income ratio.
Don’t overspend, but reward yourself (with your spouse if you’re married) when you’ve paid off your first loan. It’s an accomplishment.
Rollover the payment. Once you have eliminated the first loan, take that entire payment and roll it into the loan with the next highest rate (or the loan with the lowest balance). Do you see what you are doing? It’s called momentum. When that loan is paid off, you have additional cash to plow pack into the third loan.
Keep the ball rolling until you’ve eliminated all your student debt. But don’t stop here. Once your debt is paid off, you may tackle credit card debt or save for a down payment on a home.
Establishing the right patterns when you are young will pay dividends throughout your life.
Can you refinance to lower rates? A lower interest rate may translate into fewer payments. But be careful about extending the length of the loan. Lower payments may tempt but the goal is to obliterate your student loans, not pile up additional interest and delay the day when you’ll be student-debt free.
The auto-payment option. Just do it. Does your loan servicer offer auto-payment? Most do. You may save 0.25%, and auto-payment is a “set and forget” way of paying back debt. Besides, you won’t have to worry about missing a payment, late fees, and a black mark on your credit report.
Be careful with extended payment plans. Such plans reduce your monthly payment and may be income-based, but it will take you longer to pay off your student debt and you’ll pay more in interest.
Your goal is to put your college debt in the rearview mirror. Be strategic about your choices. Set up a plan. Use our pointers as a guide. As always, we’re here to answer your questions.
Headlines
Trade headlines have driven price action during much of the year. September and Q3 were no exception. A shift in the Fed’s stance and a reduction in trade tensions sparked a rally that took the S&P 500 Index to a new high in July (S&P 500 data, St. Louis Federal Reserve).
Despite a late July rate cut, an escalation in trade tensions in August created a brief bout of volatility. Yet, the peak-to-trough decline in the S&P 500 Index amounted to just 6.1%.
Economic growth and a Fed that was (and probably still is) in rate-cut mode (the Fed snipped another quarter-point from the fed funds rate in September) cushioned the downside.
But a renewal of trade negotiations—more headlines—and a de-escalation of tensions were well-received by investors. When September ended, the S&P 500 wasn’t far from a new high.
Enter Q4
While I suspect that trade headlines will continue to influence short-term trading, let’s keep in mind that the uncertainty surrounding Brexit could also influence daily activity.
Meanwhile, Europe appears to be on the cusp of a recession. And if that’s not enough, the speaker of the House launched an impeachment inquiry against the President.
Some of us are old enough to remember President Nixon’s troubles coincided with a nasty bear market. But was there a link between Nixon and the 1973–74 slide, which lopped nearly 50% off the S&P 500? Or did the economic fundamentals hobble the major averages?
| Table 1: Then vs Now | ||
| 1973–74 Bear market | 1998 Bull market | 2019–? |
| Inflation rose to double-digit levels, peaking at over 12% | Inflation low and slowing | Inflation is low |
| Interest rates were spiking higher; prime loan rate hit 12% | Interest rates steady | Interest rates are low |
| OPEC oil embargo roils economy; oil prices rise four-fold | Oil plentiful; prices stable | A glut of oil exists today, and prices are well below levels of recent years |
| The unemployment rate jumped; the economy fell into a steep recession | The economy expanding | The economy is expanding, and the unemployment rate is near a 50-year low |
Source: St. Louis Federal Reserve, U.S. State Dept.
Past performance is no guarantee of future performance.
Though political uncertainty likely exacerbated the sell-off, high inflation, high interest rates, and a deep recession took a big toll on stocks.
Contrast 1973–74 with the late 1998 impeachment of Bill Clinton. Twenty-five years later, stocks performed well amid much better economic fundamentals. While no two situations are exactly alike, economic conditions today are more reminiscent of the late 1990s than Nixon’s second term.
Bottom line
We can point to uncertainty lurking in the near term, but risks never completely abate. If they do, stocks are usually bid up to reflect perfection. It won’t be long before disappointment sets in.
So, let’s end on an upbeat note.
While we have seen a few rocky days this year, major indexes have performed well, and the S&P 500 and the Dow have yet to shed 10%—which constitutes an official correction. For the long-term investor, it hasn’t been a volatile year because interest rates provide little competition for stocks, the consumer has been strong, and the economy is expanding at a modest pace.
That said, successful long-term investors do not make investment decisions based on an emotional response to daily volatility, and they are wary of being whipsawed by headlines.
I hope you’ve found this article to be informative and helpful. If you have any questions, concerns about this article or would like to discuss any planning or investment matters, please feel free to email Eric@ElmTreeCapital.com or give my office a call at (781) 236-0802.
I'm happy to talk!