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Continuing to deal with Part 1: the biggest things holding you back and as a follow up to our previous article Part 2: Murdering Your Consumer Debt, today we’ll talk about one of the most tricky and misunderstood types of debt that there is: Student Debt.
Let’s not mince words: We have a SHITLOAD of student debt. Americans owe a combined $1.4 TRILLION of student debt, at an average of $30,000 per student. Canadians are not much better, owing $15 Billion, or an average of $28,000. Student debt is one of the most common types of debt there is, and is remarkable for a few things:
- It is ridiculously difficult to get rid of. Unlike Consumer Debt where you can declare bankruptcy and have your debt discharged, Student Debt generally cannot be discharged in bankruptcy. There are no do-overs with Student Debt.
- They can get surprisingly massive. Despite that statistic where the average loan is $30,000, nobody ever writes us to complain about $30,000. The people who write us have $70k, $80k, sometimes over $100k in student debt!
- They do not, as my fellow Millennials have acutely realized, guarantee you a good job. Or any job. If you picked some useless degree and got into massive student debt, you are in deep, deep trouble.
So how the Heck did we get here?
Student loans originated in the 1950’s, when the government wanted to “help” families of lesser means send their kids to institutions of higher education, with the idea that this would allow them to get better paying jobs and therefore increase the overall wealth of the nation. However, this wasn’t done primarily using, say, scholarships or grants where the government would cover the cost of the said higher education. Instead, it was done by loaning the student money so that they could afford to attend college, and then after they graduated they’d have to pay the loan back. Meaning the government actually got to MAKE money on this deal.
You may recognize this as the exact OPPOSITE of “helping”.
So here we are. The people with Medicine, Law, Accounting, or Engineering degrees aren’t complaining, because they can pay their debts off easily with the high-paying jobs they got in exchange for their expensive degrees. But for everyone else who got talked into a less lucrative Arts or Psychology degree, with just as much debt but are now competing with high school students for barista jobs at Starbucks? Life is a liiiiiiittle more complicated for them.
But, as we say here at the Millennial Revolution, it doesn’t matter how we got here, only what we do from here on out. So what do we do?
Rule #1: Do NOT take on any more debt
I cannot emphasize this enough. If you don’t have a clear pathway to clearing your student debt in the next 3 years (with some exceptions, as we’ll discuss below), do NOT make the situation worse. Put away those credit cards, walk away from that car dealership, and do NOT buy a goddamned house. I mean it.
Rule #2: Do NOT miss any payments
Whatever you do, do NOT miss any payments. Pay off the minimum payment each month but don’t miss any. Once you do, you are considered in default, and many options for getting out of debt (like refinancing) are now closed off to you.
Rule #3: Increase Your Debt-Killing Ammo
This is the same as with Consumer Debt. When it comes time to killing, well ANYTHING, you need ammo. And when it comes to killing your debt, your ammo is your money.
To figure out how much ammo you have, take your take-home after-tax pay (combined if you’re married). Now minus off your basic living expenses (rent, food, gas, etc.). Don’t include debt payments here, just your basic living expenses.
So for example, if you make $3000 a month and you spend $2000 on basic necessities, you have Debt-Killing Ammo of $1000. This is how many bullets you can shoot at your debt each and every month.
So to increase your Debt-Killing Ammo, you have two options: Increase your Income or Reduce Your Expenses.
What this means is you have to be willing to:
- Take on extra shifts at work. If you can get overtime by working during the holidays, do it!
- Take on an extra job. Here’s a story of a guy who worked three jobs to pay off his mortgage in his 30’s. If he can do it so can you.
- Take part in the Sharing Economy. If you have an extra room, rent it out on AirBnb. If you have time on the weekends, drive for Uber. It’s only temporary, and you may find yourself actually enjoying it like Financial Samurai did.
- Cancel any vacations, cook more instead of eating out, and cancel any suspend and recurring bills like gym memberships or Digital TV that aren’t absolutely necessary.
Rule #4: Take Advantage of Repayment Assistance
OK so we’ve tried the usual stuff. Can’t cut back any more, can’t earn any more. Now what the Hell do we do?
Fortunately, government-run student loan programs generally have some kind of provision for people who go massively into debt for their degree only to discover their degree was worthless.
In Canada, our loans are typically arranged through our provincial government. As such, each province has their own programs to help people repay their excessive student loans. First and foremost, check with your province’s student loan office to see what programs are available that may apply to you. Here’s a program called the “Timely Completion Benefit” for New Brunswick residents which forgives any loan above $32,000. Here’s a program called “Loan Forgiveness for Nurses and Nurse Practitioners” that help pay back student loans for nurses in Saskatchewan who are willing to work in rural communities.
Here’s a directory of provincial/territorial government student loan offices to help you get started.
But available to all Canadians with student debt is the Federal Repayment Assistance Plan (RAP).
How this works is it limits the maximum amount you have to pay towards your student loan based on a percentage of your family income. The limits and percentages differ by province, so again you’ll have to check with your province of residence, but as an example, in Ontario a family of 2 making under $30k doesn’t have to pay ANY amount towards their student loan.
The Canadian RAP works in 2 phases. In Phase 1, which covers the first 5 years after graduation, people on the RAP will have their monthly payments reduced (or eliminated), and the government will cover the interest portion of the payment. This means that during this period, your loan amount may not get paid off, but at least it won’t increase.
In Phase 2, which occurs after 5 years under Phase 1, the government begins to cover any loan principal AND interest you can’t pay. That means that during this period, your loan will slowly get paid off by the government. If your income never rises enough to be able to affordably repay your loan, over time your loan will go to zero courtesy of the government.
Participation in the RAP is NOT automatic. You have to apply, and you have to re-certify your income every 6 months. However, because these programs exist, they ensure that even if you screw up and get into a massive amount of debt pursuing a useless degree, you won’t be permanently saddled with that debt. In Ontario, for example, these programs insure that your loan is eliminated in 15 years whether you pay for them or the government does.
Hoo boy. Where do I start?
First of all, the American student loan system is a goddamned MESS. Leave it to you guys to take a complicated problem and make it WAY WORSE. We shall try to deconstruct it here, but don’t hold your breath for an easy answer. Because none exists.
First of all, the American student debt system is a hybrid between the Federal Government and Private Lenders. Private Lenders somehow have all the protection of Government Loans (i.e. they generally cannot be discharged in default), yet typically have none of the borrower perks. Loans backed by the Federal Government should be taken out before any Private Lender is even considered.
So what perks are we talking about? Calm down, they aren’t that great. Similar to the Canadian system, there are repayment programs to help people who accidentally got a useless degree. Their names are the Income-Contingent Repayment Plan (ICR), the Income-Based Repayment Plan (IBR), the Pay-As-You-Earn Plan (PAYE) and the Revised Pay-As-You-Earn Plan (REPAYE). Here’s how they work.
|Income-Driven Repayment Plan||Payment Amount|
|REPAYE Plan||Generally 10 percent of your discretionary income.|
|PAYE Plan||Generally 10 percent of your discretionary income, but never more than the 10-year Standard Repayment Plan amount.|
|IBR Plan||Generally 10 percent of your discretionary income if you're a new borrower on or after July 1, 2014*, but never more than the 10-year Standard Repayment Plan amount. Generally 15 percent of your discretionary income if you're not a new borrower on or after July 1, 2014, but never more than the 10-year Standard Repayment Plan amount|
|ICR Plan||The lesser of the following: 20 percent of your discretionary income or what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income|
Source: US Dept. of Education.
And similar to Canada, there are limits as to how long you’re allowed to carry your debt. If under one of these income-based repayment plans you still can’t repay your loan, it will eventually be forgiven.
|Income-Driven Repayment Plan||Repayment Period|
|REPAYE Plan||20 years if all loans you’re repaying under the plan were received for undergraduate study. 25 years if any loans you’re repaying under the plan were received for graduate or professional study|
|PAYE Plan||20 years|
|IBR Plan||20 years if you’re a new borrower on or after July 1, 2014. 25 years if you’re not a new borrower on or after July 1, 2014|
|ICR Plan||25 years|
Source: US Dept. of Education.
Here’s my problem with the American system.
Remember how before I was describing how the Canadian government covered your interest if you were on one of these repayment plans? That’s not the case here. The Income-driven repayment plans simply allow you to kick your debt down the road. However, it does NOT address the interest accruing and because of this these plans don’t actually help you murder your debt. It simply prevents you from defaulting. If you can’t pay your student loan because your degree was useless, that debt will continue to grow and grow.
But what about the forgiveness part? If you can make it to 20-25 years, the debt will go away, right?
Well, yes. But also, no. Because that debt forgiveness, for whatever reason, becomes taxable income. So if you had $100k of student debt and it got forgiven, that gets added to your tax return and you now have to pay taxes on it. So it’s not so much of a FORGIVENESS program as a way for the Federal Government to discharge their debt at a steep discount.
So instead of having to pay $100k of useless student debt, you only have to pay $20k (based on your tax rate)! Everybody wins!
Except, of course, you. Think about it: If you couldn’t pay back a student loan for 20-25 years because your degree was useless, what are the odds that you have $20k just lying around when that tax bill comes?
Right. So now that debt has been transferred from the Dept. of Education to the IRS. I’m sure they’ll be MUCH nicer to you.
Again, this seems to reveal a peculiarity of the American government. It’s extremely accommodating to people of means (i.e. people who don’t need student loans), but also exceptionally unforgiving to people who make mistakes of any kind. If you screw up that decision of what degree to pursue when you were 18, you bet your ass you will be paying for it for the next 25 years!
However, there are a few ways out of this conundrum. First and foremost is the Public Service Loan Forgiveness (PSLF) program. This was created to encourage people to take lower-paying public-service jobs, such as government or non-profit positions. Under this program, anyone who works full-time for these organizations and makes 120 qualified monthly payments on their student loans (i.e. 10 years) can have their loans forgiven entirely. Unlike the Dept. of Education “forgiveness” programs, this is not counted as taxable income. The loans are just gone. Poof. Like they never existed.
Similar programs exist for Teachers, BTW. Go check them out.
Note: This is not meant to be a comprehensive resource on either the Canadian or USA student loan forgiveness programs. Check with your loan provider to see what options are available to you.
Rule #5: Refinance Your Debt
Hoo boy, be careful with this. Interest rates have dropped like crazy, so a 7% loan that you got back in 2001 can probably be refinanced at half of that now. However, this is not without its drawbacks.
Namely, if a Federal Loan is refinanced as a Private Loan, you lose all those flexible repayment plans and loan forgiveness programs. That being said, if you manage to land a high-paying, stable job with your fancy degree, refinancing may save you a butt-load of money because you’ll be able to pay off the loan faster.
Here’s a list of banks that will help you do just that.
However keep in mind, if it’s a Private Loan, there is no Plan B. You have to pay off those monthly amounts, so you’d better be sure that your job is secure. If you run into trouble with a Private Loan, you can’t reduce your payments and you won’t be able to discharge it in bankruptcy.
So that’s it for Student Debt. Coming up, we will be talking about strategies for getting out of Mortgage Debt.
And as always, we love to hear from you! Are you currently struggling with student debt? Did you used to have student debt and successfully got out of it? Tell us your story!
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21 thoughts on “Murdering Your Student Debt”
I crushed my $87k of student loans in 2.5 years. While the rest of my lawyer buddies were balling, I was just trying to live like a normal person and threw everything into my student loans.
I recently just detailed what my student loans cost me and how much I paid to them each month. Was shocked to see that I had paid over $102k to get rid of my $87k of student loans! Imagine how much you’ll pay if you keep those loans around for longer!
Getting rid of those student loans was definitely the best thing I did. I wish I didn’t have them – would be nice to have an extra 102k in my bank account (or invested) – but getting that freedom is huge. Didn’t have to be stuck in a job I hated just so that I could send money to the student loan companies.
If you’re planning to pay off your student loans fast, I recommend everyone refinance their loans! You want to get that interest rate as low as you can if you want to pay off your loans fast!
Well, at least you paid it off fast and it was towards a USEFUL degree. That was a smart choice.
Right on! Killing my $50k in student debt was the first step to financial independence!
That’s so awesome! I feel lifted!
Good post. I was fortunate to graduate debt free as the schools I studied waived off all tuition fees and my engineering grad school even paid me. I chose a lower tier grad school that paid me rather than a name brand one that wouldn’t. I bought a used car, my first one, with all my grad school stipend savings and showed up for my first professional job with it, and to the ridicule of my colleagues for driving that rust bucket to work. I made the right work friends later who agreed with my decision to continue driving that beat up Honda. American student loan system is indeed a mess, and I don’t know how some students graduate with over $100K loans!
All very wise choices. We feel the same way. Being able to graduate with zero debt is an amazing feeling (our school had a co-op program that let us work during school).
“If you picked some useless degree and got into massive student debt, you are in deep, deep trouble.”
This is the number one driver of why people cannot pay back their student loans from what I have seen.
Yeah, it’s a tough situation. Very easy to get into, insanely hard to get out of. Every single one of those degrees need to come with warning.
Funny you should mention student loans…I just wrote a cheque today for $35,500 to pay off my nieces student loan. The deal was…you graduate…I pay. She did with honors! I am so very proud of her. And yes…being FI lets me use my money in ways that make me happy, like this.
Your niece is very lucky to have such a generous uncle! I agree, that’s a very good use of Fi-dom.
Off topic, being a novice investor and not yet trusting anyone but the big banks, I contacted your go-to guy, Garth Turner with some super-novice questions regarding “investment companies” in general.
I asked him “What prevents investment companies from robbing their clients?” I genuinely don’t know and have seen/heard stories (or feel like I have anyways) about companies doing just that. I know, sounds ridiculous and overly paranoid, but hey, I thought it wouldn’t hurt to ask and I thought he would say something to calm my ridiculous, irrational fears.
Garth’s response? “Anyone who asks me a question like that will never be my client.”
Wanderer, Firecracker, what do you make of that?
Hm…maybe you caught him on bad day.
Anyway, I can answer your question, as it’s something that we thought of a lot when researching financial advisors. We used the following criteria:
1) The firm needs to a CIPF (Canadian Investor Protection Fund) member so that you get reimbursed by CIPF if the company goes bankrupt.
2) Your funds are held in trust by a corporation, in which the advisor is not an owner of ( in this case, funds are held by Raymond James, and Garth is not an owner).
3) The financial advisor must be a member of IIROC (Investment Industry Regulatory Organization of Canada), which investigates misconduct and can impose fines to reimburse the investor if any wrong doing is found.
4) There must be transparency in the funds they are buying and you, as a client, must sign-off before they make the purchases.
All 3 criteria is met by Garth’s practice.
Hope that helps.
Well what can you say, a stupid question gets a stupid answer. Garth doesn’t have much time for novice investors who have no idea what they’re doing and trust big banks over investment firms.
If you’ve ever read Garth’s blog (and particularly the comments section where he responds to comments like yours) you would know he can be quite direct when it comes to uneducated investors and he certainly doesn’t care if he offends you. He has potential clients coming out of his ears so he isn’t like banks and average Joe brokers who are trying to sell themselves. Clients flock to him, not vice versa, and he is probably turning down people every day.
I fully suspect in order to be a client of Garth you not only have to have A LOT of money, but you also need to have a brain on your shoulders. Opening with questions like “can’t you steal all my money?” shows a lot more than your lack of knowledge of investing, it shows your total paranoia to a highly esteemed and trusted industry. I’ve no doubt this offended him intellectually and as such you got an abrasive response.
It’s not too dissimilar to asking a surgeon “how do I know you won’t kill me on purpose?”.
When I started paying off my student loans of about 8K from OSAP (the Ontario program) at 8.9% they suggested paying it off monthly over 10 YEARS! This is the default payment terms, I asked around and this is what most people I knew were doing.
I increased the monthly payment to $400 (manageable with my new accounting job) and threw any extra money I had at the loan, it was paid off in 2 years.
Paid off in 2 years? Good job! And smart of you to pick an accounting degree too.
I just found your site through JL Collins and you are awesome! Keep it coming! I will definitely be binge reading as I have time throughout the week.
I am currently in the middle of paying off my student loans, I started paying minimum payments in Feb of 2014 when my grace period ended, however in June of 2015 I finally decided to get serious about murdering this debt. It isn’t dead yet, but I have definitely kicked its a**!
I started out with $130,000 total in student debt (if only I could go back in time and stop myself!) and I officially hit the halfway point last week, now down to $65,000. I have actually paid a total of $78,000 with interest included. I got serious after finding Mr. Money Moustache and learning about FI. I also found a student loan amoritization calculator and calculated that if I paid a standard payment of just over $900 a month for the term of the loan (about 20 years due to the size of the loan), I would be paying $93,000 IN INTEREST ALONE! On top of the $130,000 loan balance. I almost lost my lunch..and got really angry at myself for being so stupid and naive. So, my hubby and I cut our lifestyle down to nothing, and we took most of our savings and got the process started by putting $20,000 towards loan payoff. Since then, every spare cent goes to getting rid of this debt. Luckily, I earn a decent living with one of those expensive degrees and once the debt is paid off, we will be using that money to build wealth by continuing to avoid lifestyle inflation. Thank you for the inspiration, I will definitely be reading your blog regularly to keep myself motivated!
Wow! Good job whacking off a huge chunk of that debt! And because you took the initiative to figure out the interest, you saved yourself from paying $93K in interest in 20 years (woohoo!).
Keep firing at that debt! Here’s an example of someone who paid off their mortgage in 3 years to inspire you: http://www.cbc.ca/news/business/mortgage-pay-off-three-years-1.3302229
Sean worked 3 jobs to pay it off, but now that he’s debt free he’s says it’s totally worth it! You should have a student loan burning party after you’re done, just like Sean did with his mortgage burning party 🙂
I could counter your graduate-with-unemployment-sign with a picture of my daughter’s department at graduation … 40 graduates, 40 of them already signed on for jobs in their majors. Why the big success rate? They’re nurses. They wisely chose a job for which there’s a demand.
The problem with student loans is that people want to major in silly things that are really hobbies instead of skill-builders that lead to professional jobs. We need to stop telling kids that lie about “follow your dreams, and the money will appear”. Nah, doesn’t happen.
Also, being a potty mouth doesn’t do anyone any good. Clean up your act.
I personally enjoy his potty mouth and he can write whatever he would like on his own blog!
I’d rather see a system where people were able to take out loans from the government or from private sources that were designed to help them pay off their debts over time. If you can’t afford your own education, then you should be able to get some help from the government or from private sources like your parents or your church or whatever. I have just ordered outlaw dip non tobacco from their official website as I have to arrange a party. But if you think that you can make it without any outside help at all, then stop being lazy and get a job!