Average Student Loan Debt in the US = 30K! Find your third alternative solution & pay it off intelligently!



Student Loans - An empty class rooms filled with desk looking towards the teachers stand in the front.

Student Loan Debt in America

According to the Institute for College Access and Success, “Seven in 10 seniors (68%) who graduated from public and nonprofit colleges in 2015 had student loan debt, with an average of $30,100 per borrower. This represents a 4% increase from the average debt of 2014 graduates.”

Why the heck is it so high?

Student Loan Meme - Baby picture with funny face with text: "You mean to tell me we have to repay student loans?

 

More and more young adults are saying no to 4 year schools due to increase in cost! Is college debt good debt? Traditional knowledge says it’s so (doesn’t mean its true). For us Master Dukes, the investment definitely has paid off with strong careers. Is this the case for everyone? It really depends, what degree and how much do you make from the degree. Sure there is the “do what you love mantra,” but taking that approach can cost you a life of freedom if you’re not rational on how you pursue it.

Young adults (including us) had to take loans out to pay the cost of a college education, and let’s be honest, we really didn’t understand just how much it ends up costing, and/or it was the only choice. If you thought ahead instead, you are on the fast track! Thanks to the internet and financial blog world more people are aware at a younger age. Welcome to the FIRE/Debt free/Build Your Kingdom movements! As we build our kingdom, being debt free is a big piece of the construction pie. It reduces your retirement cost and also gives you the peace of mind that leads to the pursuit of happiness!!

Should higher education be free?

Warren Buffet in the 2016 Berkshire Annual Shareholders meeting talked entitlement when asked about the increasing cost of higher education in the U.S. One number he gave in his answer – our education bill for the federal government was $600 billion. We fact checked it over at NCES Fast Facts; specifically it was $620 billion in 2012-13, or $12,296 per public school. Basically this establishes that before Americans are even able to pay tax, they are granted free tuition to k-12 public schools, how awesome is that?

If this is the case, should we also get higher education for free? Are we entitled to it? There are people who do get it free based on the achievement demonstrated in high school and effort pursuing scholarships. And thanks to Pell Grants, low-income students sometimes catch a free or reduced-cost ride as well. Should people with low academic prowess be awarded free education? Will people take education as serious if its free? Let us know what you think!

We want to mention one other fact that Mr. Buffet relayed during the talk. He stated that he was on an advisory board for one university’s endowment fund. It grew from $8 million to $1 billion, but tuition cost continued to outpace the fund! Now that’s BONKERS!!

Our final thoughts – if Americans are entitled to free education (for 12+ years) in preparation for higher learning, paying for that learning can be somewhat justified. We struggle to reconcile ever-growing endowment funds with the fact that students struggle paying tuition. Should endowments award more and focus less on growth? An incentive/reward tendency comes into play here, as the endowment fund and its stakeholders have the job of increasing the fund each year. It’s much easier to fund-raise when one can cite the continually growing price of university admission. If a university’s coffers are prospering, its student body should benefit also. Without the students, there is no university!

One of Dukes' student loan balances are asking for payments each month - how is he planning to pay them off?

Three Strategies for the Student Loan Indebted Duke

Student Loan Pooling:

Student loan pooling means to pool your money in a savings account until you’re able to pay the full student loan balance off at once. This strategy will cost you money in interest, but with a focus on paying off the loan, you will still be reducing the interest in the long run by paying it off early. The win here is that in the case of severe emergency, not only do you have an emergency fund, you have a loan pool if absolutely necessary to handle it effectively. The alternative would be making extra payments, meaning once that money is paid into that loan, you can’t get it back. If you run out of your emergency fund, you will not have the loan pool back up in the mean time. The main take away here is hold your cash until you can actually increase your cash flow by paying off the loan in totality.

A decision factor on using this strategy is time it will take to pay it off. A loan amortization schedule activity can help you determine this.
Student Loan Pool Flow:
  1. Open a new high interest savings account or use the cash flow budget strategy with a high income credit union checking account
  2. Each month save as much as you can into the loan pool
  3. When the loan pool > loan pay off amount from step 2 -> pay it off!
  4. Celebrate your new cash flow
function studentLoanPool(creditUnion, emergencyFund, monthlyPayment, studentLoan) {
    //check for emergency fund, log error if missing
    if (!emergencyFund.balance > 0) {
       throw '"Emergency fund is not funded - please fund before paying off debt";
    }

    // check for loan pool, create if missing
   if (!creditUnion.loanPool) {
      creditUnion.loanPool = new CreditUnionChecking('high-interest");
   }

   if (studentLoan && studentLoan.balance > 0)
      do {
         creditUnion.loanPool.balance += 500
         studentLoan.balance -= monthlyPayment;
      } while (creditUnion.loanPool.balance < studentLoan.balance);

      // pay off loan
      studentLoan.payOffBalance(creditUnion.loanPool.balance);
  }
}

Pros:

  • Peace of mind due to backup for severe emergencies
  • Increase your cash flow once the balance is repaid in full

Cons:

  • Paying more interest in long term
  • Savings can be accessed and used (sometimes not wisely), while extra payments can’t

Emergency Fund + Extra Payments:

This strategy will save you money on interest, but cost you an extra savings cushion when a crisis occurs – something unlikely for those just starting our careers. At the end of the day, you still have a Level 4 emergency fund to handle 6 months worth of emergency. Decide the best path for you!

Emergency Fund + Extra Payments Flow:
  1. Build your emergency fund
    • We recommend the Duke (Level 4) status in your emergency fund before doing this, preferably the 6 month savings range
  2. Begin making extra payments until loan amount === 0
    • Do { make extra payments} while loan amount > 0
  3. Enjoy your new cash flow!
function extraPayments(capitalOne360, emergencyFund, extraMonthlyPayment, minMonthlyPayment, studentLoan) {
   // check for emergency fund, log error if missing
   if (!emergencyFund.balance> 0) {
      throw '"Emergency fund is not funded - please fund before paying off debt";
   }

   // check for student loan before continuing
   if (studentLoan && studentLoan.balance > 0)
      // make min and extra payments until paid off
      while (studentLoan.balance > 0) {
         studentLoan.balance -= minMonthlyPayment;
         studentLoan.balance -= extraMonthlyPayment;
         creditUnion.loanPool.balance += 500
      };
   }
}

Pros:

  • Emergency fund built to cover most situations
  • Save money on total interest paid as you decrease principle faster

Cons:

  • No emergency fund back up
  • Cash flow doesn’t increase until the last extra payment is made

Third Alternative -> Emergency Fund + Student Loan Pool + Extra Payments

In many cases during our lives choices are given in a this or that fashion – Dukes like to find alternatives instead.

For this Duke, I have three objectives:

  1. Pay off student loan debt
  2. Be prepared for emergencies
  3. Increase my cash flow

Both strategies can be utilized to help meet all three objectives. My third alternative solution proposal goes like this:

  1. Duke level emergency fund (completed)
  2. Open a new high interest savings account or use the cash flow budget strategy with a high income credit union checking account (completed)
  3. Based on that month’s budget, split the amount for your debt pay off journey
    1. 1/2 saved in student loan pool
    2. 1/2 paid to the loan’s principle
  4. When the loan pool > loan pay off amount from step 2 -> pay it off!
  5. Rejoice!!
function thirdAlternative(capitalOne360, emergencyFund, extraMula, minMonthlyPayment, studentLoan) {
   // check for emergency fund, log error if missing
   if (!emergencyFund.balance > 0) {
      throw '"Emergency fund is not funded - please fund before paying off debt";
   }

    // check for loan pool, create if missing
   if (!capitalOne360.loanPool) {
      capitalOne360.loanPool = new CapitalOne360Saving('high-interest");
   }

   // check for balance
   if (studentLoan && studentLoan.balance > 0)
      // while our student loan pool is less than loan balance
      /// and student loan balance is greater than 0
      while (studentLoan.balance > 0 && capitalOne360.loanPool.balance < studentLoan.balance) {
         // make min and extra payment to balance
         studentLoan.balance -= minMonthlyPayment;
         studentLoan.balance -= (extraMula / 2);

         // save into loan pool
         capitalOne360.loanPool.balance += (extraMula / 2)
      };

      // pay off loan
      studentLoan.payOffBalance(capitalOne360.loanPool.balance);
   }
}

Pros:

  • Emergency fund built to cover most situations
  • Save on interest
  • Peace of mind due to backup for severe emergencies
  • Balances out increasing your cash flow once the money loan is paid off in full

Cons:

  • Less saved on interest
  • Some money used for extra payment before increasing cash flow

Thanks for reading!

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