Student loans: The ultimate POS

In the earlier segment we discussed the effects of student loans from a national standpoint, and how to fix them.  In this segment, we will dig into exactly how student loans are for many “educated” American families, one of the largest POS’s we face. This is going to be a long segment, but each of these topics covered is extremely important, and the combination of them all is the reason student loans are a huge POS.

1. First and foremost, college is no longer necessary to live a good life, be successful, and financially independent, and hasn’t been for over a decade now.  Many trades such as welders, mechanics, plumbers, electricians, and carpenters can make six figure annual incomes with little to no formal education.  An example is our local marine mechanic shop has a shop rate of 104.00 per hour, and the mechanic courses required for this position require less than 1 year of education.  My local welder, electrician, and diesel mechanic all charge 75 dollars an hour, and all were self-taught or learned their jobs in trade school. I as an Occupational Therapist with a Master’s degree, make less than 50 dollars an hour after working in the field for a decade with a 5 year education.  I am not complaining about my income, I am merely showing that many jobs pay more than I make, while requiring minimal higher education. On top of this, many of these professions have waiting lists for clients, because they are so busy! So, while college is an OPTION, it is not a requirement.
2. The cost!  According to a 2019 U.S. News and World Report article on the cost of college tuition, the average cost for 1 year of college is just shy of 37,000.00 for a private college, 22,577.00 for public, out of state tuition, and 10,116.00 for public in state tuition. These numbers include TUITION and FEES only and exclude costs such as room and board.  Many colleges, like the one I attended, require students to live on campus and have campus meal plans, thus further increasing actual costs of college.  For instance, when I attended college my college required all undergraduates to live on campus unless they grew up close to the college.  When I hit graduate school and moved to a nearby private apartment complex, my “room and board” fees decreased since I was no longer required to pay the predetermined and inflated college rates.  So, the true cost of tuition could easily be increased by 10-20K annually when you include room and board for a grand total of around 50K per year for all college expenses at a private college, plus interest.  https://www.usnews.com/education/best-colleges/paying-for-college/articles/paying-for-college-infographic
3. Lost Income.  Every year spent in college is one less year available to make money.  As we will discuss further, and you probably have read elsewhere, the best asset to have on your side for building wealth is time.  For instance, 1k invested monthly for 30 years at 5% interest will yield over 800K after 30 years.  But subtract those 5 years I spent in college, and the savings drops to 576k!  So, in the long run, those 5 years I spent in college cost me 225k in retirement savings, compared to the plumber or mechanic who started his business after graduating trade school when he was 18.  
4. Tax deductions.  I cannot recall how many times I’ve heard “why worry about student loan interest, it is a tax deduction!”  This is only partially true, and besides you don’t want any debt at all!  Student loan interest is deductible up to $2500.00 only per year, and only if your individual MAGI is BELOW 70K with a reduced rate for individual MAGI between 70 and 85k. God forbid you do something extremely productive and meaningful to society like become a physician, surgeon, dentist, physician assistant, or CPA and you will be ineligible for any student loan interest deductions due to your income!  Ironic isn’t it??
5. Income based repayment plans.  This is the absolute worst idea ever invented for student loan repayment!  If you ever had any question that the government wants you to be an indentured servant to your loans, look no further than this program.  Basically, the program requires you to pay between 10 and 15 percent of your “discretionary income” every month.  In many cases, this will cause the loan balance to INCREASE, like in my wife’s case, because the payments aren’t enough to cover the annual interest on the loan.  The result, along with the compounding interest effect, mean that every year your principal balance will continue to expand.  Should you make all your payments year after year for 20 to 25 years, the government promises to forgive any remaining balance you may owe on the loans.  However, if you have been watching the news in the last few years, you may have noticed that the Department of Education is currently getting sued for allegedly failing to forgive the student loan debts of government and non-profit workers who were promised after ten years their remaining loan balances would be forgiven.  I feel for these people, as many of them took lower paying jobs with the promise of full student loan forgiveness after a decade of work.  Unfortunately for them, they cannot get that decade back, and are still saddled with the debt.  SO, if you want to take the risk of waiting 25 years to find out if your loans will be forgiven that is up to you, but I do not recommend it at all.  Currently, I have a college friend who recently posted the details of one of his federal student loans.  On an original balance of 10k, after paying 10k for ten years, he owed just over 10k!  Ten years, ten thousand dollars of payments and he still owed ten thousand dollars on an original balance of ten thousand dollars!  If that isn’t modern day highway robbery, I don’t know what is. 
6. Student loan forbearance.  In the student loan forbearance scheme, the government simply says you don’t have to make any payments on your balance at all, but your balance will continue to expand due to interest. Again, thanks to the effect of compounding interest, every month you delay payments significantly increases how many payments you will have to make to pay off the loan.
7. Bankruptcy.  If the “income-based repayment plans” weren’t enough to convince you that your student loans are modern day indentured servitude, the bankruptcy regulations surrounding student loans will.  With almost all student loan repayment plans, should you file for bankruptcy, your loans will not be discharged.  Simply put, if you go bankrupt and lose your home, car, and any other possessions, you will still be stuck with your student loan balance. https://www.businessinsider.com/people-filing-for-personal-bankruptcy-carry-student-loan-debt-2019-6  and https://www.cnbc.com/2018/08/13/twenty-two-percent-of-student-loan-borrowers-fall-into-default.html
8. Disproportionate effect on minorities. Although the average student loan balance owed in the country is around 30k, the majority of the outstanding nearly 2 trillion dollars in student loan debt is made up of loan balances totaling less than 10k.  Let that really sink in.  Nearly 1 trillion dollars of student loan debt is made up of people who owe the equivalent of 1 year of education at a public in state institution.  Because these people most likely didn’t obtain a college education, and our educators spent a decade telling them college was the only pathway to success, they don’t make enough income to survive, and don’t have any extra income to pay towards their loans.  I would love to see all balances on student loans below 10K forgiven.  The positive effect on the economy would be more than worth the short-term loss.  If Congress can pass a COVID19 stimulus worth over 2 trillion dollars and have no idea where the money really goes, they can forgive 10K of student loan debt for those who were tricked into the college scheme. Furthermore, thanks to income-based repayment plans, minorities were much more likely to owe larger principal balances on student loans even after paying towards them for over a decade!  Simply put, student loans which were designed to assist minorities in getting ahead in this country not only failed miserably but have caused a larger financial burden.  https://www.usnews.com/news/education-news/articles/2017-10-17/crisis-for-african-american-student-loan-borrowers and read the full study here: https://nces.ed.gov/pubsearch/pubsinfo.asp?pubid=2018410
9. Taxes. Having a college education and a typical 9-5 job, will most likely put you in a higher tax bracket, while excluding you from government programs such as Medicaid and the recent $1200.00 stimulus check.  Due to our income, my wife and I, both healthcare workers during a pandemic, were excluded from the $1,200.00 stimulus checks based only on our income.  This also effected half of nurses, all physicians, physician assistants, nurse practitioners and surgeons.  Let that sink in for a minute: Congress excluded the majority of healthcare workers during a pandemic from funds for pandemic relief!  This POS adds salt to the wound so to speak and is too variable to discuss in detail and will be discussed in a separate post.  Basically, instead of being rewarded for trying hard, working hard, and being successful after years of dedication and study, the government will take a larger percentage of your paycheck, causing those student loan payments harder to pay every month, thus setting you up for “income based repayment plans.” Hopefully now you understand why student loans are the largest POS those of us “educated idiots” who went to college will ever face, and will take the largest chunk of our discretionary income we have left after paying other POS’s.  Although federal student loans are not truly a tax, in my opinion, the interest you pay on them is.  The initial principal balance is your money.  You use it to further your education whether its to pay for the classes themselves or textbooks, but the interest is a payment you make monthly to the federal government, just like payroll taxes. I also consider it a tax and POS, since actual costs for classes varies so much based on the income of your parents.  When I attended college, I was excluded from many government programs and college discounts, based on the income of my parents.  So, I was punished with higher college costs, based solely on the fact my parents worked hard.  So, this is a POS that literally spans generations, and will influence your children too. 

In conclusion, student loans and college in general are not a necessary pathway to obtain FIRE, and in fact, may very well cause some road bumps on your journey.  Student loan interest is only partially deductible at best, and student loans cannot be discharged in bankruptcy.  Second only to taxes, and possibly mortgage/rent payments, student loan payments are the next most significant POS you will pay each month/year, and are the second largest payment you will make each month, again to the federal government.  See a trend here?? These facts combined with the fact you lost years of your working life in return for that piece of paper, make student loans the “ultimate POS.”