Planning For and Overcoming Student Debt

Student loan debt is a major financial burden for many people. In the United States, student borrowers owe $1.78 trillion in federal and private student loan debt as of March 2023, according to the Federal Reserve.¹ The average student loan debt amount varies depending on the degree earned: $28,400 for a bachelor’s degree, $71,000 for a graduate degree, $203,062 for medical school, $301,583 for dental school, and so on. For many, a quality education can help lead to financial security. What type of education, how much it should cost, and how it’s paid for is a matter of great debate for our society (which we won’t hash out in this article). At the individual level, having a clear and complete picture of the benefit-to-risk dynamic is critical in making the decision of how to pursue and pay for your education. Why? Because there are wrong ways to get a good education. For those with debt, there are steps to take to limit the cost and headaches of student debt obligations.

The Student Debt Trade-Off

Taking on student debt makes sense for many students. Borrowing to earn a degree that is likely to lead to a high-income profession often works out in the long run. This is a comfortable trade for many. There are also students who borrow to pay for degrees that end up giving them little to no advantage in the job market after graduation. These students can end up drowning in interest payments.

Simply put, student loans limit disposable income until the loan is paid off. Dollars spent on paying back loans are dollars unavailable to invest. When considering the long-term advantage of compounding interest, underinvesting during early years comes with a significant opportunity cost. This is a key trade-off consideration when deciding about committing to student loans. In my work as a fiduciary financial advisor, I often work with people who admit they did not consider the downstream disadvantages to taking on so much debt at a young age.

Making Informed Decisions

I recommend the following action items to students (and their families) in the process of deciding if student debt is a wise choice. Take them seriously. Your future self will thank you!

1. Consider career goals.

   What kind of job do you want after college? What are the salary expectations for that job? How much student loan debt will you need to take on to get that degree? It’s true that money isn’t everything, but it’s not nothing.

   If you're planning on a career in a high-paying field, such as law or medicine or business, then student debt may be a worthwhile investment. However, if you're planning on a career in a lower-paying field, then you may want to consider less costly education options that will still position you well to succeed in your field of choice.

2. Research your loan options.

   There are many different types of student loans available, with different interest rates and repayment terms. Do research to find the best loan for your needs and your situation. Also work to find scholarships, grants, and work-study programs to help reduce your overall debt burden.

3. Talk with a financial advisor.

   Advisors can help you weigh the pros and cons of taking on student debt. Advisors are well-equipped to help you make decisions with your long-term financial well-being in mind.

Overcoming Student Debt

If you have debt today, it’s important to face the challenge head on. I deal with a lot of people who prefer avoidance. This just makes things harder. There are a few things you can do to minimize the impact of student loans on your long-term investment options.

1. Always pay at the least the monthly minimum amount due. This may mean changing spending and saving habits in the near-term. Getting in the weeds of your personal budget is a must. Whether or not you pay more than the minimum amount due depends on multiple factors including the interest rate on your loans and your other financial obligations.
2. Pay off your highest-interest debt first. This will save you the most money in interest over time.
3. Consider consolidating your student loans. This can make it easier to manage your payments and may lower your interest rate. It doesn’t hurt to investigate if there’s a refinancing option out there. Do your homework!
4. Take advantage of student loan repayment for forgiveness programs when available.

In some cases, investing while paying off your loans makes sense. The long-term benefits of investing (even small amounts) early in your career while you’re still paying off student debt depend on you interest rate, loan amount, expected market returns, and personal circumstances.

Committing to and then managing student loan debt is daunting. Balancing your debt payments while making smart investment decisions for the long term can feel even more difficult. By setting and following a plan you can overcome these challenges, set yourself up for a fulfilling career of your choice, and reach your long-term financial goals.

1. nerdwallet.com, “Student Loan Debt Statistics: 2023.” 2 Jun 2023