Hi everyone! Please enjoy this guest post from Brad, who is a former financial analyst and Wall Street executive as well as a regular contributor to How to Save Money.
The government of the United States is in league with US bankers to create a nation of well-educated debtors!
Did that lead catch your attention? It was meant to be provocative. But still, it is at least partially true, even if the US government’s involvement is unwitting.
Every year in the United States, 60% of those who attend college borrow money to do so. That is 12 million borrowers. There are 37 million people who have outstanding loans currently. The estimates vary, but there is somewhere between $902 billion (that is billion, with a “B”) and $1 trillion in outstanding student loan debt. As of the first quarter of 2012, the average student graduating with a four year degree was $24,301 in debt.
There is now $85 billion in past due student loan payments. The default rate is 9.1%, and only 37% of student loan holders have made all of their payments on time.
Now get this, a huge 48% of 25 to 34 year olds who have student loans report that they are either unemployed or under-employed.
The Chains of Debt Are Wrapped Tightly
While it has been getting progressively more difficult to discharge student loan debt through bankruptcy since 1984, just a few years back Congress passed new legislation that makes it virtually impossible. And, interest rates on student loans can now go as high as 8.5%. This payable to your government at a time when the government charges banks only 0.25% to borrow money. Quite a difference.
I don’t really believe in conspiracies, but I do believe that the government and banks are looking out for themselves and your well-being comes in a far distant and remote second.
That means you have to look out for yourself and consider all of your options to reduce and eliminate your student loans. Translated this means that I believe we are all of us justified in getting rid of this debt by any means possible.
Getting Rid of That Debt
Sadly, there are not many means open to getting rid of student loan debt. You can die. The loans will not follow you to the grave (unlike taxes which will) but that isn’t a great proposition for anyone.
Another option is permanent and complete disability. This is how I got rid of my student loan debt (around $100,000 worth). I developed arthritis in my feet and can only walk with much pain. I don’t recommend this as a great strategy, but if you are disabled you can use it!
The interesting thing about discharging debt through disability is that I must now report the value of all the loans I received on my taxes as income for the year of the discharge.
So I’m disabled, unable to work in a traditional job, and am currently only earning income in the form of paltry pennies thrown at me by some blog owners, and I’m supposed to pay taxes on over $100,000 worth of income. Please tell me how that is supposed to work? The US government wants to get its pound of flesh no matter where it comes from. Ask me next April 15th if I managed it. In the mean time I am trying my best to find new ways to save money and also generate a passive income stream to assist with my day to day monetary needs.
While I am on the topic of disability, the maximum anyone can get through Social Security disability (which SSI says I’m not disabled enough to get) is just under $25,000 a year. Between income and self-employment taxes, my effective tax rate is roughly 25%. So I could pay 100% of my income in taxes, if I had an income.
Another Discharge Alternative
Do you think I should join the Peace Corps? Run away to sunny Africa? In fact, doing that is one of the ways you can discharge up to 80% of your student loan debt. It will take you four years of Peace Corp service to get rid of this much of your debt.
There are a number of other fields that you can go into that will allow you to discharge at least some of your debt. You could become a librarian for instance.
So we are left with the calculation of whether to pay off the debt early or just to make the minimum payments the government is looking for. Easy choice. Look at interest rates and the alternative uses for your funds.
Check Your Interest Rates
Do you have credit card debt with an interest rate higher than your student loan debt? Pay that off the credit cards first. Make a similar calculation for any of your other debts, mortgages, car loans, etc. Pay off the higher interest rate first.
Now my advice veers from the conventional. Ask yourself if, realistically, you can get a better return for your money from an alternative investment like a new business or the stock market. If you think you can, then do so.
Consider the amount of your payment here. There are not many 10% returns available for $200 a month. Also consider your age. If you are in your 20’s this is a better option than it is for someone in their 50’s.
The stock market is more of a gamble these days than ever before. The Federal Reserve’s program of easy money to stimulate growth has pushed the market to way over-priced levels. But if you want to join the parade, you should. Just be aware that the good times in the market are going to end someday and abruptly. Get out when you see this coming. [Editor’s note: While I agree that the stock market can be a gamble, my personal approach is more of a “buy-and-hold” type philosophy. I tend to buy stocks of solid companies (hopefully ones that pay dividends) and hold them for a long time rather than trying to figure out when to get out].
Not everyone should go this route. You have to accept some or a lot of risk. It might suit you better to join the Peace Corps.
What do you think? Would you ever consider joining the Peace Corps to pay off student loans? Do you think it’s better to invest if you can earn a higher interest rate on your money than your student loan interest rate?
Brad holds an MBA and is a former financial analyst and Wall Street Executive. He regularly contributes to How to Save Money, a personal finance website dedicated to helping people save money and find financial freedom.
Photo credit: 401kcalculator.org