When you send that monthly check to your student loan servicer, it’s natural to imagine the many ways you’d prefer to spend it. But you might not have considered the ways your student loans are costing you.
Here’s a look at how student debt might be keeping your net worth down — and what you can do to build wealth anyway.
Student loans tied to low net worth, fewer assets
Young college graduates with no student debt are wealthier than their educated peers with student loans by a lot, found a 2014 survey from the Pew Research Center.
College graduates with no debt had an average net worth of $64,700, which is more than seven times higher than those repaying student loans. This wealth gap exists even though these groups earn similar household incomes.
Student loan debt is also tied to fewer assets, found a recent study led by University of Illinois professor Min Zhan.
At age 30, adults with student debt had, on average, financial and non-financial assets worth $52,300 less than their peers with no student loans. Among homeowners, student loan borrowers’ houses were valued $103,000 lower on average than their peers with no debt.
Additionally, student loans are the most common form of debt that puts Americans’ net worths in the negative, according to an August 2016 Federal Reserve Bank of New York analysis.
Student loans account for 47 percent of all debt for households with negative wealth over $47,500, compared to less than 10 percent of debts in households with non-negative wealth.
Student debt is a “barrier to future wealth building”
It makes sense that student loans are tied to lower net worths, since part of figuring wealth is weighing cash and other assets against debts and liabilities. Graduates with student loans will have more debts that offset savings and earnings.
Interest also means that borrowers are paying more than debt-free graduates for the same degrees. If two graduates face the same costs for an education, but one is debt-free while the other relies on student loans — the latter will pay thousands more for his degree through interest.
Student debt limits borrowers’ financial choices in ways that have far-reaching effects.
“Our findings suggest that in addition to negatively impacting young people in the short term, education loans may also compromise their financial well-being over the longer term,” Zhan said of her study to the Illinois News Bureau. “Both large and small amounts of education debt act as a barrier to future wealth building.”
The opportunity costs of student debt
A big reason for this is that student loan borrowers are working against interest, rather than using it to build wealth. Earning compound interest on savings is a smart strategy to get rich, but paying it on debt can keep you poor.
That lost opportunity might be the most negative aspect of debt. With monthly student loan payments to make, borrowers are not free to save, invest, or take advantage of opportunities to build wealth.
“Student loan borrowers have monthly payment obligations and interest costs” that their debt-free peers don’t, explains Heather Jarvis, a student loan attorney specializing in training for financial professionals.
If you’re putting $400 a month toward student loans instead of a retirement account for 10 years, that’s an earning opportunity you’ll never regain.
How to catch up your net worth
For those with student loans, it’s not all bad news. If you earn a college degree you’re still likely to come out ahead, even with student debt.
“People with degrees have lower unemployment rates and higher incomes,” Jarvis says. “Those who earn college degrees with no debt are a leg up, but many of us have no opportunity to complete a degree without some borrowing … Earning a college degree usually pays off.”
There are some things you should do, however, if you want to make sure your student loans don’t hold back your net worth long-term.
1. Pay off student loans early
Repaying loans ahead of schedule is likely the simplest way to close the gap (though not always easy or possible). Early repayment has the dual benefits of “reducing the opportunity for interest to accrue over time, and completing monthly payments so that you can do other things with your money, like save,” Jarvis says.
2. Reconfigure your student loans
If your student loan balances are too high for early repayment to be realistic, you might want to look into programs or products that can make your debt more manageable.
Student loan refinancing can be an effective way to knock out higher-interest student loans. Alternately, an income-based repayment plan can also give you more breathing room in your budget to make there’s room for important financial goals.
3. Maximize earnings
Another important part of the wealth formula is how much money you’re able to bring in. A higher income will directly translate to a higher net worth.
Working hard to make sure you’re a valuable employee on track for a raise is one way to do it. You can also start a side hustle to generate a second source of income.
“The worst case scenario is having student debt and no degree,” Jarvis says. Borrowers in this situation have monthly payments to keep up, but without a degree to boost their earning potential to match.
If this is you, working toward completing a degree and making yourself a high-quality job candidate might be a smart move to offset the damage of student loans.
4. Educate yourself about money
Even if all your extra funds are getting sucked up by student loans, you still have some irreplaceable resources that can be used to build wealth: your mind and your time. Start listening to financial experts and develop a disciplined approach to your finances.
As you learn more about income, budgeting, debt, investments, and other finance topics, you’ll equip yourself with the know-how to put any extra money you have to good use.
You can figure out the most effective way to build wealth while accomplishing your financial goals, and hopefully avoid some common money missteps along the way.
Interested in refinancing student loans?Here are the top 6 lenders of 2020!
|Lender||Variable APR||Eligible Degrees|
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|1.89% – 5.90%2||Undergrad & Graduate|
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|2.39% – 6.01%||Undergrad |
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of September 9, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 10, 2020.
5 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.16% effective Sep 1, 2020 and may increase after consummation.