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 2018!
|Lender||Variable APR||Eligible Degrees|
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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 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.30% 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 Month/Day/Year, 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 08/21/18. 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@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). 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 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.47% – 6.30%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.69% – 7.21%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|