my two cents

How to Live With Student Debt Without Losing Your Mind

Photo: H. Armstrong Roberts/ClassicStoc/Getty Images

Dear Charlotte,

I’m 26, owe over $90,000 in student loans, and make $52,000 a year, which doesn’t go far beyond covering my cost of living in Brooklyn. I have a combination of federal and private loans, and when you factor in interest, I’ve hardly made a dent in what I owe. At this rate, I worry that I’m literally going to die in debt. I also feel like I can’t plan for my future while this is hanging over my head. I’ve barely put away anything for retirement and I live paycheck to paycheck, so I can’t afford to increase my payments, let alone try to save up for anything else. How can I make this situation better?

This fall, about 20 million Americans will crack fresh notebooks and wedge their butts into chair-desks at colleges and universities around the country, trying not to think about the price tag on each hour they spend yawning through lectures. Around 70 percent of them will graduate with student debt (average amount: just over $30,000), which they’ll carry for decades. And during that time, they’ll lie awake at night and worry about it, just like you. According to a study released by the U.S. Department of Education last March, 72.6 percent of college students who graduated with loans in 2007–2008 reported “moderate” to “very high” levels of stress related to their debt.

Not that any of this is a surprise. You could probably gather that same information from a quick poll of your friends and co-workers, or just by reading the news. Student debt in America: it’s bad! And for some people — particularly those who entrust their education to for-profit universities — it can be downright ruinous. But until our system of higher education gets an overhaul, there’s not much action that many student debt-holders can take, besides buckling into a manageable repayment plan and plugging away at their bills, like you’re doing now.

If you haven’t already, look into your options for refinancing or consolidating your debt (you can find more comprehensive instructions on that here). Some of your federal loans may be eligible for an income-driven repayment plan, which tailors your monthly bills to what you can afford (usually about 10 percent of your discretionary income) and forgives the remaining balance after 20 to 25 years. I get that you don’t want your debt lurking around for that long, but “gentler” plans that reduce your payments can provide much-needed wiggle room for you to pursue other goals simultaneously — like creating an emergency fund so that you won’t risk default if something awful happens and your paychecks dry up.

Otherwise, the rules are pretty straightforward: pay down loans with higher interest rates first, and if things really go sideways, talk to your loan servicer about deferment or forbearance instead of burying your head in the sand.

Still, many people believe that debt is bad under all circumstances, and the internet is awash with frenzied advice on how to get out of it as soon as humanly possible. Some of this information is helpful, but most of it is repetitive: Earn more, spend less, try harder. While you’re at it, why not work your ass off and eat nothing but cereal for two decades in an attempt to retire by your 40s? Or pin your hopes on Paid Off, a new game show on TruTV that “wipes out” student debt for one lucky winner? These are not realistic alternatives. Instead, you’ll have to wrap your head around the decent chance that you’ll be living with debt for a while, and there’s no point in letting it prevent you from enjoying the life that your education helped you build.

But that’s easier said than done. “Right now, we have some pretty good solutions for loan repayment from a policy standpoint, but not necessarily from a psychological standpoint,” says Ben Miller, the senior director for postsecondary education at the Center for American Progress, a public policy research and advocacy organization. “If you have an income-driven repayment plan, we can say to you, ‘Don’t worry. We’ll cap your payments at a set share of your income.’ But you’re still going to feel pressure and stress, because the interest on your loans keeps accumulating, so it seems like you’re falling into a deeper hole even when you’re making progress.”

Miller also suspects that people feel uneasy about long-term student-loan repayment plans because they’re relatively new. Many of these options weren’t available for federal loans until 2009, so the first wave of students to sign up for them aren’t even halfway through their 20-year forgiveness timeline. “I think people may start to feel better once they see others who have gotten rid of their loans this way,” Miller explains. “Currently, we don’t have anybody who can say, ‘Yes, I went through that, and it was terrible, but there’s a light at the end of the tunnel.’”

Even if you decide not to refinance or consolidate your loans, believing that you should put the rest of your life on hold while you hammer away at them can be a costly mistake. “You can really undermine your financial security by being scared of debt,” says Georgia Lee Hussey, a certified financial planner and founder of Modernist Financial. “A lot of my clients are adamant about getting rid of their student loans when they first come to me, but that’s usually not the best idea because the interest rates on those loans are way lower than what they can make if they invest more of their income in the market over time.”

Think of your money at the starting line of a race: If your debt has a 5.05 percent interest rate (as direct federal loans for undergraduate borrowers currently do), and your 401(k) portfolio will see an estimated 5 to 8 percent return rate (as many predict it will), then the 401(k) portfolio wins, especially when you factor in compound interest and inflation. “The scariest thing I see is when young people want to pay off their student loans before they invest in the stock market,” says Hussey. “I understand the urge to focus on what you have control over, but you’re throwing away a big opportunity to grow your money for the future.”

Mentally and emotionally, it’s hard to feel great about slowing down your debt repayments in favor of the stock market, but financially, it’s almost always the better choice if your loan’s interest rates are around 5 percent or lower, says Hussey. She also recommends building up an emergency fund to create a buffer for worst-case scenarios. (Make it easier on yourself and automate as much as possible — I set up a monthly transfer from my checking account into my own emergency fund so that I don’t have the chance to forget or spend that money elsewhere.)

Finally, it’s time to move past the bad rap that debt has inherited from previous generations. “A lot of older people say dumb things about millennials and debt because they don’t see the reality of what you’re up against. It’s important to remember that it’s not all negative,” says Hussey, who’s still chipping away at her own student loans with an income-driven plan. “I now look at my college degree — which is in sculpture and creative writing — as the best investment I’ve ever made in myself, because it’s been incredibly helpful for me as an entrepreneur.”

Of course, it was a struggle for Hussey to get into this mind-set, especially when she was trying to support herself as an artist during her 20s. It also runs counter to what she learned growing up: Her parents struggled with debt throughout her childhood, and she never wanted to be in their position. “I wish somebody had taken me aside after college and said, ‘It’ll be okay. You will get through this. It’s scary and uncomfortable, but it requires time to figure out what your values are and how you’re going to make money,’” she says. “Now, I’m not worried about my debt, and I’m not paying it back any faster than I have to.”

How to Live With Student Debt Without Losing Your Mind