I have client. Her name is Mable. She graduated college in 1996 with $60,000 worth of debt. She left school and was paying, paying and paying; and then she went on forbearance and deferment. She went through a divorce, became a single mom of three, and went through multiple career changes in 20 years. But basically, she paid when she could and didn’t when she couldn’t. She fell into default one time, got out of default, paid, went on forbearance, paid, went on forbearance.
That $60,000 loan today is now… $260,000.
THAT is what’s happening out there. That is the extreme danger of student loan debt compounding interest. This is the silent enemy of every college graduate with this debt—the thing that no one seems to be talking about but me. Mable has probably paid $60,000 over the past 20 years, but because of this crazy interest, she is going to be pushing this boulder up the hill for the rest of her life. Luckily, she met me, so that’s not going to happen. But you can see how it might happen for so many others.
Remember a while back in this series, when I said something else was causing the student loan mess to be such an epic crisis? This is it.
Student loan debt forbearance and deferment—more specifically, the interest and how it’s calculated—is a killer. Forbearance and deferment are like feeding the fire.
Let me give you another real-world example, without forbearance and deferment.
I have a client, Ronald, who is a chiropractor. He graduated 25 years ago with $70,000 in student loan debt. He has been paying on automatic payment for the last 25 years. His payment has been roughly $600 that entire time. That $70,000 of debt after all these years of payment is now $50,000. He probably paid $180,000 or something near that. Now he made a very small mistake that anyone can make: he put his loan on a 30-year plan without knowing it, but the thing is, the real issue is the interest!!
The math is just ferocious and irrepressible.
Check this out. Let’s say you owe $50,000, right? You are going to be paying $500 a month. Once the principal starts go down, maybe it’s $40,000, and you’re paying $400 a month. The interest is always slightly ahead of the principal. It gets tapered, so they can squeeze as much interest as they possibly can.
So why does this system exist? To play the devil’s advocate. It is because the government is lending money to people without credit. They are lending money to kids, so they are taking a bigger risk, or at least that is how they are justifying it.
But in my opinion, it breaks all usury laws. If someone borrows $60,000 to go to school, and 10 years later they’ve had to pay $120,000 to get rid of their debt, knowing that might change their mind in signing up for this debt at all.
And the craziest thing—that nobody’s talking about—is that the government is the one making that money.
Remember back to 2007, when the federal government took all the loans on? The government right now makes $10 billion a month in student loans.
6% of the U.S. economy comes from student loan debt.
If you want to get deep into the numbers and look at the overall situation, here it is.
In 2007, 10 years ago, our federal debt was $300 billion held by banks and insured by the federal government in the form of FFEL Loans. Then the lending switched to the DOE as the lender in the form of Direct Loans. The FFEL loans that are still held with banks 10 years later have grown to $600 billion dollars of debt, not $300 billion. FFEL loans are now at $600 billion, even though they literally went out of existence ending in 2010.
Remember that the 10-year standard plan—which everyone is put into—is for 10 years. That should mean the debts are supposed to be paid off in 10 years, right? So why isn’t the debt going down, even though 90% of people are in the 10-year standard plan? Why, instead, is it going up at an exponential rate? Well, that’s because we keep lending principle (in the case of FFEL, they don’t even lend it anymore in this particular way) but the American people keep paying interest. Apparently, they are not paying enough interest either, because the interest keeps growing and growing and growing.
Welcome to the revolution, my friends. Once you know how student loan interest is calculated, you can never go back. Once you see the horrid mess we’re in, hopefully you’ll join me in changing things.