I’m sure you’ve heard a lot about student loan debt lately. “Student loan debt is killing the economy” is the common phrase I’ve heard lately. Then they quote that the average college graduate has over $25,000 of student loan related debt according to some survey and that this debt puts off the normal spending cycle of someone with their first post college job. Today, I’m going to share how student loan debt has affected us and our spending.
How We Became Two Polar Opposites – No Debt vs $80,000 of Debt
When I graduated from college I hadn’t taken out a penny in loans. Part of this was due to me saving money when I worked, part was from applying for and winning a few scholarships and half of it was my parents helping me pay my way through college. I was lucky and graduated with zero debt, or $25,000 below the average.
My fiancee, on the other hand graduated with $80,000 of student loan debt which is over 3 times the national average. She went to college during the credit crunch and didn’t have the same resources available to her that I had.
Her major (nursing) was much more demanding on her time, so she couldn’t work outside of school as much as I did. She was also the typical American college student (white, female, and decent but not top 1% grades) which leads to very few scholarship opportunities and no financial aid other than unsubsidized loans.
She didn’t borrow $80,000 to get through college, she borrowed much less. However, when you can only secure very little in federal fixed rate loans, the rest of the money has to come from some other source of loans. Unfortunately, this meant turning to variable rate private student loans during one of the worst borrowing environments in recent history.
Her variable rate private student loans started accruing interest immediately, as all unsubsidized loans do. The interest rate was insane and at times it was more than 12% . Luckily, it has come down to 8% at the current time, but adding 12% to her balance every year while she was in college made her debt blow up bigger than a hot air balloon.
How Our Post Graduation Spending Was Different Because of Debt
After I graduated from college, I didn’t have many worries financially. I had to find a place to lay my head, but other than that I didn’t have any major expenses. I owned a decade old used car that was paid off and I had a job lined up.
I ended up maxing out my Roth IRA during my first full year of work and started saving for big purchases, such as my new car I bought a year after graduating. I saved for a house down payment and spent some money on small luxuries that I couldn’t afford in college.
I wasn’t like my peers, though. I tried to keep a tight budget and save for the future. I knew this would be the easiest time in my life to save, since I hadn’t experienced any major lifestyle inflation yet and I didn’t have a ton of responsibilities. The money I saved in the first couple years after I graduated allowed me to take advantage of some great opportunities that I may have had to pass up on otherwise.
My fiancee, on the other hand graduated from college with a ton of worries. Her student loan debt was more than double her expected annual gross income and she didn’t even have a job lined up yet! Talk about nerve wracking!
After three months of searching, she settled into her first job and immediately began to pay down her student loans. She only contributed up to the match in her retirement account and set a strict budget for herself. All extra money went to pay down the student loan debt.
Luckily, she had a reliable car that was paid off, so there was no need to spend money there. She lived with me, so she only had to worry about her part of the monthly rent or mortgage and didn’t have to worry about saving up for a down payment. However, if she had to live on her own her budget would have been even tighter. She has done a great job of paying her loans off so far, but we still have a long way to go.
How Student Loan Debt Will Affect Our Future Spending
Since my fiancee still has over $50,000 of her original $80,000 of student loan debt, we still have a long way to go. We’re getting married in just a couple of months and we plan to combine our finances. That means I’ll be working just as hard as she is to get rid of that student loan debt.
With our focus on the student loan debt, that money won’t be going toward other goals. My fiancee would love to decorate our new house but there isn’t money for it in our budget. We wouldn’t mind going on a nice cruise on a fancier cruise line or cruise ship, but again, the student loans come first. Basically, rather than spending money or investing more money to secure future spending, we will be paying down debt.
So does student loan debt destroy the economy? I’d definitely say it changes it in a major way. Students spend the money up front and then they pay the original money, plus a ton of interest, back to banks. Assuming the banks loan the money out again, the money should be spent somewhere. But does that happen?
I’m interested to hear your opinion! Do you think student loan debt kills the economy? It definitely puts an interesting twist on the normal spending timeline!