The U.S. Will Forgive $108 Billion in Student Debt

So you went to a fancy ivy league school for undergrad, got a degree, made a ton of connections, got a great paying job but then, you can’t escape those student loans.

You borrowed to get that education, and we’re not talking a few thousand bucks, but more like in the tens of thousands if not hundreds of thousands of dollars.

Yea, true story! So that means, on average, that 20%-35% of your after tax pay is going back to the bank to pay off those student loans.

OK, so let’s think about this, in theory, let’s say you have a marginally high salary of $65,000. Let’s assume that 35% of your income goes to tax (65,000*0.35) which is $22,750 and that leaves you with $42,250 in after tax income per annual basis.

Now before you think about buying that car you’ve always wanted (assuming you don’t live in NYC or San Francisco) and living in the city or neighborhood you’ve always wanted or take cool vacations on the regular, you have to instead think about paying back the money you borrowed from banks to get that nice education.

So lets think this out play-by-play. You make $65k a year. Again, assume that 35%, which is $22,750 will go to state and federal taxes leaving you with $42,250.

Say you have $80,000 in student debt to be paid off in 12 years (standard education term) at 3% because you got lucky and consolidated all of your loans with one bank at a lower interest rate.

Assuming simple interest here, which is the annual interest rate multiplied by the total balance owed and time remaining, there will be about $28,800 in total interest owed if you wait 12 years to pay off you $80k student load.

Here is the simple math; $80,000 multiplied by 0.03 (3% interest) multiplied by 12 since the loan term is twelve years.

So in 12 years, you will have paid $108,800 back to the bank for that fancy education you got or if you want to look at it on a monthly basis, just divide by 144 (12 years multiplied by 12 months because there are 12 months in a year) and your average monthly payment would be $755.55 assuming you are on a fixed schedule.

So that $755.55 a month is equal to $9,066.67 a year in student debt loan payments bringing your after tax income mentioned earlier of $42,250 (assuming your $65k salary remains constant for 12 years) to $33,183.33 or paying a little over 21% of your annual after tax income to student debt.

Now take that $33,183.33 and divide it by 12 to see a monthly figure which is $2,765.28. Did we mention that the interest accrued on those loans is tax deductible? Yep!

In California, to live off of $2,765.28 a month is doable but by no means will you be living large and you most likely won’t be driving that 911 Porsche anytime soon unless you want to live in that car.

The upside here is that, say you maintain an average income of $65k a year or $42,250 after taxes, in 12 years you will have earned $780,000 in income or $507,000 after taxes so paying off $108,800 in student debt doesn’t seem so bad when you look at it from a macro prospective.

Another way to look at it, is that it cost you $108,800 in 12 years to earn $780,000 in 12 years. If you want it in business perspective, you generated 717% return on your investment in 12 years which is pretty good if ask us.

So was borrowing money to pay for college worth it after all? Sure if you can generate more money in income using that degree you earned and be able to pay of your student loans while making a living; of course.

Now the good news, according to a report from the Government Accountability Office, an estimated $108 billion or more in student loans will be forgiven over the next 10 to 20 years, thanks to federal programs that help ease the financial burden for those attending higher education institutions.

That figure is roughly one-third of the $352 billion in estimated loan volume U.S. students are expected to take out between 1995 to 2017.

So it is likely that that $80k you borrowed may be reduced further increasing your monthly/annual earnings.

As my grandpa always said, “don’t be a fool, go to school”. Salute!