Let’s be real, y’all. The student loan crisis in this country has become way too serious to ignore. Right now, the total amount of student loan debt in the U.S. is coming in at over $1.6 trillion.1 That’s insane.
And you know what? I’ve been there. I was that kid who owed more than $10,000 in student loans (with $15,000 of credit card debt) after being in college for only three semesters. I fell into the trap of thinking loans would make my life easier, and it cost me a lot. In fact, I realized that taking out loans and going into debt was probably the worst mistake I could have made—after I wound up homeless and living in my car for a season. Yeah, not cool.
I followed the Baby Steps to get out of debt, and I’m blessed to be where I am today. But you better believe I’m going to do everything I can to make sure other young people don’t go through what I did.
Let’s take a look at the simple (but painful) facts so we can understand the problem and work toward a solution—and make sure the next generation, including your own kids, know how to graduate debt-free.
The Sobering Stats on the Student Loan Crisis
- At this point, national student loan debt has way exceeded credit card debt—by over $800 billion!2
- Student loan debt has seen almost 130% growth since the Great Recession and is the fastest-growing portion of total household debt in the U.S.3, 4
- There are currently about 44 million student loan borrowers in this country.5
- Sixty-five percent of college seniors who graduated from nonprofit colleges in 2018 had student loan debt.6
- The average student loan debt is about $35,000 at the time of graduation.7
- As of 2019, almost 6% of people with student loans were over 90 days late on their payments. That’s the highest delinquency rate of all household debt—outranking auto loans, credit cards and mortgages!8
Still breathing after reading those facts? Good. Because we’re not done breaking down just how crazy student loans really are.
The True Cost of Your Student Loan Payments
There’s a reason why lenders make it pretty easy and painless to take out a loan. They know people (especially high school and college-age people) just want to take the next step in their lives and will be drawn to the fact that student loans make college seem affordable and accessible. But really, the cost of the loan is so much more than meets the eye.
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Picture it: You’re young, so you take out student loans to major in something you’re passionate about. You’re hopeful about the future—and then you have to make payments for up to 30 years, depending on your repayment plan.9
That’s a lot of life to spend being weighed down by debt.
How Are Monthly Payments Calculated?
First of all, it’s worth noting that monthly student loan payments usually range between 10–20% of graduates’ income after they enter the workforce.10 (Gotta love a monthly reminder that the money you’re making isn’t really yours, right?)
Let’s take a look at federal student loans. (I’ll get to private loans in a minute.) Monthly payments vary based on the amount borrowed and the interest rate. The average interest rate really just depends on the type of loan and when you get the loan (Congress adjusts the rates each year). Interest rates can range from 4.53–7.6%.11
So, for example, if a student borrowed $40,000 with a 6% interest rate, they’d have to make 10 years of monthly payments at $444 per month. And with recent college grads averaging salaries of just over $51,000, that student loan payment is going to eat up almost 13% of their monthly take-home pay!12
But what would happen if those payments didn’t exist? What could that money do? The typical monthly student loan payment is between $200 and $300. So, say a 21-year-old graduate started investing $250 per month with a 10% return instead of putting that money toward a payment.13 They’d have almost $2.9 million by the time they retire at the age of 67. Just for fun, let’s say that same student invested $444 per month with a 10% return. By age 67, they’d wind up with over $5.1 million!
Don’t even get me started on what you could do with that kind of money. Talk about living and giving like no one else!
Already paying off your student loans? Use the Student Loan Payoff Calculator to calculate how quickly you can pay off your loans by making extra payments.
What About Refinancing Student Loans?
Student loan refinancing might sound like a quick and easy fix, but let’s face it, quick and easy is what gets folks into student loan debt in the first place. If you’re not careful, you could end up with a higher interest rate or longer payment terms than you had before. So before you decide refinancing your student loans is the winning lottery ticket you’ve been waiting for, let’s get clear on a few things.
With refinancing, you’re basically asking a bank or private company to take all your student loans, pay them off, and give you a new interest rate and payment terms. They front you the money, so now you owe them.
Your job is to lock in a better interest rate (especially if it means dumping any variable interest rates and replacing them with fixed rates) and shorter repayment terms so you can get your loan paid off faster.
Student loan refinancing is the only type of debt consolidation that I (or Dave Ramsey) recommend. But it isn’t for everyone.
I talk more about this in my new 64-page quick read, Destroy Your Student Loan Debt, but here’s a quick checklist. You should only refinance your student loans if:
- It won’t cost you anything to consolidate them.
- You have a variable interest rate and can lock in a fixed interest rate.
- Your new net interest rate is lower than your current net interest rate.
- You don’t sign up for a longer repayment period.
- You don’t get so relieved by the thought of a single payment that you lose your motivation to pay off your debt fast!
Before we get deeper into how to avoid student loans so the money you save can be used for better things, let’s talk about all the types of student loans out there. That way you can prep your kids on exactly what they should be running away from.
Types of Student Loans: An Overview
Subsidized, unsubsidized, federal, private . . . they’re all just different ways to spell the same word: T-R-O-U-B-L-E. But it’s worth a closer look for clarity. I cover all this stuff in my book, The Graduate Survival Guide, but here are the basics on the different types of student loans.
Federal Student Loans
These types of loans come from the U.S. Department of Education’s federal student loan program. So they’re funded by the government and have a “grace period” of six to nine months after students graduate before the payments start.
- Direct Subsidized Loans are loans for undergraduate students based on financial need. While the student is still in college, the government pays interest on the loan. But once the student starts making payments, they become responsible for paying the interest.
- Direct Unsubsidized Loans are loans for undergraduate, graduate and professional students not based on financial need. The amount a student can borrow is determined by their school. The government doesn’t pay the interest on these loans for any period of time. Instead, interest accumulates while the student is in school and then that interest is added to the loan amount once they start making payments.
- Stafford Loans are the most common type of subsidized and unsubsidized loans. The financial need requirements for these can vary.
- Perkins Loans are subsidized loans with a lower fixed interest rate and are intended for students with the most financial need.
- PLUS Loans are loans for graduate students (Grad PLUS loans) or the parents of undergraduate students (Parent PLUS loans) to cover education costs that have not been covered by other financial aid. These are not need-based and require a credit check to be eligible.
It’s possible for an independent undergraduate student, who is at least in their third year, to borrow up to $12,500 per year in Direct Subsidized Loans and Direct Unsubsidized Loans, which is bad enough. But get this: A graduate or professional student can borrow up to $20,500 per year in Direct Unsubsidized Loans.14 Just imagine if you took out loans for a two-year graduate program. You could owe $41,000 by the time you’re done!
Private Student Loans
These have higher interest rates than federal student loans and are available through banks, schools, state agencies or credit unions. The student has to make payments while they’re still in school, plus they’re responsible for all interest payments.
Why Do People Rely on Student Loans?
Now that we’ve seen the facts on student loans, let’s look at the reasoning (or lack of reasoning) behind getting one.
Right now, there’s a mindset in this country that if you don’t get a degree, you can’t win. So it’s understandable that high school students are freaking out, thinking they won’t get a decent job when they graduate if they don’t have a degree. And they’ve been fed the lie that the only way to afford that college degree is to take out a loan.
But neither of those ideas are true. Plenty of people who never went to college have succeeded with plain old hard work. And there are lots of opportunities out there: A labor-market research firm analyzed job-search websites and reported that 70% of job postings don’t require a college degree.15 But still, sometimes you definitely need a degree to go into the field you want. Just remember a degree is a degree no matter where it’s from—it’s 100% possible to get a degree without loans by choosing an affordable school. And if that means a community college, who cares?
Again, I’ve been there. I totally remember what it was like to believe there was no way to get an education (or pay for anything expensive in life) without taking out loans and piling up debt. But once I started learning about all the different things I could do to graduate debt-free, I knew it didn’t make sense to pay for college any other way.
The truth is, while student loans are meant to make life easier for students, they do just the opposite. They create harmful money habits while students are in school for sure, but the negative effects of student loan debt aren’t just financial.
Recently, the Ramsey Research Team surveyed young professionals in my tribe and found that 58% of them said their student loan burden has kept them from achieving goals. Seventy-four percent of them said if they could go back, they wouldn’t take out those loans. Living in regret isn’t emotionally healthy for anyone.
Sadly, being in debt can cause symptoms of depression, stress and even suicidal thoughts. A report from the Community Mental Health Journal showed that of the students they studied, 15.5% of those in debt had a mental health disorder, while only 8.9% of those not in debt had a mental health disorder.16 And we all know today’s generation suffers enough from those burdens without the added stress of a ton of student loan debt.
Listen: I’m all for higher education. But young people have to know that taking out a loan isn’t the way to get it. Not only is student loan debt weighing down their future, it’s affecting the future of our country too.
Student Loans and the Economy: The Long-Term Impacts
As it turns out, having piles of student loan debt makes millennials less likely to be able to afford things like houses and families. Go figure. And 41% of millennials surveyed by the National Association of Realtors said they want to get married but can’t because of their student loan debt. Over 50% said they’re waiting to start a family because of it.17
It’s pretty simple: When people are putting a huge chunk of their income toward paying their student loan debt, they have less money to spend on other things like products and services that keep the economy going strong.
Are Universities Fueling the Student Loan Crisis?
I’m definitely not saying that every university is contributing to the problem, but it’s no secret that college tuition isn’t getting any cheaper. Between 1989 and 2019, the cost of getting your degree doubled, and it continues to rise. Private universities are especially pricey—average tuition was almost $50,000 for the 2019-20 school year!18
Income Share Agreements: The Misleading “Alternative” to Student Loans
Rising tuition costs are bad enough, but have y’all heard about income share agreements? That’s a contract between a college and a student. The school loans money to the student to cover education costs, and the student commits to paying a percentage of their income later on. When their income increases, their monthly payment increases.
Some people think this is better than a student loan, but is it really? Truth is, students who do this are still in debt because they borrowed money—and they’ll have to keep making payments for years. Nobody wants to graduate from college, get an exciting new job with a dope salary, and then face the fact that thousands of dollars of that salary will be going right back to their college. Kind of a letdown.
Bucking the Trends—How Some Universities Are Combating the Student Loan Crisis
Luckily, there are some colleges out there that are actually trying to do something about the student loan crisis. One of those colleges is the University of Wyoming.
The University of Wyoming Story
The University of Wyoming (UW) is a land-grant university on a mission to make higher education affordable and accessible to everyone in their state. Making tuition “as nearly free as possible” for in-state students is mandated in the Wyoming State Constitution! How cool is that?
According to their website, this college has been “bucking the system since 1886.” They’re not afraid to rebel against the world’s popular money habits, which include taking out student loans. In other words, they have no problem being weird in a culture where debt is the norm.
UW’s also promoting a fundamental change in the way people interact with money by making sure high school kids form good financial habits while they’re young. They’re actively helping students in their state become equipped with the tools they need to handle money wisely and go to college debt-free by sponsoring Ramsey Education’s curriculum, Foundations in Personal Finance, which has impacted the lives of over 4 million students! That sponsorship means this industry-leading curriculum will be available to every high school in the state.
And they’re not the only ones. Arkansas Tech University, Georgia Military College and Chadron State College are just a few examples of colleges that promote accessible, affordable education by keeping their in-state tuition costs low. (Chadron even has an initiative to make the price of in-state tuition the same as out-of-state!) Plus, they sponsor the Foundations curriculum in multiple high schools near them to help as many students as possible know how to be wise with money. Now that’s what I like to see.
Bottom line: Affordable universities do exist, and helping your teen find the right one for them is just one of the ways you can make sure they graduate debt-free!
How to Prepare Your Kids to Go to College Without Student Loans
Have you fallen into the trap of thinking there’s absolutely no way to send your kids to college without the “help” of student loans? Trust me. I’ve talked to students all over the country who have cash-flowed their degree and graduated with a bright, debt-free future ahead of them—and your child can too. Here are a few practical steps you can take to help them get ready far in advance.
1. Encourage your child’s financial literacy.
If your child’s school offers Foundations in Personal Finance for middle or high school, talk to them about enrolling! They’ll learn everything they need to know about winning with money so they can step into their future with boldness and confidence (and no debt)! And of course, it truly makes an impact when you talk with your kids about money and lead by example.
2. Talk with your child about their career goals (and how to get there).
Right now, your child might be wondering if college is really worth it, so weigh the pros and cons with them. I’m a huge fan of college, but there are less expensive alternatives to a four-year degree. Maybe a trade school or military program is a better option, depending on what kind of career they want. Sit down with your child and have a conversation about what they really want to do and what their calling is––and then compare the costs of different types of schools using my Debt-Free Degree College Calculator.
3. Find an affordable college.
Remember, public in-state schools are your best bet for affordability. And keep in mind that a degree from a public college can be just as effective as a degree from an Ivy League university. Besides, not everyone asks the doctor where they went to school before getting a checkup.
4. Help your kids find scholarships.
Scholarships are a key part of graduating debt-free, and there are hundreds of them available to students. It can be overwhelming to comb through all of them, so here are some tips for your scholarship search:
- See if the scholarship can be renewed. If a scholarship is annual, that means your child can reapply multiple times! Just check to make sure the requirements haven’t changed at all before reapplying.
- Think outside of the GPA box. Your child can get scholarships for lots of different things that don’t even have to do with academics—like being the first person in their family to go to college, for example!
- Ask your company if they offer scholarships to children of employees. Many companies offer this benefit, so check with your HR department to see if yours does too!
How to Help Your Kids Stay Debt-Free in College
Just because your kids have left the nest doesn’t mean you can’t still encourage them to be wise with their money (so they don’t wind up in your basement after they graduate).
Here are just a few of the tips you can give them:
- Budget your money so every single dollar has a purpose.
- Keep looking for scholarships, grants and work-study programs that will help fund tuition costs. Apply for as many as possible. Fill out that FAFSA every year, people!
- Stay away from credit cards. Far away.
- Work part-time during the school year (and full-time during summers) and save the majority of your income to put toward tuition. Or get a side hustle going!
What’s a surefire way to fight the student loan crisis? Putting a plan into action so no one in your family has to take out any student loans—ever!
That’s why I wrote The Graduate Survival Guide with Rachel Cruze. I’m passionate about letting young people know that they can live and achieve their dreams without ever taking out a loan. The book walks them through the five mistakes they can’t afford to make in college and includes advice on being smart and money savvy—both in and out of school. When students learn these concepts early, it means less debt for our country and a brighter future for everyone.
Want to learn more about how to go to school without loans? Debt-Free Degree is the book all college-bound students—and their parents—need to prepare for this next step. Grab a copy today or start reading for free to get plenty of tips on going to college debt-free!