How $50,000 in Student Loans Affects the Path to Wealth

I’ve mentioned this before but I want to make it clear: one of the biggest reasons I have $150,000 wealth to my name is thanks to having zero student loans to wrangle. This runs counter to the SEVENTY PERCENT of folks out there that take out debt to finance their education*. So knowing that, let’s do a thought experiment. If I was part of the average, could I have still reached a six-figure net worth while in my 20s?

The Background

I thought I would have debt to grapple with, as my parents did take out a wealth of student loans for my first two college years. But those loans weren’t in my name and they never walked me through the financials of it all; like countless others, I was in the dark about how it all worked.

Thus, when I graduated in spring 2016, all I had to go on was knowing I’d have to get ready for paying all of that back. I assumed I had the six-month grace period to get my shit together before beginning payments, which left me to obsessively track the money in my bank account and further depressing behavior. It left me with more stress than necessary until Christmas 2016, when my dad mentioned they’d already paid back those loans.

And that they’d planned to this entire time since I covered all other expenses on my own.

Plans that didn’t involve my input or, y’know, letting me in on it.

Don’t get me wrong, I was overwhelmingly grateful when I got the news. And just overwhelmed in general – I had promised myself I’d get it paid off within five years, and it’s already done with six months in. (???!!?) Which meant I could put the money I earned towards other goals and dreams, like becoming an investor and growing my wealth.

And grow it did, thanks to catching the tail end of the 2010s bull run. When I was 23 years old I reached a $50,000 net worth. At 25 years old that became $100,000. And now I’m 26 and it’s gone up more to $150,000.

Question is: how much would I have if my life went a little differently? If my parents didn’t decide to just pay off all those student loans? Could I have even come close to impressive wealth at a young age?

The Case Study

I could just make it easy on myself and say “oh, of course! $150k minus $50k is $100k, so I’d still be worth six figures by now. Done.”

But we’re not here to make it easy, we’re here to be truthful. Making it so simple is doing a huge disservice to others that do have to deal with this reality. I’d be both minimizing it and failing to consider further realities like added interest and accrued penalties by ignoring it for this long.

After checking the old numbers myself via my alma mater’s payment portal, I estimate my student loans would have been $12,000 per year, or $50,000 total. Yes, this is after taking out my half-ride scholarship, other grants, grandfathered tuition, and working several jobs at the school.

Which is scary. At least that makes the math a little easier.

Let’s say $50,000 is in loans that are at a 7% annual interest rate, which is the highest rate I’ve seen between subsidized/unsubsidized and Direct PLUS loans. That basically means you need to pay off not only that $50k, but the interest it accrues as well.

We’re also assuming I’d have that 6-month grace period before I need to start paying them off.

The Dangling “Carrot”

There’s a reason there are so many debt-focused blogs out there, and that’s because there is an inconceivable amount of information out there about it. So much that it makes the mind shut down and only focus on very few things; generally, those few things are picked – out of fear – as whatever seems easiest. That seemed to be the idea of minimum payments and debt forgiveness.

Chiefly, we know the student loans crisis needs solving and something has to give. Why not just pay the wealth minimums until that happens? It’s not that dumb of a premise when you think about what doing just that offers you:

• Paying the smallest amounts possible, which frees up your spending budget
• Ensuring no further brain power or energy is required about this, and
• Avoiding the stress it takes to sort out these depressing numbers

There’s also the perceived opportunity cost you might lose if you don’t take this approach. What if you work your ass off to pay that huge amount off, only for Congress to forgive all debt a year or two later? You’d feel robbed! Why did you spend all that time sweating and stressing, only to find out you didn’t freaking have to in the first place?!!

That’s a valid concern too, especially when Millennials are already at a disadvantage financially. Minimum payments sound like they’d make everyone happy, right? You keep your debt repayment the lowest it’ll go, the lenders are happy with getting paid, nobody needs to get their panties in a twist. Right?

Well, it’s a choice you need to make on your own, while considering all the options on the table. I put “carrot” in quotations up there because you’ll likely pay several thousands more in the long run.

Case Study Option 1: Minimum Payments

Given the $50,000 at 7% interest, there’s a couple of ways we can calculate what my minimum monthly payments would be. Sallie Mae has a simple calculator to give me an estimate.

We’ll round that up to $400 for some easier math, meaning that’s $4,800 wealth per year with student loans repayment. Which is a lot of money, but not that much that it would make a difference to my portfolio, right? 3.5 years of repayments would have been $16,800; that alone would have dropped my net worth down to around $133,000.

But we’re not considering the cost of missing out on investment gains from that time. I started investing in early 2017, dumping everything I could spare into S&P 500 index funds. How much money would I have lost out on with investment gains to boot?

Well, let’s take a look at how much that would be. The S&P 500 had awesome returns these last 3.5 years, to the tune of 13.7% on average.

And if we use that to tell us how much we’d earn on investments…

Year	Contribution	Total investment gains	EOY total
2017	$4,800	+$1,047.84	$5,848
2018	$4,800	-$466.38	$10,182
2019	$4,800	+4,717.71	$19,699
2020	$2,400	+1,345.84	$23,445

We find out that doing the minimum payments make you miss out on over $23,000. Ouch.

Brace yourself: it gets worse.

I’d still have 16.5 years of missing out on further gains in the stock market, while STILL having this huge debt looming over me. Which, by the way, takes away from your net worth overall. Despite those minimum payments, I would have only managed to pay off $8,750 of the loan itself (thanks, interest). Meaning my debt would be sitting at $41,250.

Subtracting $23,445 and $41,250, my net worth would have been $85,305, all else being equal.

Which ain’t bad. I’d still have enough to never worry about a traditional retirement, or put my brother through a couple of years of college. But that also means almost HALF of my net worth would have never came to fruition at this point in time. Worst of all is if I end up paying the minimums for those 20 years; once it’s all said and done I’d have forked over $96,000 total over the course of two decades. I don’t even want to calculate how much in investment gains I’d have lost in that time frame.

Case Study Option 2: Furious Debt Paydown

Let’s say I decided to get aggressive on this debt after looking at what I could frugally afford. Sallie Mae helpfully informs me that paying this off in five years requires roughly $1,000 in payments per month. Or $12,000 per year.

Fine. You gotta do what you gotta do, right?

This is still doable for me too; in 2017, 2018, and 2019 I’ve put more than that into my Vanguard account (excluding my contributions to my Roth IRA). It means the total amount of money I pay back is $60,000; that’s 20% more than the original loan, but it’s a lot less than what I would have paid total in Option 1.

It also means a lot less money is being invested, too. $12,000 over 3.5 years is $42,000 in capital I now do not have. And by looking at the returns…

Year	Contribution	Total investment gains	EOY total
2017	$12,000	+$2,619.60	$14,620
2018	$12,000	-$1,165.93	$25,454
2019	$12,000	+11,794.16	$49,248
2020	$6,000	+3,364.59	$58,613

I would be out almost sixty thousand dollars. And that’s out $60k before I take out the remainder of the loan, which at this point is at $18,000 left to pay down.

$150,000 minus $58,612 and $18,000 leaves me with $73,388 in option 2.

Even less than making the minimum payments, for this point in time. In another 1.5 years I’d be debt-free and quickly hopping on my path to wealth. It just sucks that taking the lead on debt repayment would have meant giving up over half of that net worth.

And People Wonder Why Millennials Are Broke??

Obviously the math here doesn’t lie: student loans cripple your ability to grow wealth before you’ve even began your career. In either case I can’t avoid that $50,000 figure, which in actuality takes away 50% of my spending power. We want to see 50% in things like pay increases, not in loss of wealth. This kind of wealth disparity easily discourages millions who have student loans, especially when most of them already don’t understand basic finance. And for people with your average income (~$45k) these payments eat up a serious paycheck amount.

Options	Net Worth Today
Minimum payments	$85,305
Aggressive payments	$73,388
No loans at all	$150,000

But here’s the silver lining: you can still amass some insanely impressive wealth with student loans. With $73,000 at the age of 26 I’ve got almost 3x what I need to retire a millionaire. That also makes me richer than 80% of my peers. Obviously the ideal would be a world where no one has to take on serious debt to afford an education, but it’s really not all doom-and-gloom.

The powers-that-be have dealt you a shit hand that you didn’t deserve. Thankfully, that doesn’t need to keep you down for long on your own path to wealth.

*Side note: if only three out of ten students can actually manage to graduate without debt, that’s indicative of a system problem, not an individual one.

Cover image credit: NRD via Unsplash