I am only 30 years old, but I am old enough to remember the housing bubble burst and the effect it had on the American economy in 2008 and 2009. At the time, I was working as a plumber’s apprentice for my father in law. In 2007 my father in law was charging a labor rate of over $100 an hour and in 2010 his rates had dropped below $60! Businesses everywhere felt the pain! In the early 2000’s we had the .COM bubble and in the 90’s we experienced the NASDAQ bubble. That is three major bubbles in my lifetime so far! Three different times that our economy reached rock bottom and (supposedly) bounced back! In this post, I wanted to talk to you about the next big bubble in America! And this one, we might not bounce back from! There is another financial crisis coming! This, unlike the housing market meltdown, is in place and contractually guaranteed to happen 20 years from now. If you have student debt you are very likely to be effected by this coming financial disaster!
A few facts to consider;
There are 1.3 TRILLION DOLLARS in outstanding Student Loans in the U.S Alone.
47% of those loans are currently in default.
“Income Based” Repayment plans are not actually designed to Repay your loans, EVER!
To illustrate, here are the numbers for a recent DEBT SHREDDER client, we rescued from financial ruin in the future.
James & Karen recently started paying on their student loans 54 months after they took them out (4 years + 6mo. Grace period.) J&K borrowed $68,000 originally. Now, since they were in deferment (Interest is ACCRUING the whole time) they OWE $85,000. The rate they agreed to 4-1/2 years ago was 6.99% APR.
After graduation J&K entered into a “INCOME BASED REPAYMENT PROGRAM” (The Federal Government signed into law in 2016.) The REPAYE calculators say they should pay just $280.00 monthly. After making payments for 20 years the debt would then be “Forgiven” and they could stop making payments and would not owe any more money.
Unfortunately, the reality is that to pay off their loans, at that rate, in 20 years would require a payment of $658.49 monthly. This means that $378.49 gets ADDED to the UNPAID BALANCE every month. ($658.49 - $280.00 = $378.49) So the REPAYE program will NEVER actually PAY OFF their loan.
After making 240 payments and paying $67,200 in interest J&K will get FORGIVEN $175,837.00 ($85,000 + ($378.49 X 240)). Or to put it another way, their bankers will WRITE OFF $107,837.00 MORE than they BORROWED after 20 years and $67,200.00 in payments.
Now you are probably asking yourself “Why should I care about J&K?” Here is why; If you get into one of these programs, and your banker WRITES OFF the FORGIVEN DEBT as a LOSS on their books that year. They will issue YOU a form 1099m for (As in J& K’s case $175,837.00) Which according to the IRS code means that money forgiven is TAXABLE INCOME for that year 20 years from now.
Please understand the full ramifications of this. 20 years after you graduate, you will likely be at the top of your professional earning capacity. Plus you will be at the highest Income Tax Rate in your life (30 – 35% according to several accountants we spoke with)
You will get a BILL for the TAXES YOU OWE ON $175,837.00 TAXABLE INCOME that you didn’t ACTUALLY GET PAID!
At the low end, that is about $52,000 in taxes you will owe THAT YEAR and we all know the IRS is VERY GOOD at collecting what is owed them.
Now for the good news. J&K got the DEBT SHREDDER. Using the money they already earn they will be DEBT FREE having PAID OFF their debts in just 6.8 years. After becoming DEBT FREE, if they continue to invest at just 1% return. They will have $1.25 MILLION DOLLARS saved. Really, someone is going to get that money. Is it the bank and the IRS, or is it you and your family?
The point is, there are options! The bubble can be avoided. It will not likely be stopped. Individuals will have a choice to either be a part of the problem or a part of the solution, and only those who were proactive will limit the suffering that they put themselves through. The old saying goes, "Nothing is for free", and that is a saying that my generation would do good to live by. I would love to run a free analysis for anyone with a large amount of student debt, to see how much you can save, but if not me, talk to your accountant or your financial advisor and come up with a plan that will keep you secure from the effects of the next big bubble!