The student loan epidemic is all over the news. Every politician is talking about it and how they plan to combat it. If student loan forgiveness is a reality, Americans will have the ability to purchase more things. But you do not want to wait for your debt to be wiped out via student loan forgiveness because we have no idea if or when it will actually happen.
According to the Institute for College Access & Success, college graduates from 2018 that took on student loan had an average of $29,200 in debt. This is largely due to the increase in college tuition costs. According to CollegeBoard.com, from academic years 99-00 to 19-20, private nonprofit four-year tuition and fees have increased $12,990. For academic years 99-00 to 19-20, the price of a public four-year school has gone from $5,170 to $10,440, respectively. These numbers do not include room and board and are based on 2019 dollars.
This is a significant amount of money! Carrying this amount of debt could potentially block you from getting a home. A vast majority of lenders want you to have a debt-to-income ratio between 43% and 50%. This being said, it is easy to notice how much harder it is to get more debt if you are already in debt.
These numbers are huge! Having nearly $30,000 in debt does not sound settling. Wages have been on an increase for the past 40 years. Unfortunately, that is not the case for purchasing power. What is purchasing power?
According to investopedia.com, purchasing power “is the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy.” For our purposes, this means the value of an hour of earnings in previous years versus current years. With debt on the rise, we would anticipate the same for wages and earnings. The unsettling news is purchasing power has not increased by much over the decades. According to the Pew Research Center, “despite some ups and downs over the past several decades, today’s real average wage (that is, the wage after accounting for inflation) has been about the same purchasing power it did 40 years ago.” Thus, making it harder to pay down larger amounts of debt.
If you have student loan debt and student loan forgiveness is not an option you need to make sure that you can afford your debt. Cutting out unnecessary spending is the easiest way to start paying down debt. Fun fact, you do not need to be spending money at restaurants. This is not new advice because I am sure we all know we do not need to be eating out. Strict budgets are the easiest way to start saving money to pay down debt. We all hope that student debt and all of our other debts will be wiped out somehow, but we shouldn’t consider this plan A. It would be really nice if our debt just disappeared, but if you consider that to be option 1 you will lag behind payments and begin to see your credit score decrease.
Debt may be at an all-time high, but purchasing power is not. You need to start paying down your current debt so you can get future debt, like mortgages. Create a budget and follow it as much as you can. Do not expect your debt to be eliminated or wiped out, this will lead you down a bad path. Make sure you never miss a payment for a debt obligation! Missing payments will have negative effects on your credit score.