Student loan debt is perhaps the biggest “first world problem” of our generation and is weighing down the young Millennial middle class more than anyone without this massive debt can begin to comprehend. Student loan debt is making it difficult for Millennials to buy homes, get married, invest in their retirement and plan for their futures the way their parents and grandparents had before them. From my experience, student loan debt is just a nicer way to phrase indentured servitude. What else would you call wasting away the best years of your youth working for someone else at a job you barely tolerate to pay for a mistake you made when you were 18? By the time you finally pay off your loans, most people are too far down the rabbit hole to come back up and get stuck on the hamster wheel until they reach the age of 65.
According to Forbes, borrowers from the graduating class of 2017 owe an average of $28,650. This is close to the amount I owed when I graduated with my undergraduate degree from my state college in 2010. So, what can you do about it? I suggest the best way to defeat student loan debt is to follow my path, grind your teeth and bare through half a decade of living as frugal and spartan a life as possible.
I spent one year searching for a career after graduating in 2010. The best available jobs I could find with my expensive college degree were serving tables at restaurants, door-to-door sales and working for a furniture moving company. This was of course right after one of the worst recessions in recent memory, but how could I afford to pay off my student loans when I couldn’t even afford to move out from my parent’s house?
This problem drove me to search for a safer career path in education, how could I be denied a government job? I had read about public service loan forgiveness and figured the best way to get out of my current debt would be to go further down into the debt black hole. One step backward to go two steps forward. To become a professional educator, I would need to go back to school to get a graduate degree in education to supplement my Bachelor’s degree in Journalism.
I graduated in 2013 with a Master’s in Teaching and found a job right out of school, but now I was $70,000 in debt and was getting paid less than $40,000 a year. The minimum payment requested by federal aid was more than $750 per month and here I was making only $2,750 per month after taxes. How can anyone afford to pay more than 25% of their net income to student loans when you have rent/mortgage, utilities, internet, groceries, etc.? What about investing for your future, how can anyone save for retirement with these types of debt repayment plans? Forget about having kids… no wonder why our generation is having less children.
I searched for loopholes, looked into joining the National Guard, everything under the sun to get out of debt. Luckily, the government has the Income-Based Repayment Program, helping those who are paying more than 10% of their income to student loans. On the IBR program you can get your monthly payments reduced to 10% of your income and if you make your payments on time for 20 years, your loans are forgiven, however you still need to pay taxes on the total amount forgiven. As a teacher, I would have only had to make these minimum payments for 10 years and work in low-income schools to meet the public service loan forgiveness requirements. However, I would only be paying interest and when my loans were forgiven, how in the world was I going to pay taxes on $70,000 forgiven?
I was on the IBR program for one year as a teacher when I realized there had to be a better way. I worked for a construction company the summer after my first year as a teacher to help make some extra money and while there, I made the most of my opportunity. The construction company had never employed anyone with a college degree before. The company was way behind on technology, no cloud services, no business systems, no organization - the company was a mess. All of the basic skills I learned in college like time management, organization, using google drive, creating spreadsheets, basic math all kicked in - my teacher’s intuition to organize and to motivate employees kicked in. I made a decision to be proactive and to reach for a leadership role in the company. What’s the worst that could happen? They fire me from a $12 an hour side gig?
I transformed the business in my two months working there in the summer and updated the business from using old handwritten ledgers to cloud based programs. I discarded all of the old systems that weren’t working and brought in new systems. While there, I learned as much as I could about construction and took the initiative to do as much as I could to help the company, rather than only what I was told to do. It was a small business, so it was easy to have a large impact with every initiative. At the end of the summer, the owner of the company requested I leave my career as a teacher and stay on at his company. I made myself invaluable.
As a teacher, I made just under $40,000 for 9 months of work. I told the owner of the construction company, if he wanted to keep me on he had to extrapolate my salary over 12 months and he had to pay me commission for any sales I made for the construction company. My first full year with the construction company I was promoted to Vice President of the company, made $50,000 salary and another $12,000 or so in sales commissions (2% of the gross total from all my sales). I detail my business building techniques here, but the point of this article is paying off my student loans.
My strategy in the first full year was to apply $500 per month to my student loans and put 75% of my commissions toward the student loans. To clarify $500 per month is a lot of money in South Florida. My rent was nearly $1,800 per month for a 1 bedroom unit (split with my fiance at the time), my car payment and auto insurance was $500 per month, plus other general expenses. I limited my spending and cut all unnecessary expenses. No eating out. No clubbing. No fancy car. No shopping for clothes or other trash. Only $30 per week for fun (mostly spent on beer) and I even set aside $100 per month to build up an emergency savings and another $475 per month to apply toward a Roth IRA, so I could max it out at the end of the year ($5,500 per individual).
Why did I only apply 75% of my commission toward my student loans? My commissions were paid via 1099, so I figured I might need to save 25% of that money for taxes at the end of the year. Never make the mistake of spending all your 1099 money, my wife did accidentally one year and I ended up having to cover thousands of dollar of taxes she owed the IRS, this was not a pleasant experience.
YEAR 1:
$500 per month x 12 = $6,000
$9,000 from commissions
= $15,000 paid off
Total remaining loan = $55,000
I managed to pay off more than 20% of my student loans only making $62,000 annually, which is the equivalent of the median national household income in 2018.
My second year at the construction company I had a slight raise to $52,000 annually in salary and managed to score $23,000 in sales commissions throughout the year. My first year at the construction company, I spent a lot of time on re-branding the company, firing incompetent workers, bringing in better employees, creating a website and online content that would generate business for the company and creating a TON of business systems. My second year at the company I was able to learn more about the trade and focus on selling larger projects now that I had the systems and the staff to handle the larger projects. In two years the company went from annual gross revenue of $500,000, 8 years running (no growth) to more than $1.2 million in gross revenue the first year and $1.8 million in gross revenue the second year.
I had a goal to buy my first house while I was paying off my student loans this year (2016); with an end target of paying the student loans off in 5 years or less, so I put aside $15,000 of my commissions to go toward a 5% downpayment - knowing starter homes in my area were going in the $280k - $325k range. You can read about buying your first home here, but I did manage to buy a house in the summer of 2016, while also paying off my student loans in less than four years.
Since $15,000 of my $23,000 of sales commissions went toward the house, plus an average of $250 per month I had saved up from the previous year and another $250 in 2016 (saved from simply not spending up to my budget) for closing costs (about $6,000), I only had $8,000 leftover, which was reserved for taxes. (I ended up having to pay $9,000 in taxes from 2016).
YEAR 2:
$500 per month x 12 = $6,000
-$1,000 extra to go toward taxes
= $5,000 paid off
Total remaining loan = $50,000
I didn’t make the progress in year 2 that I had hoped for coming from year 1, but I did shell out more than $20,000 to buy a house, which is a nice long term investment, as I plan to never sell a property - you can read about investing here. Plus I also added another $5,500 to my Roth IRA and the first $5,500 was mostly spent on Apple and Amazon stock, so that had increased nicely.
In year 3, after my success in growing the construction company nearly 4x in only 2 years, I convinced the owner of the company I was worth not just 2% of the sales that I made, but 2% of the entire revenue of the company. The company was running at about 12% net margins that the owner took home at the end of the year on top of his salary and at this point, I was running the company not him, while he only worked 3 days per week and collected a good amount of money my systems, marketing, sales and branding were making him. In year 3, I made a salary of $54,000, plus 2% of all company revenue (money received), less certain incomes retroactive from the previous year and with some incomes from sales deferred until the following year. I pulled in about $35,000 in sales commissions, even though the business grew from $1.8 million to $2.3 million this year. My sales commissions were paid out to an LLC I formed for business consulting services as per my agreement with the owner of the construcion company and I in turn paid myself after accounting for business expenses and taxes. You can read here or in many of the business books on my book notes about why this is a good idea.
In year 3, I saved about $12,000 for taxes, spent $3,000 on business expenses and committed the full remaining $20,000 plus a raise from $500 per month to $750 per month toward my student loans. I wanted to kill this thing off once and for all. My fiance and I would be getting married before the end of year 4 and I had a goal in mind to pay off my student loans, pay for a honeymoon and save a certain amount for the wedding before I said my vows, I didn’t want to straddle my future wife with my student loan debt (she was one of the lucky ones whose parents paid for her college).
YEAR 3:
$750 per month x 12 = $9,000
$20,000 from commissions
= $29,000 paid off
Total remaining loan = $21,000
By year 4, I had expanded the construction company from 1 full-time employee, 5 1099 contractors and two trucks to 18 full-time employees, 10-15 1099 contractors at any given time and eight trucks and vans. The company went from a $500k annually to $2.8 million annually in revenue (up from $2.2 million in year 3). I would bring in nearly $54,000 in sales commission on top of a $56,000 per year salary and ended up paying my student loans off about seven months into my fourth year at the construction company.
YEAR 4 (7 months in):
$750 per month x 7 = $5,250
$15,750 from commissions
= $21,000 paid off
Total remaining loan = $0
There’s the trick to paying off your student loans. Be frugal, don’t spend in excess, don’t buy Starbucks coffee every day, don’t take expensive vacations, don’t go on shopping sprees, don’t live a life of luxuries. Instead work hard, find a niche, make yourself invaluable, know how much you are worth and put every penny you make outside of standard living expenses toward your student loans.
You might say, I can’t make commissions or I can’t make six figures in a year. A lot of people do and can make that kind of money, but the average annual household income tells us most people don’t. Most reports tell us the average college graduate right out of college is making more than $50,000 annually. If you are above average, you can likely make something near what I made in year 1 ($62,000), especially living in a place where the cost of living is higher (like I live in South Florida), you are likely to make more money to balance out the costs of living.
If I had just continued to follow the pattern I had set in year 1 ($15,000 per year), I would have paid off my student loans still in less than 5 years. This is very doable, but you have to take actionable steps to change your lifestyle to make things happen. Build a frugal budget, stick to the budget and know how cash flow works. Know the difference between what you want and what you need. This is the difference between those who retire early (FIRE Movement) and those who rack up massive debt their entire lives and never dig out of the hole. Please share or comment below with your experiences.
SOURCES:
https://www.forbes.com/sites/zackfriedman/2019/02/25/student-loan-debt-statistics-2019/#39b22aa9133f
https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service
https://studentloanhero.com/featured/income-based-repayment-plan/
https://seekingalpha.com/article/4193310-june-2018-median-household-income