Emotionally Treating Your Student Loans Like A Mortgage

Recently, one of my employees highlighted that soon, many people will have to pay $500,000 or more for a graduate degree¹, and the average student loan debt is currently almost $40,000 for undergrad ($80,000 for grad school) with the total student loan debt being $1.76 trillion, increasing over 70% since 2006². I’ve already had several clients come to me with $300,000 student loan debt balances. These balances didn’t necessarily come from medical doctors (and many others), who expect that their income will generate enough money to pay the loan off. Even those clients don’t like having $300,000 of loan debt and typically want to throw their hands up in dismay. The silver lining of hope is a mind shift from the burden of student loan debt into seeing it more like a mortgage on a house.

Mentality of Mortgages vs Student Loans

Many people want to be a homeowner. To acquire a home, most often they take out a mortgage. Traditionally, there was a 20% down payment expected, while today there are programs that are allowing people a path to ownership with less money down. However, the mortgage holder does not own the home; although they frequently say they are the “homeowner”. They are already involved in an optimistic bias that says they will successfully pay off the house and it will increase in value.

I know several individuals who don’t even see their mortgage as an encumbrance at all. Yet there are many people who, unfortunately, get foreclosed on without fully understanding what they signed on for. For example, there’s no guarantee that their house will appreciate in value. I have experienced this myself, and so have my parents. For these very large purchases, the bank typically scrutinizes you, looks at your credit rating, how much money you make, etc. With college loan debt, the government, at the time, only knew about the school that you were attending and nothing else. Mortgages usually come in 15 and 30-year varieties. Some people, especially with their first or second house, don’t intend to ever pay the mortgage off, but instead anticipate an appreciation that will allow them to make a profit off of the sale, move into a bigger house, and then start that process all over again. As we look back from 2007 to 2009, we saw market highs for real estate and then a real estate crash immediately after.

In an ideal world, people are choosing schools and professions to have a certain lifestyle when it’s over. Let’s say you’re 25 years old and make $50,000 a year. Over the next 40 years that would mean $2 million worth of income. If you make $80,000 a year that’s $3.2 million, and so on. Of course, there’s always the possibility of going to grad school and altering what those numbers look like. In that case, one could see that the $100,000 loan debt (without the interest charges tacked on) had 200 times the return on investment.

Student loans, if one is truly going to pay them off, have varieties of 10, 15, and 25 years; if you go with an Extended Repayment Plan option, when your loan amount is 6 figures, it may be best to treat it like a mortgage. In this case, you would pick a 25-year plan and stick with that; if you’re 25 that’s age 50. That’s also the time when you would now be able to take advantage of the increased catch-up contribution to a 401(k) or 403(b) plan. You would have also consumed about $1.5 million of the total value of what your degree allowed you to make.

Conclusion

Ultimately, this education is intended to reduce the natural response, anxiety and feeling of helplessness, that you may have when facing such a large debt. I will say that too many people don’t understand that buying a house does not guarantee your wealth will increase. The equation for wealth is: “Wealth = assets – debts”. This is often referred to as a “balance sheet”. People with mortgages often call themselves ‘homeowners’. Realistically, they are ‘home debtors’ until the mortgage is paid off.

It’s important to look at your total financial picture and the goals and aspirations you have for yourself. Sometimes, you can’t immediately jump onto the path of your goal until certain criteria are satisfied. It’s important to chart your own way, which may not be the same as your next-door neighbor. This may include lassoing your student loan debt to pursue bigger dreams down the road, such as buying a house. Thinking of it as a mortgage can help calm your emotions while paying off the debt.