Couple uses student loans to finance a CEO lifestyle
I speak to a lot of people burdened with high student loan payments, the cause of which is overborrowing while in school. It is not true that student loans can only be applied to tuition. I talk to many people in my job, and I know many people personally who used student loans to pay for lots of expenses other than education.
Deanna and her husband Richard are one such example of people living on student loan debt. Deanna’s husband was going to school to get his PhD. They had two young children and an interest-only mortgage they could not afford. We put together their household budget, and their monthly expenses were double their income.
They were borrowing about $20,000 every year just to help pay for their cost of living. That didn’t include the $20,000 they borrowed each year to pay for Richard’s schooling. He did not work and Deanna only brought home about $2,000 a month.
“I’m sure your husband will be making great money,” I said. “But right now he’s not making any money, and you guys have big expenses, way beyond your income. Can’t you move into student housing? You guys are students, but you have the lifestyle of a CEO.”
“I love my house,” she said. “I’m not moving into student housing.”
“But you’re borrowing tens of thousands of dollars to pay on this house. And the debt isn’t getting any smaller because you’re only paying the interest. You’re borrowing to pay other debt, and that’s a bad idea. You’re essentially paying interest twice for the same house. And the amount you owe isn’t getting any smaller! When you finally start paying on the principal your payments will be a lot higher than they are now.”
“Actually, we have the option of paying less than the interest owed, and sometimes we have to do that. So we actually owe more on it than when we bought it.”
With every sentence, the decisions got worse and worse. They were borrowing money at 4 percent interest, to pay on their mortgage debt, which carried a 6 percent interest rate. This was a financial disaster.
“Deanna, you need to realize and understand exactly what you’re doing,” I said. “You’re paying interest twice for the same house. And the debt is getting bigger. What you’re doing will end up costing you a fortune.”
“But Richard will be making a lot of money,” she said again.
“Fine, so once he’s making a lot of money you’ll have the higher house payment, and you’ll have high student loan payments! For all his work getting that degree, your standard of living will be the same it is now.”
Deanna and her husband were sacrificing their future happiness for immediate gratification. Their kids were age 1 and 3. If they got rid of the new car and big house, and just got a little apartment until Richard finished school, they wouldn’t need to borrow so much. And that means they would have more of Richard’s high income to enjoy when he finally got it. Instead, once he got the big income, it would all just go toward debt payments.
“But we really like this house, I think we’ll be okay,” Deanna said.
“I hope he makes a fortune,” I said.