Years ago, when I graduated with $386,000 in student debt, like many in six-figure student debt, I entered the U.S. Income-based Repayment Plan.
I was able to make payments that were in line with my income, but I quickly learned this plan wasn’t a viable solution for getting out of six-figure debt. When I read the fine print, I realized even if I kept up with my minimum payment so as not to default, twenty odd years from now, when I was ready for debt forgiveness, I’d still owe hundreds of thousands in taxes. The Income-Based Repayment plan considers student debt forgiveness taxable income, and I would end up owing approximately $410,000 in taxes. I would have to apply for bankruptcy.
This was clearly not a viable option for me, and it was this that kicked me into high gear, motivating me to come up with revolutionary solutions to paying down a lot of this debt quickly. More on this in my upcoming book.
If you’re following me on Twitter, you’ll notice I’m posting a lot on the growing student debt crisis in the UK. High student debt isn’t just an American phenomenon anymore. In Britain, the amount of student debt has more than doubled over the last ten years.
“Although the $1.3 trillion in student debt in the United States dwarfs the UK’s debt load, on an individual basis, UK students will carry nearly twice the average debt, about £45,000, of U.S. student borrowers. With an economy just one-sixth the size of the U.S., runaway student debt could have serious economic implications for the UK,” according to a recent article by Clair Hart in the London Economic.
Unlike the U.S., however, the UK actually does have real debt forgiveness. Here’s how it works in Britain. UK students only make payments on student loans if their income is more than £21,000 ($36,000) per year. After that amount, loan payments are capped at 9 percent of their income per year. After 30 years, the remainder of the student debt is forgiven.
What this means in the UK is that as long as a person isn’t a high earner, it doesn’t really matter how much in student loans they take out.
As Martin Lewis of Britain’s iNews explains, someone in £50,000 student debt with earnings of £31,000, with a 9 percent repayment on everything above £21,000, will have an annual repayment is £900. And similarly, someone with student debt of £1 billion who earns £31,000 will repay 9 percent of everything above £21,000, and their annual repayment also will be £900.
“So the only difference the amount you borrow makes is whether you will clear the debt within those 30 years. All but the very highest earners won’t – so unless you’re on a big salary the amount you borrow is irrelevant.”
Debt forgiveness isn’t, however, a panacea for Britons. The UK, like the U.S., is feeling the ripple effects of high student debt. Younger people are opting out of things like home ownership, starting families, purchasing cars and the like — milestone events that affect the economy.
“The UK economy relies on a highly skilled workforce and it also takes in billions of dollars in revenue from the universities. As middle to lower income students come to question the tangible value of a college degree and opt instead for trade schools or simply joining the workforce, the universities will see their revenues decrease and the economy will lose its stream of highly skilled labor,” Hart explains.
With or without debt forgiveness, there is still the negative impact on the psyche of so many young people coming of age. Many are struggling with having enough money to pay rent, buy food and make even minimum student loan payments, and they’re being hounded by debt collectors, just like their American counterparts. Estelle Clarke, advisory board member for the UK Intergenerational Foundation, which recently conducted a study on stress and student loans in the UK, says in a recent article for the Independent newspaper: “There is an undisputed negative relationship between debt and mental health. Being unable to pay bills is particularly stressful…It is upsetting to think of students depriving themselves of food and perhaps enduring loneliness, trapped in their rooms because they cannot afford to eat or go out.”
With no end in sight for rising student debt, in the U.S. or in the UK, we need to be having meaningful discussions on the personal and national level on how to tackle this growing crisis.
For now, each of us came take some action. Scroll through my blog posts for ways to empower yourself, for radical ideas to pay down your high student debt and to feel less victimized by the burden of your debt.