Last year, 284,000 college grads across the US were stirring up lattes, bagging your groceries and asking “Do you want fries with that?” And 37,000 of these minimum wage earners held advanced degrees beyond a Bachelor’s! This trend began increasing after the 2008 crash and peaked in 2010 at over 327,000 college graduates working for peanuts. In 2011, the number dropped a bit, but it’s unfortunately on the rise again!
Was this just a blip and 2013 will see a course correction? Analysis suggests the college educated may have more struggles ahead. And these aren’t the only disappointing employment figures for recent graduates. The US Department of Labor numbers also show that nearly half of employed college graduates are in jobs that don’t traditionally require a college degree.
And that trend, according to a recent Canadian study, looks to continue. So if you’re spending quality time brewing caffeinated treats or flipping burgers after years of post-secondary education, you may be frustrated and if the trend holds, you may continue to be. Since 60% of college students are borrowing to finance their education, it stands to reason that 60% of these minimum wage earners have student loans.
Assuming the average loan balance for recent grads of $27,000, what does this debt load mean for you baristas out there? Minimum wage averages (roughly) $7-$9 per hour depending on what state you live in. For purposes of our calculations, we’ll go in the middle and assume $8 per hour.We’ll use 6.8% interest – the current unsubsidized rate (and what will be the subsidized rate as well if Congress fails to act). Let’s crunch some numbers…
The weekly wages for this rate are $320 and the annual pay is $16,640. You can see from the chart below that the standard monthly repayment amount on this loan is $311. That’s 22% of your income! A graduated loan payment starts as low as $213 which is just 15% of your pay. But let’s be realistic, when you’re earning that low of an income, you probably need all of it just to get by, so neither of these are an option.
That’s where income based repayment comes in – this is the program that allows you to pay based on your income and family size and after 20-25 years forgives the remainder of your balance. But there’s both good news and bad news about this arrangement. The good news is with a pay rate this low, your monthly payment under IBR would be $0! When your pay hits $18,000 it will kick in at about $10 per month and bump to $40 when you hit $20,000. That’s affordable.
But here’s the bad news. On a loan balance of this size, interest accrues at a rate of about $152 per month. If you are not paying at least the amount of interest each month, the interest then piles on to the principal and then that is subject to interest. With the IBR plan, you would not even touch the interest, so by the end of year one, your loan balance will increase and will continue to increase by larger increments each year until you start servicing at least the interest. This becomes harder as the balance rises with each passing year.
The total interest you’ll pay on the standard plan is a little over $10,000 and is done in 10 years. If you pay $187 under IBR, you’ll pay triple the interest and pay for 25 years. At lower amounts, you’ll never see the bottom of this loan. But once you hit 20-25 years of IBR payments, your balance can be forgiven.
Sounds great, right? But wait – there’s a huge caveat… As of now, forgiven student loan balances are taxable. And for a loan of $27,000, if you carry on with IBR payments of $40 per month, at the end of your 25 years, your loan balance will have risen to a whopping $145,700! That’s the amount that would be written off – and that you would owe taxes on.
Any idea what income taxes are on $146k? The amount you’d pay in income tax would be roughly $31,000 – greater than you borrowed to start with and just a few thousand dollars shy of what you would have paid with the standard loan repayment. So here’s our advice – if you are a minimum wage earner, go ahead and sign up for income based repayment – that will set your monthly loan payment at a minimal amount. But then send in every spare dollar you can find in the form of extra monthly payments.
Stephanie Halligan, founder of The Empowered Dollar, had this to say about her own student loan debt: “Everything about my student debt made me nervous, even my plan to eliminate it. I quickly realized there was only one strategy that made me comfortable: Get rid of my debt, as much as possible, as quickly as possible.” Check out how Halligan paid off her student loans in half the time to see if her strategies can help you!
You should save money every way you can so that you can pay off your student loans as fast as possible – even if that means moving back in with mom and dad until your job prospects improve! You can also consider a career in public service. The pay is a little better than being a fry cook, the benefits are great and you can have your student loans forgiven after 10 years with no tax impact!
If you owe student loans, try Tuition.io’s free tool to manage and optimize your debt, review repayment options and contact your lender! Also enjoy these other recent articles on fast tracking loan payoff, public service forgiveness programs and heading back home after college: