High Salary Fails to Solve Student Debt Crisis, Real-Life Example Shows the Struggle

What You Need to Know

Anyone earning six figures a year and still owing student debt may feel frustrated, having worked hard to earn a degree and land a job, only to still face financial strain. With a high income, you may be tempted to throw all your earnings at the debt and live frugally for a few years to get on track. But for many high-income earners, other options may be worth considering.

Consider an Example

To see how debt can still saddle a higher-income earner, let’s use a hypothetical example. Maya is 33, a lawyer with an income of $180,000, and $92,000 in student loans left over from graduate school. Say she has:

• $52,000 in federal loans at 4.1% interest (fixed)
• $40,000 in private loans at 7.6% interest (variable)
• Access to employer-matched 401(k) and an HSA option
• Can invest approximately $2,500/month toward goals after expenses

Maya’s first instinct may be to put her extra cash toward her loans, but she has other steps to consider. Let’s review some of her alternative strategies.

1: Understand Your Loan Terms 

Federal student loans can offer lifelines like income-driven repayment, more lenient deferment or forbearance options, and loan forgiveness, whereas private student loans do not. So Maya may want to target her higher-interest private loans first.

2: Compare Interest Rates to Expected Returns

If your loan interest rate is higher than what you expect to reasonably earn after taxes from investing, you may want to prioritize repayment. But if your loan rates are low (e.g., below 3% or 4%), investing could be a better choice because you could potentially earn a higher return.

Paying down Maya’s private loan at 7.6% is, essentially, earning a risk-free 7.6% return in terms of what it means to her long-term finances. Her federal loan at 4.1% is less clear-cut. Maya may choose to invest at least some of her money for retirement if she believes she can earn more than 4.1% (after inflation, taxes, and price fluctuations).

3: Avoid Lifestyle Inflation

Having a high salary can give you the confidence to spend more. Just a few “quality of life” upgrades, such as eating out more, renting a larger apartment, or leasing a fancier car, can add up and even increase debt.

Maya can establish a period of “budget stability” in which she maintains her current lifestyle without further upgrades and allocates any raises/bonuses toward debt repayment and savings.

4: Prioritize Tax-Advantaged Accounts

For those in higher tax brackets, funding pre-tax retirement accounts is often good advice. Instead of making extra debt payments, you may want to prioritize:

Maya can prioritize her employer match, then fill her HSA, then turn to maxing out her 401(k) while aggressively paying down her high-interest private loan.

5: Refinance With Caution

Refinancing your student loans can lower your rate, but refinancing federal loans into a private loan removes all of their benefits and forgiveness options.

Maya may want to refinance only her private loan to reduce her rate to 6%. She could leave her federal loans intact for now.

6: Balance Investing and Payments

Aim to seek a balance in your financial priorities. A barbell strategy highlights two weights on the financial scale:

• One side: serious investing (retirement, tax-advantaged accounts)
• The other: consistent extra principal payments

Maya can continue to max out her 401(k) and make additional payments to her private loan.

7: Know When to Just Pay Loans Off 

Sometimes it may be best to pay off the loans with your income and become debt-free. And even when investing can win the numbers game against your loan interest, you might find you gain peace of mind by paying off debt.

So, after considering all her options, Maya may find that eradicating her debt as soon as possible with her income may be the best route, after all.