Debt is an Income Depressant


Do you make good money but feel broke? Chances are your debt obligations are what’s cramping your style.

We tend to think of debt as it’s own entity and not something that affects other aspects of our finances. Or at least, that’s how we think of it when we’re first borrowing the money.

Most university students don’t think twice about accumulating debt, student loans and otherwise. After all, they’re earning a degree that will skyrocket their income and let them earn more than enough to pay it back after graduation.

But do they know that earning a high income with hefty debt payments feels exactly the same as earning a low income?

This is how much debt really costs

A good general rule of thumb is that for every $10,000 you owe in student loans, you will have to pay at least $100 per month in payments. This means if you borrowed $40,000, then you can expect your monthly payment at graduation to be approximately $400.

For ten years.

Depending on your income tax bracket, that $400 monthly payment will actually require you to dedicate about $525 in gross monthly income to pay it, or $6,300 per year. For a decade. In other words, regardless of your salary, a whopping $6,300 of your gross income is going towards making the minimum payments on your student loans. Did I mention this was for ten years?

Even if you start out at a decent $50,000 salary, you’ll have to live like you’re only earning $43,700 to make your student debt payments. With a $400 student loan payment, a shocking 14% of your gross income is going towards making the minimum payments on your loans.

The more debt you have, the further you’ll have to downgrade your lifestyle in order to accommodate your payments. You will have the option to pay off your debt sooner, but this will require an even more drastic cut in your lifestyle expenses to afford it. Which is a problem, because it basically means the solution to feeling less broke is to feel even more broke for awhile.

A high income will not protect you from a high debt

For people seeking high-earning degrees, like medicine, many justify multi-six-figure balances because their income will be so high. It will and it won’t. The $100-monthly-payment-per-$10,000-owing rule still holds true, though now it’s not unusual for your debts to have longer terms like 15 or 20 years, which means you’re stuck on the hamster wheel for longer.

If you borrow $180,000 to become a doctor or a dentist, your monthly payment towards your student loans will approximately $1,800 per month. This will take $2,520 of your gross monthly income, or $30,000 per year (remember, you’re in a higher tax bracket now). This will be for 15 years or longer. Also, don’t forget you’re entering the workforce 4-7 years later than your peers, you haven’t been saving for retirement, and you have high insurance costs. To add insult to injury, everyone expects you to buy a luxury car and a home because you have “Dr.” in front of your name now, and they don’t know about the $180K student loan balance. I’m being serious — the Millionaire Next Door found doctors are actually the poorest wealth accumulators out there, and the main factor to blame was the lifestyle expectations of their professional incomes.

The lengthy terms on six-figure debts make them even harder to get rid of. If you’re stuck on a 25-year repayment term, throwing an additional $100 at the balance is a drop in the bucket. Sure, every little bit counts, but a multi-decade debt repayment term has a lot of inertia, and isn’t readily swayed by any sum less than full extra monthly payment.

You’ll pay much more than you owe at graduation

When you graduate from post-secondary, you’ll get your student loan bill with your amount owing, but that is not actually the amount you’ll pay.

A $40,000 student loan debt at 5.5% interest and a 10 year repayment term, will cost you $12,093 in interest. This means the total you’ll actually pay back is 30% more than what you originally borrowed.

All those beers from the campus bar don’t seem like such a great deal at 30% more than you paid for, now do they? Most young people aren’t aware of exactly what they’re doing when they’re signing on that dotted line for student loans. I know, I was one of them. At 18, $40,000 doesn’t sound that much different than $10,000 or $70,000. It all represents a sum of money they’ve never had to earn before, but are confident they will definitely be able to earn in the future, especially with a degree.

It’s not until that first paycheque collides with our and the first student loan bill that we realize exactly how little we earn to pay for how much we owe.

All debt depresses your income, but consumer debt hides it better

Student loan debt is an income depressant because the payments drastically reduce your disposable income, and you have nothing physical to show for it. Consumer debt is more expensive, but can at least provide you with the illusion you can afford a flashier lifestyle because it rewards you with stuff.

A luxury car will still set you back $600 per month in payments, but you’ll be driving a luxury car, so you might feel better about it.

Nevertheless, once you get into double-digit interest rates, a terrifying amount of your income will go towards this debt, even if the monthly payments make it seem not so bad. Many credit cards and lines of credit will allow you to carry exorbitant balances with laughably small minimum payments. The minimum payment on your credit card bill is usually only a few more dollars than the interest accruing, which means unless you take it into your own hands to pay more than you’re required to, you’ll be in debt forever.

Give yourself a raise by paying off your debt

One of the easiest ways to increase your income is not to get a side hustle, it’s to eliminate your debt.

Paying off your debt will put hundreds (or thousands) of extra dollars into your bank account each month, which you can use for whatever you want. I want you to save at least some of it, but as far as I’m concerned, buying six slurpees every day is a better way to spend money than on student loan interest. After all, at least the slurpees bring you some joy and keep you cool.

Need more motivation? Check out my post: Pay Your F#$%Ing Debt

You deserve to enjoy all the money you earn, and that starts by being able to through eliminating your debt. Right now, your debt is depressing your income — and I’d wager it’s depressing you a little bit too.

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12 Comments. Leave new

  • Another excellent post – what’s really ugly about student debt is its mass accumulation in pursuit of degrees with little or no prospect of a higher-paying career to follow. At least the doctors or students you reference who might make “a decent $50,000 salary” have some means of repayment; what about all the graduates with worthless degrees (no need to name them here) entering the job market with skills of little value? Anyway, I can’t say enough good things about your attitude toward debt; this should be required reading for high school graduates & credit card applicants.

    • YES. Exactly.

      Though I’ve also thought it was interesting (and terrifying) that some medical students in Canada are not getting matched to residency programs… which means they have the MD degree but don’t actually get to become a doctor. It’s awful.

  • I like the phrase “income depressant”. It captures the psychological aspect of debt beneath the surface that most of us ignore.

    Great post! Thanks as always.

  • It’s criminal how easy it is to get a student loan these days, so the onus is on the consumer/student to be responsible. How many 18 year olds are responsible with money?

    i would argue with your allusion to the fact that consumer debt is better or less of a hindrance than student debt. With consumer debt, the things you have to show for it are material and rarely improve your net worth. In regards to student loans, the product you received via that debt can increase your earning potential in various ways for your 40+ year working career.

    Going into student debt can certainly be a bad decision for some people, but there’s more nuance than that.

  • Great post, this is what I hate most about debt as well. Some of your dollars are already allocated, and you have no choice on how they’re spent. With most areas of spending you can cut back if necessary, but debt payments there’s no option to.

  • This rings so, so true to me. I graduated with a mid-6 figures school debt for a mid-range pay (very close to your estimates above), and believe me, I feel it every. single. month. It’s hard to get ahead on loans when you owe so much. It’s compounded when you realize you also need to catch up on retirement, savings, and actual life stuff.

  • Thank you for bringing light to the financial cost of ‘professional degree programs’. My husband is a recent med school graduate and on year 1 of 5 of his residency. While the 6 figure debt is the norm amongst him and his classmates, it doesn’t make it okay. While the bank is happy to delay line of credits going into repayment until their residencies are completed (after all the bank is still getting interest the entire time), student loan repayments start immediately after graduation. That means a huge chunk of a resident salary (resident salaries are nowhere near an attending doctors salary) is going towards only the minimum payment of a student loan.

    I would never discourage someone from becoming a doctor if that is what their heart is set on. They do amazing work and are so vital. However, I would caution someone considering medical school about the huge financial strain that no one likes to mention. Eight years of paying tuition while completing school and an additional 2-5 years of residency means its a lot of years of your life before you start digging your way out of the hole.

    • So true. It really is a financial strain (which is added stress on top of all the stress of the program and profession) for decades — first, when you’re racking up the debt for 8-10+ years, and then second, while you have to grapple with paying it off after 8-10+ years of also not saving or making contributions to your retirement. I think people forget or ignore how it expensive it is because the end salary is so high… but it’s not that high when you subtract the costs!


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