Whether your student loans add up to a manageable number, or you’re groaning under the crushing weight of six-figure loans (or worse), there are some hidden rocks lurking just under the waters in your attempt to get safely to the shores of debt-free living. The nefarious thing about these traps is that they tend not to be the open, transparent kind – where you know what they are, can size them up, and therefore devise good, solid solutions that will help you cruise past them.
For example, picking the right repayment plan, knowing when to refinance or not, finding forgiveness options, selecting good benefits packages to reduce the weight of your loans – these may be tough problems, but they all at least have a name and a shape you can associate with them. They may be big or small, easy to hold or jagged and squiggly, but they’re all visible, and they’re reasonably well-defined.
These traps I am talking about are harder to spot – you can feel the drag from their impact but it will be very hard to put a shape or a name to many of these. We’ll take a look at six such traps I have faced in my own financial journey, both with student loans and others. And in so doing, we’ll start to see the solutions take shape at first nebulously, but growing clearer, more solid and more dependable the more we lean on them and start putting them to work.
Trap #1: Emotional push-back
As with any problem that is big and unfamiliar, your ancient brain will kick in with a frantic whisper to you to drop everything and run fast in the opposite direction whenever you think about your student loan problem. This emotional push back is rooted in the evolutionary imperative for survival, and lumps anything unknown and potentially scary into the same category as woolly mammoths and saber-toothed tigers.
The signs that you’re facing this trap are very clear: mild to strong sense of fear or panic, and a fierce inner resistance to going anywhere close to touching the problem so you can start to tackle it. I doubt any ancestor of ours survived a strategy of trying to “better understand” a saber-toothed tiger, so this visceral reaction makes total sense.
The secret to beating this push-back is repeated exposure to what you fear, but starting in very tiny doses. So if looking through the myriad repayment plans is what you fear, then start slow with just understanding how many there are to begin with, and then go away from the subject for the day. Try it for yourself – it’s amazing how powerful such a silly-sounding technique can be.
Trap #2: Decision traps
Imagine for a moment this stark scenario: you fall sick, and you have to pick between two methods for a surgery you’ve been told you must have. In the first method, the survival rate is 90%. With the second method, however, of the 500 people who underwent the surgery, as many as 50 died. Which one will you choose? If you’re like most humans, you instinctively recoiled from the second method – but they’re practically the same – 90% survive, 10% don’t in either case.
This example perfectly highlights the many decision traps we face, especially when it comes to financial matters. Whether it is having to select from many refinance options, deciding to defer a loan versus pay immediately, or not take the time to think through other loan options, for example, decision traps are rife throughout the journey.
There are a few classic signs of decision traps: the biggest is that how the decision is framed can significantly pre-dispose you towards one or other option, and not to your benefit, either. This was what you experienced in the example I just used. There are other decision-traps too: most people look for too few options when trying to make a decision, stopping the search too early. Another biggie: relapsing into the default option when the decision demands some mental heavy lifting, rather than thoughtfully understanding each option and what it means for you.
How do you address this? The simple steps can get you surprisingly far: to begin with, make sure you’re physically in a good place when you make decisions. For example, don’t make any decisions when you’re tired, sleep-deprived, stressed or hungry. Also, don’t make decisions in a stimulating or noisy environment like a loud coffee shop. Once you’re feeling physically well, make sure you get in a positive and uplifted mood before jumping into the task.
These two steps alone will get you very far towards taking well-grounded and prudent decisions. Beyond these, try re-framing the decision in a different way, by changing what you’re trying to solve. For example, you’re not trying to afford the monthly payment, rather, you’re trying to maximize how much money you have in your pocket when you’re done paying the loan off. Same problem, but vastly different solutions emerge when framed differently.
Lastly, always force yourself to look for at least two more options beyond the obvious candidates for the problem you’re trying to solve.
Trap #3: Logistical difficulties
Financial services are notorious for making life as complicated and hard as possible. All of this comes at a cost. From my personal experience, I feel that student loans in particular are an outlier even for the financial services industry.
Leaving aside all intention and mindset, the sheer difficulty of going through the steps to do something can make or break whether you’ll even do it – no matter how terrific the impact on your pocketbook.
Something as simple as pulling together all the information on your outstanding student loans can be incredibly difficult and frustrating: only some of your loans are available on the NSLDS database. For the other, private loans, you have to go through a complicated and mind-bending process of requesting up to three different and voluminous credit reports, understanding what all the contents mean, and then extracting only the information you need to complete your simple snapshot.
The net result of these logistical difficulties is likely to be that you’ll simply give up trying to do anything at all about your student loans because it’s too darned hard.
The options left for you in this situation are not many, but they can significantly ease the pain. The first and best option is to outsource the thinking to a piece of paper and create a simple list of steps and literally cross off each one whenever you find the time to complete a step. Do this before you ever take a single step forward. Chances are, you won’t have the luxury of sitting and completing any activity at one shot. Kill the stress by downloading the worrying to something more efficient and go about your business with a lighter and clearer mind.
If you can afford it, you can also hire a financial expert (like a licensed financial planner) to handle the hassle on your behalf.
Trap #4: Ability hurdles
The entire field of financial products and services is becoming more and more “innovative” – in my view that’s not necessarily a good thing. The dark side of all this innovation is that you may be faced with a plethora of loan types and options along with dozens of features each, making it hard if not impossible for someone who’s not a financial expert to make sense of it all.
Add to this the fact that you probably made the decision in the emotionally turbulent time: you were making a decision about going to college, deciding among multiple colleges and/or fields of study and the possible excitement of living in a different environment. Now you begin to see why this ability hurdle creates immense risk – it would’t have taken much to make you inadvertently stumble into a terrible choice for you.
The bottom line is that financial products including student loans, are becoming more and more complex. This means you need more and more financial expertise to be able to first understand what they offer, and then to evaluate each to see which option will leave you financially in the best place. It’s not something within the reach of many people, unless they stick with the most tried and true options, and it’s not a given even then: in this case, you must do the numbers to see where each option falls out.
There may well be an accessible solution: picking simplicity is usually a winning strategy. At least, it won’t lead you far astray. When faced with topics and questions where you don’t feel equipped to handle, first choose from the simplest options. Not only will you understand these better, but fewer things can go wrong with them, thus also reducing your risk.
Second, leave the decision in the hands of a trusted financial expert whose interests are aligned with yours, and who has the competence to understand the products. (Note: Only a subset of all financial planners have dedicated the time and energy needed to understand and devise smart strategies for student loans – so do your homework carefully here).
Trap #5: Pain points and friction
Pain points and sources of friction arise when there are needless steps in a process, or a very important step in the process or piece of the puzzle is made impossibly difficult to access. This trap is a little similar to the logistical difficulties we talked about, but is deeper in its cause in that there are structural walls and barriers to getting what you need or want to get.
Here is an example: in the United States, federal loans are serviced by companies contracted to the government and paid some fixed fee per account for servicing your loans. Given that the amount they receive per loan serviced never goes up or down regardless of how well they serve their customers, what do you think the most likely outcome will be?
This is an excellent example of a pain point or source of friction. In the case of your loans, there are many examples where rules regarding how interest should be charged, how much and when, or how payments should be applied, get very complicated very fast. It may be hard if not impossible for the lay borrower to replicate or check how these calculations were performed. And if they end up being to your detriment, guess how much incentive the servicer has to find them, leave alone fix them?
What are you to do? Unfortunately, I have no easy solutions here to make the problem disappear. Your best bet is to take two steps: first, be alert to spotting and identifying at least the two or three biggest of these traps. In my book, challenges with servicer errors ranks far and away at the top of the list. Second, within these top categories, keep an eye peeled for mistakes that harm you. If you find them, your best bet is to focus your energies on tackling the biggest and most egregious of these – life is simply too short and too valuable to try to track them all down.
Trap #6: Psychological bias
A close sibling of our first trap, psychological biases are hardwired and systematic errors we are prone to not just because our emotions override our logic circuitry, but because the circuitry itself is faulty to begin with. These biases are well-studied in recent neuroscience research, and many smart companies leverage them against consumer interests.
Examples are: a tendency to stick to a losing strategy even when we know we can do better by leaving a sinking ship immediately. The fancy term for this is “sunk cost fallacy”. Here’s another one: you tend to overestimate the likelihood that something will happen if you can recall an actual incident of its happening. Classic example of this is because airplane crashes come much more readily to mind than traffic accidents and deaths, people tend to assume that airplane travel is more dangerous than car travel.
How does this manifest with your student loans? The biggest bias is inertia, or sticking to status quo because it feels “safer” and more “tried and true” than other as yet, unknown paths. Perhaps there’s a better repayment plan, or payment option or loan option that will leave you significantly better off. But the prospect of having to rouse yourself, look for these, and face the discomfort of not knowing if you’ll really be better off, is all likely to be too much for the ancient lizard brain in your head, and it relapses back to comfortable ignorance even though doing so might be costing you a new car or at least a nice vacation somewhere.
Other examples? Preferring easy, simple choices over ones that look more obscure but may turn out to be better for you in the long run. There’s a good reason why some seller marketers focus on big, simple numbers and make them look very attractive: it plays straight into your cognitive and behavioral biases.
What’s the solution here? The funny but sad truth is that even when you’ve been made fully aware of these biases, it’s virtually impossible to overcome them. Evolution has been smart, and it made deadly sure that the wiring built into us would help us survive for a long, long time. Unfortunately, evolution hasn’t had to contend with 8 repayment plan options and doing lots of spreadsheets, so we’re left to our own devices.
What has proven to be effective is to build in external behavioral guardrails that will significantly soften or reduce the impact of these biases: think checklists, processes, and having people play the devil’s advocate when you’re considering some course of action. These are good for a reason, and that’s why you’ll see many of these tools religiously adopted in critical professions: emergency response, medicine, the military, for example. You too can use them for fun and profit so get friendly with them in a hurry.
The bottom line
You’ve taken on a long, tough road but a highly rewarding and worthy one. You’re now forewarned about the biggest dangers lurking on this path, just out of sight. If you do nothing else here, do this: every time you run into resistance in what you think you need to do, pause for a moment, and name it. Just doing so will put you well on the path to overcoming the biggest and baddest of these.