"I can't afford to take a pay cut to do the work I really want to do. I have student loans and need to make payments"..... said just about every one of my early career clients. Interestingly, student loan debt isn't just a millennial problem. I just read an article last week in the Wall Street Journal titled, Over 60, and crushed by student loan debt about the growing student loan problem with Americans at retirement age.
Student loans have seen almost 157 percent in cumulative growth over the last 11 years. By comparison, auto loan debt has grown 52 percent while mortgage and credit card debt actually fell by about 1 percent, according to a Bloomberg Global Data analysis of federal loans. All told, there’s a whopping $1.4 trillion in federal student loans out there (through the second quarter of 2018), marking the second largest household debt segment in the country, after mortgages. And the number keeps growing. (source)
I have been following Travis Hornsby's writing for several years as he's a regular contributor to several financial blogs that I read. Because the student loan landscape changed so quickly in 2005-2012, I personally found that many financial gurus do not understand the new climate. Travis, however, has a real insider's take on student loans. Before founding Student Loan Planner, Travis helped his physician fiancée navigate ridiculously complex student loan repayment decisions. To date, he’s personally consulted on over $320 million in student debt, more than anyone else in the country. He is a Chartered Financial Analyst and brings his background as a former bond trader trading billions of dollars.
Sarah: Seven in 10 college graduates are in debt from their education. Americans are now more burdened by education loans than they are by credit card or auto debt. And more than half of student loan borrowers say that debt informed their career choice, according to a study by American Student Assistance, an educational nonprofit.
What advice do you have for professionals who are in jobs that they dread going to on Monday mornings but need to work because of student loan debt burden? Are there smart options for lower payments?
Travis: Say you have enough savings to start your own business but your student debt is stressing you out. If your taxable income is ever below $18,000 (even if only temporarily), you can call up your servicer and ask to get on the REPAYE plan. That income driven option can even slash your interest in half if your income is low enough. Eventually, you'll have to tackle the debt, but almost no one should be stuck in a job solely because of their student debt load. That's not good planning.
Sarah: A study by the website Earnest found that More than half of recent graduates between ages 18 and 24 who have student loans said they changed their job search strategy because of their debt. Among millennial's who changed their job search strategy, 55% said they accepted a job more quickly in order to have income than they would have without debt.
--In your opinion, why is this happening? Can loans be deferred so that new graduates can take the time to do smart, strategic searches? What are typical deferment options?
Travis: You get a standard 6 month grace period when you graduate. After that you can pay based on your income (as long as you have federal loans). That means even if your job search goes beyond six months after getting your degree, you should feel comfortable taking your time.
Sarah: How do the gainful employment rule and other student loan regulations fail?
Travis: Most rules apply to for profit colleges, which are certainly bad offenders on average. However, at the professional degree program level, there is virtually zero oversight for non-profit institutions. You can become an acupuncturist and have a 10 to 1 debt to income ratio, or you can get your dental degree and have a 6 to 1 debt to income ratio. Because neither degree granting institution is for profit, they get away with wrecking students' financial futures.
Sarah: Your website proclaims that you are CEO of Student Loan Planner and chief strategist for students with over $400K in student loan debt. That's a lot of money to be burdened by!
--How does this happen? Are most of your clients in the medical field? How common is this amount of debt load and do you see this being an upward trend in borrowing?
The number of borrowers who owe more than 400k is growing by around 17% per year. That means the number of folks with that debt level is doubling every four or five years. Dentists are moving towards an average student debt of 400k at graduation. While many of our clients are in the medical profession (probably about 75%), we've seen debt loads that high from a variety of fields. We also see debt levels that high with career changers who go back for more degrees.
Sarah: What's your best success story this month?
Travis: We had a physician / lawyer couple who owed over half a million together. They were filing separately utilizing the IBR and Extended program. I calculated that they were paying about $6,000 per year too much. Their decision to file married filing separately had put the physician into a higher tax bracket, so they were paying about $20,000 in extra tax penalties annually for no reason. Also, their loans were set up on an older loan program called FFEL, which is not eligible for loan forgiveness under PSLF. When you looked at the projected savings, they were going to get about $400,000 in principal forgiveness, $60,000 from lower payments, and $60,000 from amending their three years of previous income taxes. Their total projected savings was about $520,000. They offered to buy me some nice scotch, but I declined haha.
Sarah: Most employees – 78 percent – say they would be more inclined to accept a job offer if it included student loan repayment benefits, according to a recent CommonBond report that surveyed more than 1,500 employees age 22 and older. The survey also found that 87 percent of employees ages 22 to 34 would be more willing to stay at their current job if it offered student loan repayment perks.
PricewaterhouseCoopers made headlines in September 2015 with its announcement to offer this benefit to its full-time employees, hundreds of other companies and different types of businesses have followed suit, rolling out similar student loan repayment benefits for employees nationwide.
—How do you know which companies offer this support? Are you finding that this is increasing?
Travis: You can ask HR or your hiring manager when you're considering a job. They'll definitely know if they do or not since this benefit is one of the hot trends in Fortune 500 companies right now. That said, I think student loan repayment assistance is a benefit employees are valuing far higher than what it's actually worth. If you're working towards a loan forgiveness program, this kind of benefit can actually be useless. If you have no student debt, it's equally useless. Also, the company receives no tax benefit currently. Hence, I'd prefer that this benefit showed up in actual salaries instead.
Sarah: What are some alternatives to corporate student loan programs for debt repayment?
Travis: Pretend an attorney has $200,000 of law school debt but has a passion for family law, which pays about $70,000 per year. That attorney can sign up for the PAYE plan, which allows her to pay 10% of her discretionary income for 20 years. After that period, she might owe income tax on the forgiven balance. She could prepare for that with a $500 per month contribution to a taxable brokerage account invested in index funds. That loan forgiveness path ensures she has money leftover for other financial goals and allows her to pursue her passion, even if the law firm offers no student loan help.
Sarah: What about loan forgiveness for public servants? Is that a legitimate path to getting rid of student debt?
Travis: If you work full time for 10 years at a non profit or government employer full time and make payments on your direct loans under an income driven plan, you can get the remaining balance wiped away tax free at the end of the 10 years. In some cases, you might be able to make similar incomes in the private or public sector. If that's true, take the 501c3 or government job. However, 10 years is a long time. I usually find that people are better off working in the private sector and making more money if the motivation is financial. PSLF is just a very nice benefit to encourage you to do something you would want to do anyway. Don't pursue a public service career just because of loan forgiveness.
Sarah: An article in Forbes shared that 37% of student loan borrowers do not know their interest rate. Why is this scary?
Travis: It's consistent with a borrower not having a plan and not being motivated enough to know. It's hard to tackle your debt when you don't even know what it looks like.
Sarah: As many millennial's are moving into parenthood--- how can this debt burdened generation be smarter about college for their own children?
Travis: Put away a regular sum every month right now into a 529 plan for your child. Consider prepaid tuition plans so your child could attend the in state public university of their choice. If you want your child to graduate debt free, encourage him or her to pick up skills that are valuable in the freelance economy such as coding, writing, tutoring, or something where you can pick and choose when and where you work. If your child goes to grad school, I suspect we'll have a radically different system 20 years from now since the one we have is non sustainable.
Sarah: What is the best career advice that you ever received? Did you take it (I am asking everyone this question)
Travis: If you haven't received a raise after your first work anniversary, start looking for another job. I got the raise, so I didn't have to go looking and I took this advice from my granddad. But what I like about it is that you have to be in charge of evaluating whether or not your employer has solid long term plans for you. If it's clear they do not, you need to take matters into your own hands.
Want to learn more about Travis's work? He's helped over 1,500 clients save tens of millions of dollars on their student loans, and he’s been featured in U.S. News, Business Insider,Rolling Stone, Doctor Money Matters, The Law Entrepreneur, ChooseFi, Bigger Pockets Money, and more. Check outStudentLoanPlanner.com.