High Income, High Debt: Strategies for Tackling Massive Student Loans Cait Howerton (EP.113)

0:28We all need to make smart decisions with our money. diversity, inclusion, LGBTQ plus financial issues, values aligned goal setting, and student loan debt. It's that last item we're focused on today is Kate is going to share some challenges that high earning professionals with student loans face. She's also going to talk a little bit about the strategies for managing student loans during your low and high earning years, as well as how to manage the lifestyle creep that can derail your progress. As always, you can find links and resources mentioned during our conversation in the show notes at thelongterminvestor.com.

1:04And now without further ado, here is my conversation with Kate Howerton. Kate Howerton, welcome to The Long-Term Investor. Thanks for having me. Excited to be here. Well, I was thrilled when somebody first suggested your name and then you quickly raised your hand. I actually went out to Twitter to ask for some people who were really deeply familiar with student debt and the strategies surrounding student debt that both helps us reduce it, but helps us grow our wealth and live a little bit in the moment. And so this is not a topic that I'm much of an expert on. So I'm so thankful for you being here today.

1:43Yeah, absolutely. So with all that in mind, give me a little bit of background on your personal experience with debt and then what you're doing professionally today to help those who are in similar positions. Yeah. So for me, I was a first generation college graduate and I didn't come from a background of a ton of money. But with that, I studied super hard. I was able to get a scholarship to my undergrad for my undergrad degree, but I went on for my MBA and that did not come with a scholarship. So I myself, you know, I've have student loans. I've been working on paying those down as a professional.

2:16And then now that I'm a CFP, I've been working within the industry for, I don't know, like eight or so years. And one of my first steps into financial planning was with a financial wellness company where we provided financial advice to employees of companies. And there I was able to provide, oh gosh, I think it was like over provided student loan advice for over$30 million worth of student loans to folks at various medical schools and folks that worked with various hospitals. So my background in helping people become student loan debt free is quite deep, as well as for myself personally. Well, and I'm curious in your experiences, if you could share what are some of those unique challenges that high earning professionals face when dealing with student loan debt?

3:04Yeah, so I think first and foremost is considering how much are they making depending upon where they are within their career. For many professionals such as doctors, attorneys, et cetera, they're starting out with far lower earnings potential than what they would have in the long term. So that's the first bit is that you're saddled with a ton of debt that you have to work through and maybe not the greatest salary to support that. than opportunity costs. We may have to prioritize paying off student debts over other things such as saving for retirement, buying a home, starting a family. Other items are earning that higher income means higher taxes, higher, et cetera.

3:49But also you don't necessarily have a break on your student debt depending upon what your income is because you're not going to qualify for those income-driven repayment plans. So those are a few of the things. And then I think the other thing that is more of an emotional item that we may not think about is pressure to maintain or to obtain a particular lifestyle. And as we're around peers that are in higher earning professions, we're potentially encouraged to try to keep up with the Joneses. But we may have that debt in the background that's prohibiting us from being able to do so. Well, it seems like as you're describing these issues that a really proactive loan repayment strategy that both works in the lower earning years and the future high income years is extremely important.

4:35Maybe we can break down the strategies of those two components, just starting with the managing student loan debt during those low earning periods. Yeah. So the first of which, if it's in a lower earning period, I'll just use a doctor, for example, just as I think it's an easy one, especially when we have the residency or fellowship to consider. One of the broadest repayment strategies that I think about is getting on an income driven repayment plan during that time period when you're earning a lower salary and then paying what you have to pay to meet that income driven repayment obligation. But then if you have the potential, sock away anything extra that you can.

5:14So that, you know, for whatever reason, if you're earning more, if you're living with a partner, if you're living in a lower cost of living area, take those savings instead of putting it towards other keeping up with the Joneses items, squirrel that away. And then when the time comes, once you finish that residency or fellowship, or even if you just get to a place where you're earning more, put all of that money as a big lump sum on your loans. That's one of the first strategies that comes to mind. And then when that time comes, when you start to earn more, you can then start to tackle those debts much more aggressively using that higher salary.

5:48Other strategies that, you know, we don't love to entertain as much, but deferment. Certainly if you're in school and if you can't make any payments, if you can't put any money towards interest, go ahead and sign up for that educational deferment and take advantage of that if you have those federal student loans. And worst case scenario, if we have to put your student loans into forbearance until there comes a time to where you can be able to pay them down sooner. And is there a time, can you maybe think of some examples when it is or isn't a good idea to go down that path of deferment or forbearance?

6:22Deferment, depending upon the type of loans that you have, and for most higher earning professionals that are taking out large amounts of loans, typically most people will be taking on unsubsidized loans. What that means is that interest clock starts immediately. As soon as those loans are taken out, interest starts to accumulate and accrue. And so as we're sitting there in deferment, your loans are getting bigger and bigger and bigger. So if we're able to pay them, I would pay them. I would pay just to keep that interest down. However, if you don't have the money, you don't have the money. And so that's where you just have to take advantage of it.

6:57Forbearance-wise, what your question was is like, is there ever a time that we shouldn't do this. Frankly, I think if you have the means to pay down your student loans, as long as you're able to meet your other obligations, your housing, your cost of living, if you have your general needs met, and any goals that you just have to meet based upon your time horizon of life, I frankly don't know that there's a really good idea to ever put your loans on forbearance unless you absolutely have to. I know that was a long answer to say, really, I don't recommend it ever unless you truly have to. Well, that makes sense.

7:33I mean, I think even just paying interest, you know, in the sense when you're in your training or your residency can really make a big difference. And a lot of that just comes down to budgeting and trying to figure out how do I prioritize loan payments within a limited income? Any advice or strategies that you have when people are going through those tradeoffs? So I first and foremost think we need to make sure that you have your needs met. You have to have your housing, you have to have your food, you know, transportation, insurance, those type things. And then we start to get into the next items such as retirement or family planning or investing for other goals or shoot, even for a lot of young professionals getting married and how expensive weddings are these days.

8:17I think it really comes down to your values of what's most important to you for you to be able to accomplish sooner. For me personally, I made the decision that I would take care of all of my core needs. I would start to make a dent on my student loans, but I would somewhat kick them down the road into my 30s as I was laying a foundation for my life. I bought a house. I got married. We don't have kids yet, but that'll be along the way. But for me, I use those lower earnings years to set myself up from an equity standpoint in my home and making sure that my immediate needs were met. And now I'm really starting to aggressively pay down my loans.

8:54I have a two income household now that I'm married and I'm earning a lot more from the time period from my mid 20s to now I've tripled my income. And that makes it much more affordable for me to tackle this pretty aggressively without having such a lifestyle pinch. Well, and when you take on student debt, the idea is that you will be earning more eventually. Sounds like you've reached that stage. And I know you've worked with people who've reached that stage. So when people are ready to accelerate their loan repayments as their income increases, what are some things people ought to think about and keep in mind?

9:28Either working with a financial advisor or running online calculations to see how much do you need to be contributing to retire on time? And if you can't meet that full investment obligation, okay, fine. But at least go ahead and try. Try to get halfway there or try to get a quarter of the way there and continue to invest alongside aside paying down your debt. The other considerations would be covering those budgetary items that you need to take care of. And then figuring out how quickly do you want to do this? Do you want to pay down these loans in five years, 10 years, 15 years, et cetera. And also keeping in mind that if you do drag out your loans over the course of time, over, you know, 20, 25 years, there does come, if you stay on like an income driven repayment plan, frankly, for most high earning professionals that might be listening to this podcast, they probably won't qualify for an income-driven repayment plan.

10:21But if for whatever reason they do, if they drag out those loans for that amount of time, later, you know, that 2025-year mark, they're going to be forgiven, but they also come with a tax bomb. So whatever amount is forgiven is going to come with, that's all taxable to you. So those are a few things to think through. And that is a really important point, something that I have seen in our practice. I'm kind of curious if you are reaching those higher earning years. I personally feel that you still need to emphasize retirement savings and some sort of emergency fund accumulation. And that doesn't necessarily mean every retirement account needs to be maxed out and you need to get to six or 12 months of expenses of an emergency fund prior to paying down your debt.

11:06But I do think that they should remain at the forefront of your mind, particularly on the emergency fund front, where if you're building up that cash reserve, it can't protect you against a tax bomb, as you call it. But I'm curious, do you agree? Do you disagree on the way I feel about those prioritizations? No, I wholeheartedly do. And that was actually one of the items that I forgot to mention is hitting that emergency fund is crucial. And I would say that's even one of the items when we think about should you put your loans in forbearance? should you go ahead and put those loans onto educational deferment or previously we had COVID deferment.

11:40If you don't have an emergency fund established, that's crucial. And I would say at least in this, you know, especially right now with it's July 2023 with this economy, with potentially turning into recession and we don't know the security of jobs depending upon what sector you're in. I really highly recommend at least having a three month emergency fund to hit that before heavily prioritizing paying down your loans. Well, and I think you just can't predict what happens with life. And there are times where I think an emergency fund could be rebranded as a cash reserve, because once you have cash, you have optionality.

12:16It's not that you'll always be using it as an emergency, but it just gives you a little bit more wiggle room to navigate through life. And if you're paying down student loans, you know, you're probably in the growth period of your career, maybe the growth period of your family. And trust me when I say that flexibility is very nice at all sorts of different parts of your financial journey. You've mentioned in passing your loan forgiveness and less of the assistance programs for high earning professionals. I'm curious, those specifically applicable to high earning professions, what are some criteria and considerations for these forgiveness programs that you think are worth pointing out?

12:56Yeah, so a few that come to mind for me are really those career-based student loan forgiveness options. We have PSLF, so that's going to be definitively for those that are working in public service sectors. So whether that's the government, whether that's working for a nonprofit hospital, if it's whatever, there is an optionality there to where if you want to be able to pay for those student loans for 10 years, and even after that 10-year time period, if you're not gonna have those loans paid off, they'll be forgiven after 120 payments. But there comes a few steps that you have to take. One, you have to be working for that qualifying public service employer.

13:33Next, you have to be on an income-driven repayment plan. So even if you are that high-earning professional, and frankly, that income-driven repayment plan may default to a very high payment, you still have to be on an income-driven repayment plan. And then lastly, you have to make 120 on-time payments. So you can't pay them ahead of time. You can't pay them late. They have to be those on-time payments for them to count. And that's one of the, probably the most popular and widely known program that comes to mind. The next ones, we have attorney student loan forgiveness program. We have national health service core.

14:06We also have the national Institute of health loan service forgiveness. We have USDA, you know, vet medicine programs. And they really just, there are so many that are out there. And also there are employer specific programs for government agencies. I have a client who's a nurse practitioner and she's working with the VA hospital. And so they are forgiving a portion of her loans, you know, as long as she makes a five-year commitment to work there. And, you know, the remaining portion are going to be forgiven. You know, if she departs, it's, you know, in game, she has to pay them back. But for her, that's a huge, huge value add to her employment.

14:43She's making a lower income for a few years, but then her loans go away after a set amount of time commitment there. Well, that's definitely a huge consideration when you're looking at the packages that you might be offered, the compensation packages, and assessing those trade-offs. I know I've worked with a number of physicians over the years where they see a higher paying private gig, but they're wrestling with the trade-off of their student loan balance and trying to right-size the financial implications of working for one employer versus another. Perhaps a good segue for the importance of seeking professional advice for the personalized financial planning.

15:22In your mind, what is the point in time where you feel like someone with a large student loan debt burden should be engaging with a professional? There are a ton of different ways to be able to be compensated as a financial professional. And depending upon a person's asset level, if they already have assets accumulated, great. They can work with someone who charges based upon a percentage of AUM. Otherwise, they can work with someone who's a flat fee professional. And that's typically pretty affordable for them to be able to go get that financial advice and to be able to make a plan on how do I tackle these student loans while also focusing on these other goals that are super important to me, buying a house, getting married, starting my retirement or continuing investing in retirement.

16:06Maybe that was started earlier in their 20s or so. So I think as long as you're able to afford that fee without putting yourself into a detriment of not being able to cover your core needs, it's worthwhile. And even if that's not a long-term engagement, for me, I am a financial professional. I do prefer to work with folks after a lifetime. But there is a time and a place also to work with someone for a year or to have a financial plan ran just to get yourself and your bearings set right and then come back in a couple of years once those loans are paid down a little further as you start to have that higher income and accumulate more assets.

16:41You'd mentioned at the very beginning something about just the general pressure to have lifestyle inflation as you start to earn more despite having these student loans that you have to pay back. And I'm sure that you talk through clients with that. I mean, what are some of the things that you see most impacting that temptation of lifestyle creep and its impact on loan repayment? Yeah, so I think this really is things that are, you know, temptation-wise that impact lifestyle creep. So especially for millennials, we are struggling. We are struggling out here with, you know, housing markets and the affordability of buying a house and seeing maybe our peers who got started sooner than we did, especially if they came straight out of college and went into a profession and have spent the last 10 years building their career and maybe someone has stayed in college longer and coming out with, they're going to have that high earning potential.

17:38But as an attorney in the first couple of years of practice, typically you have a made partner and you're not making great amounts of money. And so it's hard to look around and know that you've amassed the success educationally or career-wise, but you haven't quite done it from a financial perspective. Cars are expensive. You know, the used car market's finally starting to go down, but that's, we really haven't seen that happen at the new car market level yet. And cars are getting more and more expensive because of just the features and the technology that come with them. So as we look around, even if we're not trying to quote unquote, keep up with the Joneses, it's expensive just to live even in the suburbs this day and age.

18:17So I think keeping those blinders on and being focused on, hey, I can live in this older place for a few years or I can drive this older vehicle for seven or eight years and that's okay. That's not connected to my self-worth or my value. I'm still just as successful without these shiny things. And that way you can keep your head down, really focus on what's most important to you rather than just focus on the objects that are going to depreciate in value. Yeah, that makes a lot of sense. Kate, this has all been really interesting. It's such a big topic. So I sort of want to ask you one final pretty broad question, which is just, do you have any thoughts or encouragement for listeners on their loan repayment journey?

19:02You know, I think it's tough. I recognize that paying that payment, even for myself, as now I'm really aggressively paying mine down. I don't enjoy paying it. When I think about what I could be doing with that money instead of taking a vacation or improving my house, I'm also a millennial with an older house. That's a little bit of a fixer upper, so I get it. But I think of it is just focus for me personally, how I say focus on getting it paid off is that I know that my education is a huge part of the success I have. And it's the foundation for me to be able to achieve the income and career progression that I have.

19:37So that's how I think about it. And also know that it's not forever. It's going to be a short part of your life. And even though they're unenjoyable to pay it now, they will eventually go away. Great insight and wisdom, Kate. Thank you so much for joining the show. And for people who want to learn more about you, how can they find you? Yeah, so they can find me on LinkedIn. I'm posting pretty frequent inspirational posts or just posts that are super helpful to educational posts from a financial planning perspective. And then they can also find me at archerim.com. Well, Kate Howerton, thank you again for joining us.

20:13For everybody watching or listening, you can find links and resources in the show notes at thelongterminvestor.com. And be sure to like, subscribe, leave comments, do all the great things that help more people find the show and help them all make better decisions with their money. Until next time, to long-term investing. Thanks for listening to the Long-Term Investor Podcast. To access free financial resources and submit questions to be answered on the show, visit thelongterminvestor.com. Peter Lazaroff is an employee of PlanCorp and BrightPlan. All opinions expressed by Peter and any podcast guests are solely their own opinions and do not reflect the opinions of PlanCorp or BrightPlan.

20:58This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of PlanCorp and BrightPlan may maintain positions in the securities discussed in this podcast.