Finance: Why We Chose Standard Repayment Over Loan Forgiveness

We started our loan repayment journey under the IBR program, as advised by so many professionals. But I always knew in my heart that this was not the best path for me. Apart from the fact that IBR resulted in more money paid towards my loans overall, there was the issue of it extending twenty five years into our distant future. I am one who values freedom above many other things. When I was young, I hated when people told me to do things that did not line up with my values. My most hated explanations were “Just because” or “Because I said so”. Talk about lack of motivation. I despised myself when I was forced to do something, because authoritative figures claimed to have the upper hand. I remember thinking to myself, when I get older, I will have control over my own life. Today, I have that same fire feeding a resolve in me to stay free, from things financial or otherwise. I want freedom to do certain types of work. I want freedom from a tight work schedule. I want autonomy in my decisions. I want the freedom to travel whenever I want to. I want to have free time. All of this also requires to be financially free. Having graduated dental school at 26 years old, the IBR program would mean that we would have this burden hanging over our heads until we were past 50 years old. Psychologically, the burden was too much to bear. It was the psychology of the thing that really pushed me towards frugality, financial independence, and hopefully in the near(er) future, freedom.

When I graduated dental school and I finally started working, Mike and I were facing numerous large payments related to moving in together, creating a home for ourselves, getting married, and going on a honeymoon. And while I would not take back any of the decisions we made, we weren’t exactly saving much at the time. The great part is, we weren’t going into debt either. Whereas some people may take out loans for things such as weddings and honeymoons and moving, we definitely stayed within our means and I am proud of that fact.

But once the dust settled and we found peace in our space and identified our roles in everyday life, we stopped having something to spend money on, and we started to see that we were not bad savers after all. In fact, we were saving at such a quick pace, that we would have saved up for a down payment for a house in two months’ time! We started to talk about buying a home for ourselves, when our financial planner asked us a simple question. Do you realize that at this rate, you can pay down your student debt the standard way in less than ten years?

At first, I was aghast. I had spent months trying to convince USC financial advisers, and Mike, and even my financial planner, that there had to be a way to do this. Mike deemed my conclusions as too optimistic, and slightly delusional. He always said, the numbers just don’t work. But in my head, they did work. The numbers don’t lie.

I then went on to bombard our CFP with a million questions. Excited, I could not wait to tell Mike when he got home that night. I remember being so stoked. Initially, he did not believe me. It wasn’t until our financial planner created a spreadsheet that demonstrated our capability to conquer the loan in 9 years, that Mike started to change his view. We were going to be free from these chains fifteen years earlier than we thought!

But with it comes a cost. We will have to give up buying a house, for now. We have to continue a fairly frugal lifestyle, and have concrete intentionality with our money. We have to be able to psychologically see a majority of our paycheck going towards paying down the loans every month. We have to give up the social status symbols that our friends will be collecting under their belts. In exchange, we will have fifteen additional years of freedom. What say you?

I say Hell Yeah! Mike and I are simple people anyway, as can be seen in the rate at which we were saving. We could rationalize not buying a house, not buying a new car, and not getting the latest gadgets. I could not rationalize being tied down by my career choice until I’m past fifty. We decided that yes, we will choose standard repayment over loan forgiveness!

One caveat. We are still enlisted under the IBR program. Why? Under the standard repayment plan, we have to make minimum payments of $6500/month to be able to pay the debt in 9 years. Under IBR, the payments are closer to $400/month. If one of us loses a job, $6500/month is impossible on only one of our incomes. Especially so if I was the one to lose a job. Switching a hundred percent to standard repayment will make us vulnerable to the whims of whatever life may throw at us. The failure of Mike’s start-up company, the selling of the practice I work at, if we decide to have children, disability for either one of us, these are all things that can greatly impact our finances and if we commit to a standard repayment, it can heavily mess with our ability to pay the loans. And trust me, you do not want to default on student loans. However, under IBR, we are able to pay more than the $400/month without penalty, so we stick with IBR in case of a future emergency, but continue to make the larger payments.

Unfortunately, this does not allow us to refinance our loans. Once the loans are refinanced, we become ineligible for IBR. So although the IBR interest rate is a whopping 6.7%, our financial planner convinced us that the IBR buffer for not-so-awesome life moments is well worth the extra interest rate. Once the loans get paid down to a more manageable sum, then we can refinance, since a smaller loan will be much more manageable.

So therein lies our decision tree, our little story.

Finance: Tackle Undergrad Loans During A Gap Year (ASAP)

There are a few financial decisions that I made in my early twenties that I am very proud of, and a few that I am not so proud of. For decisions that fall in the latter category, I sincerely wish that someone could just create a time machine so that I could send myself back to my younger self and shake some common sense into her. Or at least allow me to go back in time and have a one-on-one discussion (likely at a cafe somewhere) regarding my retrospectively realized financial mistakes, with the hopes of guiding her towards the right direction. But alas, there is no time machine.

However, knowledge lost to me should not be lost to others. I am fortunate enough to have a little brother, six years younger, who recently shocked everyone we knew by deciding to switch from pursuing a path to physical therapy to becoming a dentist such as myself. At first, I told him not to do it, mostly out of fear that he was entering the profession for the wrong reasons. It’s not exactly the profession for everyone. You have to love being inside people’s mouths, and I sincerely believe that description fits a very small group of people. And in exchange for this privilege of being surrounded by teeth, there is a costly price, which includes not only dedicated time towards earning the degree, but a huge monetary cost as well. I could see a young man entering the profession thinking it’s all fun and games. You can call your own hours, you get a decent pay. But you lose a lot of hours compared to your peers, studying the craft and paying off the debt. Additionally, you don’t see a majority (in my case, any) of your pay if you are dedicated to paying off the loans by the time your 38 years old. And by the time you are free from the debt, your peers would have had a 17 year head start on building their lives over you. I was simply afraid he would become a tooth doctor and then regret the bondage and the responsibility that comes with that. The worst you can do is choose to spend your days doing something you don’t absolutely love.

After a lot of back-and-forth conversations about the whys and the whats and the hows, I could see this is what he decided he wanted to do. And in my family, once we made up our mind about something, there is no change of course. Despite my resistance to the whole thing, I could tell he was going to push through with it, whether I supported him or not. So I did what any big sis would do. I immediately switched to supportive mode, figuring that if he is going to do this thing, then I’m going to give all I’ve got to making sure he loves every moment of it. So now we work together at the same office, me guiding him towards becoming a better dental assistant everyday, and him helpfully suctioning saliva out of my patient’s mouths. Perfect harmony.

I started writing the finance part of my blog to help newly graduated dental students with a massive debt realize that they are not alone, and that there are ways to overcome that debt. Now, I have an even bigger responsibility to walk my little brother, and other newly graduated undergrads towards a path that would minimize that final number, as much as humanly possible. If I can’t send myself back in a time machine to save myself from all the silly mistakes, I can at least try to save my brother. I am not doing this so that he could be rich one day. Such is never my goal. I am writing this so he can be a free man.

So if I could travel back and tell my recently graduated undergrad self what to do while waiting to get into grad school, I would tell them one thing. Use your hard-earned money towards paying down your undergrad loans. This was a very feasible thing for me, since I graduated undergrad in 3.25 years and I had an extra 9 months of freedom between graduation and grad school. It was a year and eight months before I was to start my dental program. During that time, I was living at home, and working three jobs. The first was a job as a dental assistant, averaging thirty hours a week. . The second was a visuals specialist at Banana Republic, averaging ten hours a week. And the last was a tutoring gig in Newport Beach, averaging an additional 10 hours a week. All jobs paid me over minimum wage, which at the time was around $8.5 an hour. The dental assisting and the tutoring paid me $13/hr. The sales job paid me above $9/hr. I wasn’t paying for food or rent, with much gratitude towards my parents. But I was also not paying my student loans down. So where did the money go?

At that age, you work like I did and think to yourself, “I’m rolling in the dough.” I had no concept of the power of money at that time, for I had no one to show me, or to even talk to me about it. Friends were dining out every night, going to concerts and raves, watching movies, and buying everything they ever wanted. What did you think I did?There was no outward consideration towards my far off future. I couldn’t see that these loans would one day become shackles that slow me down from enjoying later joys. There was this concept being fed to young kids, summarized in four capital letters. YOLO.

I was twenty one years old, and I thought I was unstoppable. I had so much energy, I worked like a horse. I never realized that the pace was unsustainable and that I will not want to work like a horse for the rest of my life. And off course, once I clocked out, I went on partying like an animal. (Okay, not animal. I saw REAL animals in college, and animal I was not. Maybe a tame deer. Either way…) I  blew my money on frivolities, living my life under the following motto: “Work hard, party hard.” WHO COMES UP WITH THESE THINGS?!

I  wasn’t fully irresponsible (or so I thought) since I paid the minimum payments towards my loans every month. They told me paying the minimum payments is considered good. No one ever told me paying off the maximum you can possibly pay is ideal. I never even hit my principle balance. I was paying so little that my accrued interest stayed about the same. At the time, I was already dating my future husband, and he was also working hard to pay for his housing. Since I didn’t pay for rent, I thought I had wayyyyy more money than him, and offered to take him out to eat whenever I felt like it. I bought him many gifts, just because. I invited him to concerts and bowling and karaoke and anything I can throw my money at. What I didn’t realize was that he had almost zero debt. He took out a skimpy little loan, which was paid off a few months after he started work as an engineer. And there I was, almost two years graduated, with the same debt I had while I was in school.

I was even so foolish as to plan a trip to Hawaii with Mike. In preparation for this trip, and as a reward for working so hard on my year and a half off, I quit all three jobs pre-emptively at the end of May, three months before dental school was to start. I continued my usual spending, and then allocated a huge chunk of my hard-earned money towards Hawaii. Granted, that trip was our first trip together and ended up being our favorite trip until we went to New Zealand. So yes, YOLO. You never get the time back, and it was a great experience. But the trip cost something close to $5,000. At the time, my student loan was about $16,000. I spent a third of my debt on a vacation, without realizing that it’s all just borrowed money. The crazy part was that I had $5,000 in my bank account, (I actually had close to $10,000 in my bank account) ready to be used for Hawaii. That money should have been placed directly into student loans the minute I was earning it. Not knowing anything at all about the power of compounded interest, that could have saved me a good portion of my current loan amount, probably around $13,000 or so, since it accrued interest over the next 5 years that I was in dental school. That’s the thing about any loan with interest. It continues to add even more debt to your plate, and the longer you wait, the more money you waste. As a young twenty something, time is on your side. Address debt while you are still young.

Now, you may be saying, $13,000 out of $550,000 is not a big difference. It’s such a small sliver of the pie! But it is, because it all adds up. It’s not like you graduate and start paying back the principle on your loans right away. You address the interest that has been growing on it first. For the first five months, we didn’t even touch our principle. Five months of all of the paychecks of a dentist going towards a loan, and not bringing down principle can be a very depressing thing. I think people need to see that. Extrapolate that for 9-10 years, as if you are essentially working for no take home pay for ten years, and then tell me that the $13,000 does not matter. Every single penny matters. That should be the mind set newly graduated undergrads should have. That every financial decision they make will shape their future. Especially so if they are going to pursue further education. It’s not a matter of “YOLO, my future self can worry about that.” Your future self is still you.

If I could do it all over again, I would continue to live at my parents, like I was doing. That was definitely a decision I was proud of. I would put as much of my income as possible (which would have probably been 90% of it) towards paying down my undergrad loans prior to grad school. I would have worked harder while I had a lot of energy. I would have saved more by saying no to all the pressures to conform to this image of a successful, newly  graduated student. I would have worked until the very end of my “time off”. I would have probably skipped the Hawaii trip, or traded it in for a more financially friendly local trip to a national park. If I had done all of this, I would have been able to pay off all of my undergrad loans easily, while still living a fairly decent lifestyle, and possibly saving money along the way for my future graduate loans. Heck, I might have even been able to go to Hawaii and do that. Don’t believe me? Here’s the math.

Dental assisting: $13/hr x 30 hrs/week x 78 weeks = $30,420

Banana Republic: $9/hr x 10 hrs/week x 78 weeks = $7,020

Tutoring: $13/hr x 10 hrs/week x 78 weeks = $10,140

Total income: $47,580

Student Loans Total when I started dental school = approximately $16,000

Conclusion: I didn’t know anything about money at the age of twenty one.

Currently, my brother is gallivanting around Costa Rican terrain with a college friend. Before he left, I went over finances with him, grilling him on what he was planning to do while there, how much he was planning to spend, and pointing out tips to save money while traveling. The bottom line is that I can’t stop him from enjoying his life. I’m not even saying his trip is a life mistake. The Hawaii trip was a financial mistake, but it was also an experience that led us to realize how important traveling was to us. Ironically, the debt limits the extent with which we can travel. You win some, you lose some. He will likely learn something very valuable about himself on his travels. But I want him to at least hear from somebody that this decision will affect his future from a financial standpoint. I think every newly graduated kid deserves to hear that. If I could talk to my twenty year old self, I can’t guarantee she would have listened, or even fully understood. I mean, I would continue to make this mistake throughout all of dental school, again and again. But there is a chance that she would have changed her course, ever so slightly. And that makes a difference.

 

Paying down student debt: Where to start

For the past few months, I have written about my debilitating student debt (We started with $538,000 with $36,000 already accrued interest at 6.7% interest rate) and the reasons I have for tackling it mercilessly and quickly. What I have learned (by the sheer number of people who have approached me and asked me how I was doing the impossible), is that there is a huge interest in the community of recently graduated students (or even people who have graduated 5-10 years ago who still have student debt) to do the exact same thing. It’s crazy to me that no one ever tells us just how. I remember taking an exit course in dental school and meeting with “financial counselors” about how I can pay back the debt fastest, and they told me that it will be best if I just leave the debt, pay the minimum payment under a loan forgiveness program, let the interest (and overall total) accrue for 25 years, and then have the loan forgiven and pay the taxes on your now-over-a-million-dollars debt. It’s alright if you end up prolonging the debt longer and paying more in the long run, because by then, you’d have saved up money and be super rich. Yeah, super rich in debt. I’m a numbers kind of gal, and their approach towards paying down student loans would probably appeal to a more emotionally inclined person. The numbers just didn’t add up for me. So I kept pursuing and pursuing, until I found a way. Current update: still pursuing a faster way. Never giving up.

Firstly, I would like to say that I tend to avoid writing how-to blogs, mostly because I don’t like telling people what to do, which is mostly because I don’t like people telling me what to do. Treat others the way you want to be treated, they say. But I’ve been getting enough questions that I think it would be more efficient to just write about it.

Second, there is not one way to go about paying down student debt, just as there is not one right way to deal with finances. You must take into account your ideal lifestyle, your life mission, your personality, and your current life situation as well. I am not writing this how-to in any definitive sort of way. I am just walking you through to how I got here, with some actionable tips that have been helpful to me, and may be helpful to you.

  1. Find a purpose. There has to be a reason why you want to pay down the student debt, but you need much more than the purpose behind paying down the loans. Obviously, that would be easy to determine. Reasons such as, to get rid of debt, to owe no money, to be financially free, to be rich, are all easily identifiable purposes behind paying down a debt. As an extremist, I had to go a hundred times deeper than that. I identified my life purpose, or what some people would call their mission statement. I realized that I wanted to have freedom from everything (hence the dislike for people telling me what to do, ever). In order to get the freedom to do whatever it is that I wanted, I had to not be tied down by material goods, jobs, or anything related to money, including student loans. I want to be creative, to have the ability to drop whatever I am doing to pursue a passion. Whether that is ridding myself of all my belongings and traveling the world with just a backpack, to creating art or side projects, or opening something as mundane as a coffee shop with my husband, or the ultimate dream, which is to be a temp and to do all these things and more, I needed to be free. Finding a purpose such as this is way more powerful that any of the reasons I listed to pay down student debt. It will provide you with the long-term motivation and inspiration that you need to tackle something as massive as half a million dollars, or in my case, more. When money is the reason for your actions, it is very easy for money to take over your life. I needed something much more substantial than money, much more positive than money, much more inspiring and uplifting. And it’s been working so far. We have been on track for 6 months (we started in May 2017), and things are looking up. We went from 25 years to 10 years to 9 years, and my goal is to get that even further down to 7 years. How awesome would that be?! $574,000 with 6.7% interest paid down in 7 years.
  2. Overcome emotional intelligence, and think long-term. With regards to student loans, it is very easy for people to opt for loan forgiveness. Many “financial advisors” will actually promote this option, and they successfully convince you to do so by appealing to your emotional intelligence. They tell you that with student loan forgiveness, you end up paying less than you would for the ten year plan, and then you just have to pay taxes on the forgiven amount at the end of 25 years. When you point out that adding the taxes at the end of the 25 years causes it to be way more than the ten year plan, they say one of the following things: “Yes, but by then you’ve earned so much money that it wouldn’t be a problem” or “Then you wouldn’t have to deal with the stress of making your payments for ten years” or my absolute favorite, “Yes, but for most people, it isn’t possible to pay it off in ten years”. Translation: Putting it off to deal with later is way easier than dealing with the problem now. Hence they are only trying to convince you that emotionally, this is the best way. It’s this idea of instant gratification versus delayed gratification. Off course this appeals to a lot of people because it gives them instant gratification. They can spend their 20’s, 30’s, and 40’s applying only a small percent of their income towards their loans and using a majority of it for themselves, to buy homes, to travel, to acquire all the social status symbols of wealth that tell the world, “Hey! Look at me! I am a successful and rich person capable of acquiring all of these But let’s just ignore that growing pile of debt that I owe. Keep looking at all the things I’m spending to show you how rich I am.” Which, hey, works for some people. Like I said in step number one, you need to figure out your life mission and if that’s your life mission, then keep doing what you’re doing. No judgments passed here. Just a different perspective. Also, it makes me think back to the published Marshmallow test, where they put a bunch of kindergarteners in a room with a marshmallow. You are either given the choice of instant gratification (eating the marshmallow right away), or delayed gratification (waiting for one hour, which in the case of a five year old is eternity, and receiving a second marshmallow if you survive). Those who choose delayed gratification end up with 2 marshmallows, and I think they measured future success as well, but you’d have to go and read it for yourself. This isn’t to say that delayed gratificators WILL be guaranteed more success in the long run. We don’t talk in absolutes here, and success is defined in so many different ways that the area starts to turn gray. But don’t let emotional intelligence be your deciding factor as to which path to choose. Run the numbers. Run the numbers in all sorts of possible future scenarios, and then find the excel sheet that most closely matches the life you want to lead. After all, you got a college education. You’re smart enough to do that, I know it. It’s just a matter of grit, and a little bit of common sense. And if you do find that waiting out on the loan repayment in exchange for heavy savings now is a good trade off, then all the more power to you! But I’m fighting for my freedom, not for the riches.
  3. Find a team of supporters. When I was about to graduate, I reached out to the aforementioned financial advisors and had one-on-one meetings with them. When I wasn’t satisfied with their answer, I brought Mike with me to some of those meetings to see if he could see any way to pay it off in ten years. He came to the same conclusion as the counselors, which is to pay off the debt in 25 years. I still wasn’t happy with that so I sought out a financial advisor. Who also initially looked at our current savings and income (this was right when I started working) and said it wasn’t possible. I sought and sought and sought, and I think I convinced myself so much that I started to convince others around me too. In April of 2017, less than one year after I graduated, my financial counselor said, “Oh my god. I think you guys can do this.” And then Mikey started saying, “Oh my god. I think we can do this.” And I started saying, “Off course we can. I knew we can do this!” Okay, so the honest truth is, it wasn’t just my convincing that did the trick. I owe a lot of our successes to our financial advisor and to Mikey. I must stop and say that yes, a financial advisor is the way I chose to go with, but it is NOT the only way. This is still perfectly doable without hiring a financial advisor. Likewise, hiring a financial advisor does not guarantee you will get it done either. It will require a lot of hard work on your part, because at the end of the day, you are responsible for your own finances. Lastly, there are many types of financial advisors out there. Some of them are affiliated with third parties and have a hidden agenda or interest. Beware of those ones. Others just tell you what to do, without going through the whys, and even others do not even bother to follow up. Beware of those too. I honestly got lucky in finding one who has no third party affiliations and who is more interested in the whys of finances rather than the whats. He helps educate us about finances and he has been very accessible and thorough in teaching us how to better manage money. I’ve recommended him to so many people and even those who have had financial planners before or are skeptical about paying someone to help handle their money (I know, counter-intuitive on paper, but really it isn’t), have reached out to him, and have found that there is a way. He and Mike are my two strongest support systems for paying off the student debt. I think everyone needs a support system. 10 years of loan repayment is equivalent to 120 recurring monthly payments of large sums of your hard-earned income. There is a point where you will wonder if you chose the right path. Once you choose paying your loans down, it wouldn’t make financial sense to turn around and go back to loan forgiveness. You just end up losing money that way, especially if you turn around near the beginning, where most people give up. Which is why having a purpose will really help you to push through. And when it feels hopeless and the purpose isn’t enough, then you will need your support. So make sure to pick a good one.
  4. Run numbers again and again. This commitment will take a lot of hard work. You can’t just put in a number on your auto-pay and leave it there for 10 years. Things change. Opportunities arise, and life happens. I am constantly re-assessing my situation. I run numbers day in and day out, multiple times a day if possible. I track all of our spending on YNAB, which is an online budgeting tool that our advisor set up for us at the beginning to get a feel for how money comes and goes in our household. You can use any budgeting tool you want, or just create an excel sheet and track transactions. I find that an online budgeting tool cuts the work in half by automatically downloading all transactions. What you find by tracking all of this and by constantly re-assessing is that you continually improve on being in control of your assets. I ask for spreadsheets and spreadsheets of extrapolations of our future earnings and spending and loan payments when any change in our current situation comes up. Mike got a new job, how does this affect us? I just got a raise, how does this affect us? We want to leave the country for two weeks, how does this affect us? Everything is budgeted, calculated, and accounted for. And what I’ve found is that the more you do it, the more it becomes second nature. The thought-process is almost intuitive and you start to apply it to every life decision you make. And the decisions get easier and easier. You no longer think, “Okay, should I be spending money on this?” but rather, “If I spend money on this, this will be what happens, and if I don’t, that will be what happens.” And then you just choose the outcome you want, and there is your answer. The decisions become very technical rather than emotional, which makes them easier to make. I’ve always loved numbers. I think it comes down to the math, and if the math says there is a way, then there is a way. And I will find that way, no matter what.
  5. Accountability. This is my last and final point. I share a lot of my life decisions and my biggest goals via Instagram or my blog, or by just sharing it with everyone I know in my daily interactions. It is not because I want attention or I want to boast. I am actually a very introverted and shy person. When I was younger, I had difficulty sharing anything, because I was afraid of being judged. Now I share everything because I want to be judged if I don’t follow through. It holds me accountable for my crazy ideas and statements. And because I still fear judgment to some extent, once I tell somebody I am doing something, I try my absolute best to get it done. To prove to the world that I can do what I set out to do. If I fail, well, I am no longer embarrassed of judgments due to failure as long as I tried my damndest. I’m more embarrassed of not trying hard enough, and not following through. So yes, I share it all. And I think something as big as this, you’ll want to share too. Hopefully it will garner you a whole community of supporters, people rooting for you to reach the end. You’ve got at least one standing right here. But if anything, share it in order to solidify your reserve to do what everyone says is impossible. Because I can tell you right now, it is not as impossible as they want you to believe.