The Real Reason Doctors Can’t Pay Down Their Student Debt

I was sitting at work once (and many times after), talking to colleagues of mine who were all in their early thirties – fairly young by doctor standards. We were talking about student loans (what else?) and how steep the price has become to get an education (in this case dental, but it applies to education in general). We were going through our numbers and they were going through their excuses as to why it was impossible in their situation to pay down debt. Of course, me being me, I gently stated the obvious which was that the real reason doctors “can’t” pay down their student debt was because they thought they deserve more than everyone else.

This statement may hurt many doctors’ feelings, but actually, it’s true.

For example. I had one person complaining about drowning in student debt. He blamed it on the kids and the fact that he is a single income household. Fine. But he also just bought a brand new Tesla SUV. He gets a nanny to watch his kids so that it’s easier on his stay-at-home wife. He gets help (did he say $100k a year??) from his in-laws that is budgeted for the kids. His dining out bill is $800 a month. But he can’t afford his student debt.

Another person also bought a brand new car after graduation, enrolled his 6-month old in Montessori private school, took wild vacations (without travel hacking!), and bought a grand house for their family of three.

Yet another person owns two medical-grade massage chairs in his home, bought his girlfriend a Tesla, and drops $10k on trips around the world.

What if I told you that this story is repeated many times over? I have spoken with my fair share of indebted graduates, especially after releasing my own personal story with ChooseFI.

They all wish to banish their student debt. They also don’t wish to do the work.

Here’s the thing I see most often with doctors. They work very diligently to get through school. They do anything to get to their dream career, including taking out a huge sum of moolah (hell, I did too). They sacrifice the best of their young years. They put off buying a home, earning money, and settling down. Then graduation hits and they think, “I’ve made it.” For a brief second, they breathe a sigh of relief thinking it’s all going to be worth it.

So they buy a new car to celebrate. Then they buy a home or a practice. They go out every weekend for food. Sometimes they dine out a few times a week! They want to live in affluent communities. They want to go on vacation. They throw themselves a dream wedding. They buy nice clothes and expensive Figs scrubs. But more than all this are the little purchases. They want the daily coffee, the trinkets from the $5 section in Target, the happy hour events, the spin class – you know, the harmless stuff.

They become obsessed with the high-life and quite quickly, they refuse to give it up.

And if you think I’m being extreme, I’m not.

Because when I graduated, I wanted all these things, too!

The most excruciating part about facing my student debt, the part that nearly killed me, was realizing that after every sacrifice and sleepless night, after giving up the best of my youth, after working three jobs during school, after wracking my brain on ways to extend $40 for another week, after being a model student, the good daughter, the most loyal employee, the most valuable I could be to the community – the work was still not done.

And when I tell new grads coming to me for advice on making loans disappear that they have to use their beat-up high-school ride, possibly move-in with their parents or take on a roommate, cook dinner every night, manage a budget every week, wear their same scrubs from dental school for five more years, and try their darndest to travel for FREE – well, their faces fall and I can see the disappointment plain as day scrawled on their furrowed brows.

Only thing is, I can’t tell if the disappointment lies in the fact that they have to continue living like a college kid for ten more years or if the disappointment lies in me – because I wasn’t the magic genie they wanted that would grant them their wish.

I can tell you how to repay your loans. You just might not like it.

99% of graduates with more than $350k of debt choose to stay with loan forgiveness. Probably because it hurts the human psyche too much to know that everything you’ve done thus far is not enough.

Becoming a doctor does not end the day you graduate. Not for me. It ends the day everything you need to become a doctor is behind you. Loans included.

Not everyone thinks this way, though. Many people truly believe that the hardship stops the day you get the degree. Ahhh, time to sit back and enjoy the benefits of all our hard work. But how can that be when you don’t even know what a hard-earned dollar looks like?! What makes you better than the rest of ’em?

I know I’m making enemies here but I must pose the question. If not I, who will?

I don’t blame the docs. They were merely children when they signed their lives away for a chance at the American Dream. I blame our upbringing for creating the expectation that a doctor’s life is a rich and easy one. I blame the institutions that are set in place that allow universities to charge this much money to get educated. I also blame lending companies who are handing out loans this large. Child robbery, that’s what I call it.

I implore to all the existing doctors that make it seem like being a doctor is easy. How will we ever change the trajectory if we keep implying to young ‘uns that pursuing this career path will mean they won’t have to work hard for the rest of their life. How will they realize and make an informed decision when the time comes?

I know the real truth.

That behind the facade of wealth is an increasingly long list of medical professionals patiently waiting 25 years for loan forgiveness to hit. Behind every confident thrust of the credit card is an avoidance technique that makes life a bit easier to live. Behind all our heroics and saving lives lies a coward afraid to face our social responsibility to pay back debt that we chose to take out. And behind every accomplishment lies a lifestyle creep that is avalanching too fast out of our reach, propelling doctors further forward towards an unsustainable way of living.

The real reason doctors “can’t” pay back student debt is because they won’t.

They choose not to work hard anymore. It isn’t burn-out, although that stuff is real too. It’s the social expectation that a doctor’s life is breezy. The mindset to pay back debt just isn’t there. Many cannot accept that graduation is not the end-game. They think they already won.

There will be excuses. I don’t buy any of it.

There will come a day when I will finish my loan repayment journey, and people will think it’s a miracle. They’ll think I was one of the lucky ones, rather than a penny-pinching maniac. Perhaps the stars aligned and the pandemic gave me this “unique” ability to pay back loans faster because I was not being charged interest for six months. My parents must have helped me out. An investment strategy probably worked out for me but not them. I can’t wait to see the excuses they make. But none of that will be true.

My current car is a high-school ride that I’ve had for 13 years. The passenger’s rear-view mirror doesn’t match, because when someone broke it (probably to re-sell it), I didn’t want to pay an extra $60 to get one that was white when the stock color was black. Mike even helped me put it on the car myself because I didn’t want to pay a service fee at the auto shop. My neighbor came out of his garage this past week and looked at me funny when he saw me physically hand-washing my car. He said, “That’s … nice…” and walked away slowly.

I sometimes have to wipe graffiti off my windows, because I chose to live in a lower income neighborhood so that I could buy a business storefront AND a dwelling at a very low price. Last Friday night, it was getting ratchet at the club next door since they moved the party outdoors due to COVID restrictions. I’ve had to run away from my own home before when the riots first started and they fired fireworks at the cops.

I spent a third of last year working midnight shifts. I still wear my USC scrubs that I was forced to buy upon entering dental school in 2012. I run with the Nike’s that my husband bought me as a gift when I was attending dental school so that I could “be cool”. They used to be orange but now they’re mostly black. I sell my de-cluttered stuff on Poshmark. I research heavily in order to travel the world for FREE. I come home from work to work. I still actively budget every week. I aim to spend only $200 a month in groceries for the two of us and $150 a month in dining out. I created a lifestyle where my job is three blocks away, to reduce the gas I have to buy. TO REDUCE THE GAS I HAVE TO BUY. I spent my last birthday repainting our bathroom. We spent Mike’s birthday picking up birthday freebies. Heck, even our cat was free.

Do you know the real reason THIS doctor can pay off student debt?

Hard work and a willingness to.

It’s not rocket science.

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Finance: The Third Year of Paying Down $575,000 in Student Loans, An Update

Every May, I post an update on how we are doing with our path to financial independence, which largely depends on our student loan repayment plan. If you haven’t already heard the story, I graduated at the age of 26 years old (turned 27 a few weeks after graduation) with more than half a million dollars in debt. A weight that was too heavy to bear, I decided to shun the common notion of waiting 25-30 years for loan forgiveness and instead to get rid of the debt as fast as I can.

Three years of aggressively tackling my loans is coming to an end, and what a journey it has been! You can read about my first two years here and here. As every year before, I will summarize what we have accomplished financially since last May, and how we plan to move forward and snowball our way down to being $0 in debt.

A Summary of Accomplishments for Year 3

This past year, there have been numerous accomplishments that I am very proud to share. It has been a year of experimentation and discovery for us both. But also, a year of triumphs over a few financial hurdles. Here is what we’ve done.

I opened a bakery and managed my own small business with one employee for an entire year. One of my life goals was to pursue my hobbies and possibly make them into mini-side-hustles. Other jobs that I had last year on top of dentistry was this blog space and dog-sitting via ROVER. After a year of baking for local restaurants, coffee shops, and markets, I closed my bakery two weeks before the COVID-19 pandemic took place.
My husband wanted to switch careers. He has been interested in coding for some time and he decided to take a coding boot camp in order to be able to do systems analytics for large data sets. We enrolled him in a program which started January 2020 and paid for the schooling in FULL (it cost $8k) without reducing the amount we put towards student loans. We took the money from our “emergency fund” and built it back up over the course of 3 months. In February of 2020, when the company he was working at was doing lay offs, he requested to be considered for it due to a nice severance package for two months which ended on April 7, 2020.
COVID-19 epidemic happened which ended up helping us financially. My husband, whose severance ended in April, then applied for EDD and instead of getting very little money during this period of professional transition, he gets paid $4200 a month from the government.
As a dentist during COVID-19, I was in a precarious position. I split my time between two dental offices and was working 6 days a week prior to March 15. However, the government decided that dental treatment should be limited strictly to emergencies, thus causing one of my offices to shut down for the time-being. Luckily, the other office located 3 blocks from my house stayed open and I was able to work 3-4 days a week due to a particular patient pool. A 3-mile radius around our office houses over 330,000 residents who are mostly within a lower social-economic status. They usually do not have time to worry about preventative dental care and go to the dental office only when something hurts. Thus, emergencies ran amok. Additionally, 80% of the patients I see have Medical. Therefore, Medical covered all root canals and extractions at 100%, and everyone who came in with a medical emergency pretty much had a free pass at getting the treatment started on that day. Since most other dental offices were closed, patients from 30 miles away were driving to see us, too. If it were any other dental office, I would have been sitting at home like all my other colleagues but due to sheer luck, this actually kept us afloat.
COVID-19 helped us even further by reducing the interest rate on student loans to 0% until the end of September. This is a dream for all graduates paying off student debt, especially if they are paying it off aggressively. With the uncertainty that came in March, we paused student loan repayment and kept all our incomes liquid. However, now that we realize that the stipend from EDD for Mike and my work situation puts us at a stable financial position, we have enough set aside for student loans to bring us in the $300,000s ($375k to be exact)! Which is CRAZY! That means that in three years, we were able to go from $575k to $375k at a 6.8% interest rate. So now, we are tossing and turning the option of partially withholding some of that loan repayment money and putting it into buying a second property that we can use as a rental unit – thus increasing passive income. We are still up in the air about whether to experiment with real estate or focus on paying down loans. Perhaps we get both?
This past weekend, we finished off my husband’s car payment, a loan that lasted five years. My husband has owned three cars and three motorcycles. Five years ago, he was convinced by the dealer that he should take out a car loan to improve his credit. His other motor vehicles were always bought in full and in cash. The dealer recommended a car loan to improve his chances of being able to get a house mortgage in the future. Since Mike has no history of accruing debt, opening his first credit card AFTER graduating from college, he technically had “bad credit”. Mike signed up for a car loan and while I agree it improved his credit tremendously, I also get weak in the knees thinking about all the money we lost on interest. It’s a screwy system. But now it’s all over, which adds that monthly $585 car payment towards liquid assets which we can put into our loans or a rental unit.
Speaking of mortgages, we are finishing up our home refinance, which if successful would reduce our monthly payments by $500 a month. Add this to the savings from the finished car payments, and that’s an extra $1k to put towards snowballing our path to FI.
Lastly, we made a few adjustments including switching our car insurance and our homeowner’s insurance to a different company so that we can shave off an extra $100 per month. Now that Mike is at home working on his course, we have saved money on dining out since someone is always home making meals. Also, without the bakery, I have less stress and can focus on improving our finances and other aspects of our personal life.

How to Continue Snowballing

There are many ways in which we are snowballing the loan repayment so that we gain momentum and speed as time progresses. An example of this is the car being fully paid off, which then adds an additional monthly $585 towards our repayment plan. We had created many ideas along the way on how to make our repayment system better. Here are a few ways.

The Repaye program pays 50% of interest for the first three years of the program. By switching to REPAYE within the first year of repayment, we have saved thousands of dollars on interest. The final year of REPAYE is this coming year. We hope to reach mid to low $300k by the time it ends.
After the 50% perk of REPAYE ends, we hope to be at a low enough dollar amount to refinance the entire student debt. If we can refinance at 3% instead of the 6.8%, that would speed up our progress tremendously. Also, as the principal amount decreases, more of our repayments go towards the principal itself.
We are debating about purchasing a second property as a rental unit. If we do, we are searching for one that would at least cover the mortgage and it would be swell if we could find one that can actually rake in a bit more than the mortgage per month. This builds equity under our name and sets us up for passive income in the future in case we pursue early retirement. As we get closer to the end of the student loans, we always have the option of selling it (assuming it accrues value) towards the end of repayment to get a chunk of liquid assets and put it into the loans. Of course, the latter option is less financially savvy.
Currently, with me working and Mike unemployed, we can still afford our monthly $6.5k student loan payment and our living expenses. My hope is that Mike will get a job after the coding program that he enjoys and we can funnel 100% of the additional income into loans.
Currently, we are renting the bottom floor of our loft to my brother’s girlfriend for a very cheap rate to help her out. My brother is currently in Arizona starting his second year of dental school in the Fall. There has been discussion about them moving in together in a year or so. Of course, we would love for her to stay with us forever and ever but if she does choose to move to Arizona, we can definitely rent the bottom space closer to market value. Since our live-work-loft is commercially zoned and faces a downtown area, we can rent the bottom space to either a business or a resident. Our options are widened by the fact that it can act as an office space or a storefront.

When we first started our student loan repayment journey, we thought it’d be great to pay it back in less than 10 years. The first plan we made put us at 9.8 years. We made such good headway the first year but it wasn’t until Travis Hornsby from Student Loan Planner tipped us off on switching our repayment plans in order to save more money that our trajectory put as at paying back the debt in 7 years. With COVID-19’s help, I did the calculations at the current rate, I can repay it in 3.5 more years. But assuming Mike gets a job soon after his coding camp ends in June, I think we can actually finish this in only 2.5 more years.

And to think that people almost convinced us not to do it. They said life would be very difficult for us personally and financially. Yet we are the only couple we know who are calling the shots at work, creating our own schedules, switching professions if we wanted to, pursuing hobbies as options to replace work, traveling the world freely, and living a relatively stress-free life. Choosing the harder path, the road less traveled, really set us up for a different life.

Which is to say that sometimes, it pays off to follow your gut. Reach for your dreams. Look at more than just numbers. Surround yourself with like-minded people, cut out societal expectations, go rogue and run like vagabonds toward the nearest exit signs. Be afraid and do it anyway. Live life to the fullest, you’ll have no regrets.

Here’s to Year #4! Cheers!

Tips for New Grads with Large Student Debt

Get a consultation with Travis Hornsby of Student Loan Planner. I know it costs money and it feels difficult to pay more money when your goals are to save and pay back debt. But you don’t know what you don’t know and Travis is well-versed in student loan repayment options. Even when we were already aggressively tackling our student debt and working with an amazing financial planner whose wife was a dentist herself, Travis still taught us a few things we didn’t know. He saved us about $10,000 by simply placing us in a different repayment plan!
Run the numbers. This may be hard without someone’s help, but you’ve really got to run every possible repayment scenario to see which one saves you the most money. Of course, in the end, you may choose the one that affords you the lifestyle you want. In our case, we chose the one that does both. By choosing to aggressively pay back debt, we are saving more than $100,000 than if we just waited for forgiveness 25-30 years later. We also are freeing ourselves us 15-25 years sooner than our peers, which is a huge psychological benefit. Notice that I said we chose the one that saves us the most money. Travis will argue that we didn’t choose the one that would make us the most money. Which is true considering you can invest over 25 years of working. But I guarantee you we chose what was right for us.
Figure out your priorities in life. The best thing our financial planner did when we started talking about our finances was to spend a few sessions in the beginning asking us the hard questions to try to figure out what exactly we wanted. It was like marriage counseling for money. The top few items we had were to spend time with family, travel the world, and have the freedom to pursue our interests and hobbies. Freedom and independence dominated the conversation, and it was because of this that we decided aggressive repayment was the way to go.
Master a budget. You have to start somewhere. Mastering the budget is where you have to start. You can always increase your income, but if you never learn to curb your spending then there is no point. I made this course FREE on my blog to help as many people out. We use YNAB to manage our budget. Get started by signing up to receive my free budgeting tool course today!

Surround yourself with a community of like-minded people. There is that saying that you are as good as the 5 people you surround yourself with. I choose to surround myself with finance resources. My favorite finance podcast is ChooseFI, but there is also Afford Anything and FIRE drill. My favorite book is Your Money or Your Life by Vicki Robinson but other goodies are The Simple Path to Wealth and Goodbye Things. And then, of course, there are blogs, including Mr. Money Mustache, Mad Fientist, JL Collins, and The Frugalwoods.

Student Debt: How to Lower the Interest Rate Without Refinancing Out of The Loan Forgiveness Program

This post may contain affiliate links. Please see my disclosure to learn more.

Almost a year ago, I wrote about refinancing and leaving IBR for good. We hadn’t refinanced up to that point because we were not sure if we had the frugal muscles and the mental and emotional strength to tackle my student debt, and we knew that refinancing would mean that we could never run back to the Loan Forgiveness Program if we ever hit a rough spot. Once you refinance, you are no longer eligible for the Loan Forgiveness Program. A pro of the Loan Forgiveness Program is the flexibility to revert back to a minimal payment of a small percentage of your income when times are tough. Meanwhile, you also having the choice to pay back the debt aggressively if you are able. If you refinance, well, it’s either you make those whopping payments (which in our case is $6,500 per month) or end up in mad doo-doo if you fail to do so.

After a year of paying back debt aggressively, it was obvious that we were BOTH in it for the long haul! We were ready and capable of getting these loans out of the way. So we said, “SCREW IBR, let’s refinance!” The worst part about IBR is the high interest percent rate of 6.8%, which meant that about half of our monthly payments were going towards interest alone! YUCK. This is the main reason why we wanted out.

We were very serious about the whole thing and even started researching refinance options. The list of lenders that we found included the following:

We got quotes from every lender and were about to pull the trigger, but we didn’t.

Why? By some stroke of luck, we went down the rabbit hole of purchasing our first property and held off on the refinancing of the loans until that was secured. However, once we had settled into our new home, Mr. Debtist’s start-up company went through some tough times and Mr. Debtist’s salary went down by 50%! At the time, this seemed like terrible news, but we were actually lucky in that we hadn’t refinanced yet and life had the opportunity to teach us a lesson: that maybe the flexibility of Loan Forgiveness Program was essential. With a loan this large, the flexibility of the Loan Forgiveness Program makes our journey much more comfortable! Shortly thereafter, I had my third stroke of luck. I spoke with Travis Hornsby of Student Loan Planner. If you have not already interviewed with him and you have a lot of student debt, I would just like to say that although his calls are pricey, they are WORTH it! You’ll soon see why!

In this interview, Travis informed me of a way to improve our aggressive loan repayment strategy. I learned that by being in IBR, we were missing out on an opportunity that another loan forgiveness program offered. Which is why it is important to know the differences between IBR, PAYE, and REPAYE! We learned that REPAYE helps our significantly by covering 50% of our interest every month! Just by switching to REPAYE, we were able to save over $7k in 8 months (find out here).

Since REPAYE covers 50% of the interest, it is as if we refinanced to get a better interest rate. The interest that we have still yet to cover with our payments come out to be about 3.4% of the loans. I like to think of this as a way to get a lower interest rate while still keeping the flexibility of loan forgiveness. Even though Mr. Debtist’s job situation has stabilized, we still never know what life may throw our way. Being able to fall back on those small payments give us a lot of peace of mind. Meanwhile, we are able to funnel even more money towards paying down principal! It’s the best of both worlds.

I think that Travis saved us from making a decision that could put us in a bind during tough times, and he also helped facilitate our loan repayment journey. This is why I think it is so important to talk to someone who can really guide you find the most optimal path for your loan repayment journey, especially when you are talking about student loans this big. If you’ve been thinking about talking to someone but are not sure if it will even help, I bet you Travis is your guy. Schedule your consult with Student Loan Planner if you are feeling lost or simply looking for loan repayment alternatives.

In short, my advice is this. If your student debt is less than two times your salary, then maybe refinancing is a doable option. It won’t be easy, but it would be doable. However, tread with care. If your debt is more than two times your salary, highly consider sticking with Loan Forgiveness, even if you have plans to attack it aggressively. Only because life is a mess and would take any chance it has to throw you a curve ball. Ultimately, I truly believe that everyone can find a path that is in line with their lifestyle and life goals.

When we started, we were told that paying down our loans in ten years with our salaries was impossible. But deep down, I knew that we could do it and that it would be the best path for us. So we set a plan to pay it down in 9 years. Before we talked to Travis, I was hoping to escalate the plan even more and pay it back in less than 9 years. After we made the change to REPAYE, I now have hopes to get rid of it all in 7 years or less. We are implementing a number of side hustles and budgeting tactics that are speeding up progress! I can’t wait to see how much more we could do. Thanks for being here, supporting our journey, and following along.

Finance: The Second Year of Paying Down $550,000 in Student Loans, An Update

I can’t believe how fast time flies! The second year of paying down my student debt has passed, and I didn’t even notice. After the first year, I posted an update that outlined a review of our journey. It seemed to help some, so I decided to do the same for the second year. This year there were some ups and downs (a lot more downs than we thought would happen), but I am so pleased to announce that we are on track to finish paying off our debt in under 10 years. In fact, if we continue on this same trajectory that we’ve been on, we are actually estimated to finish 6.9 years from now, for a total of 8.9 years!! And I have high hopes to bring that number even lower. Read on to find out how we got here, and where we plan to go.

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To recap, we started off our journey with $574,034.50 of student debt (including the interest that had accrued)! All of which was mine. To date, we have paid a total of $145,128.48 towards my student debt over the last two years, bringing the principal amount down to $481,368.06.

To understand the progress, do recall that after year one, only $28,000 went towards paying down the principle. The rest of the $84,000 that we had paid towards the loan went towards the interest only. This means that only 33% went towards paying down the principle amount of the loan.

In year two, you start to see improvement. Of the $61,000 we paid to the loans, $29,000 went towards paying down the principle. That’s 47.5% of our payments going towards actually making the loan smaller!

Off course, you will see right away that we paid way less towards the loans in year two ($61,000) versus year one ($84,000). If we had paid the same amount or higher, we would have had an even higher percentage going towards the principle balance. So I guess this is a great time to recap what slowed us down this year.

THE SET-BACKS

In September of 2018, we decided to buy property. Property ownership was something we felt was right for us to do. We bought a live/work space that we hope to utilize in the future for some sort of business. Meanwhile, we are co-housing, or as financial independents might say, house-hacking, our way towards paying down the mortgage. Buying the property did entail two things to happen: We used some of our emergency fund to place a down payment on the home. Because of that, we are now re-building the emergency fund back up to what it was, which decreased our ability to pay back loans. Currently, we are setting aside $1k a month to rebuild the emergency fund and are on track to being back to normal in March of 2020. Also, it raised our total payments towards our housing a teeny bit, since now we pay for things like HOA fees and home insurance.
In October of 2018, we were delivered some shocking news. Mr. Debtist’s company experienced a laying off of 80% of the people working there, and even though Mike was one of the “lucky” few to stay, his pay got decreased by more than 50%! It was something we were not really prepared for, so on top of wanting to re-build the emergency fund, we also had to deal with a huge blow to our income. Since we were living off of one income, the change in salary really affected our ability to pay down the loans. But we made it work! That’s part of the joys of being on Loan Forgiveness Program even though we were paying it back aggressively. They still only required the minimum payments. Off course, we continued to pay more than the minimum. We were able to keep up with the interest that accrued and to slowly bring the loans down.

THE POSITIVES

Now that those two negatives are laid out, here are some positive things that happened!

A conversation with Travis from Student Loan Planner (affiliate link) is saving us THOUSANDS of dollars. He brought to our attention that we could optimize the loan repayment by switching from IBR to REPAYE. How does this help? Under REPAYE, the government subsidizes the interest at 100% for the first three years for an subsidized loan, and at 50% for unsubsidized loans and subsidized loans that have been present for longer than three years. Which means every month, we are given a free $850 to go towards our loans and help us out! This is fantastic because now that Mr. Debtist has a new job and we are back to our previous income, we also are getting help to pay back the debt. Whereas last year we were paying $6,500 per month towards the loans, we are now sending $7,300 towards the debt with the help of REPAYE’s stipend. And while we were dealing with the smaller income stream for four months, we were still getting that helpful $850 to add to the few thousands that we were contributing to the loan. If you want some loan advice, I really think Travis is your guy, and you can schedule a call with him to discuss your particular situation.
Additionally, the side hustle game has been ramping up since 2019 started! Now that we have our budgeting in order, it was time to start increasing our income. I was already writing on this blog and doing some dog-sitting on Rover, but I just recently started as a bread baker, and soon thereafter opened my own bakery called Aero Bakery. In January, I made only $14 in side-hustles, which made sense since we were off traveling in Australia and New Zealand for the first half of January. In February, I made $450, and in March, I made $750. For April, I am on track to make an extra $1,500 in side hustles! Read more about why I am an advocate of side hustles, here.

Why the Future Is Bright

So now, we are not only back on track with making $6,500 payments, but we are actually on track to be finished one year early! How did we do that? By being AGGRESSIVE. The minimum payment for a 10 year repayment plan was $6,063 a month. We set our sights on $6,500 a month. Even with the lapse during those few difficult months while Mr. Debtist struggled with his work situation, we were still able to be at a point where we have only 6.9 years to go! How exciting is that?! And what’s even more exciting is that I predict this will all snowball even more! I turn 30 years old this year, and wouldn’t it be great if this would all be cleared by the time I turn 35? That’s right! I have my sights set on getting rid of this in 5 more years. Here’s what we have planned.

Since we are now switched to REPAYE, we are making $7,300 contributions towards the loans, instead of the $6,500 that we were previously doing under IBR. That will vastly improve the trajectory of our path.
In March of 2020, we predict to have saved enough for our emergency fund, leaving an extra $1k to be funneled into the loans. That would increase our contributions next year to $8,300/month.
Also in Spring of 2020, Mr. Debtist is scheduled to finish his car loan payments. While I was in dental school, Mr. Debtist got a car loan and we currently pay $585 towards it every month. Freeing up $585 will increase our loan contribution to $8,885/month.
The side-hustling is just getting started. I hope to continue with many of these hobby-turned-hustles, and we will see how that impacts our payments.
Lastly, we decided not to refinance our loan at this time because of the risk of not being able to meet the minimum payments in case we have another fiasco like the job situation. However, when the loan is small enough (say under $300,000), we may still consider refinancing the loan. It’ll be less of a risk at that point, since the monthly payments will be way more doable. If we DO refinance as we get closer towards paying the loans off, then we will be able to attack the loans at an exponentially improving clip.

Please note that we are paying back student loans aggressively, but we are also doing it responsibly. We are living within our means, investing in our 401ks respectively, and are diversifying by entering real estate last year. I make myself less susceptible to fluctuating job conditions by having my own dental S corporation, opening my own bakery, working as a dog-sitter, working as a baker for another company, and doing some writing on the side. We are also a dual-income household, which greatly affects the possibility of this success.

If you are feeling lost in your student loan repayment journey, or you simply want to know your options, I would start with talking to a consultant at Student Loan Planner. This path is not for everyone, but it also may be more doable than they want us to believe. For those who just want to get budgeting down, why not start with my free course on creating a budgeting tool?

How Switching Your Student Loan Forgiveness Plan Can Save You Thousands of Dollars!

This post may contain affiliate links. Please see my disclosure to learn more.

How would you like to save thousands of dollars a year, simply by switching the loan forgiveness program you are on? We know we did! A recent conversation with Travis Hornsby of Student Loan Planner informed us that we could speed up our loan repayment simply by switching from IBR to REPAYE! The information that Travis shared with us was so valuable, because it could in fact save us thousands of dollars on our student loans! That’s equivalent to refinancing to a lower rate, thus cutting down our repayment timeline, while still allowing us the safety net of being in a loan forgiveness program. After conversing with Travis for an hour, I would highly recommend Student Loan Planner as the starting point for any student or new grad looking for student debt advice.

So how do we save $$$ this year? It’s simple. All we need to do is to switch from IBR to REPAYE. Today, I will outline why.

Related Posts

A Case Study: IBR VS REPAYE

We were under the IBR program since we embarked on this journey to repay our student debt of $574,000. Before you consider which loan forgiveness program you want to choose, you should probably read Finance: Student Loan Forgiveness Options: IBR VS PAYE VS REPAYE. We had initially chosen IBR despite the fact that the monthly payments would be 15% of discretionary income vs REPAYE’s 10% of discretionary income because of this one factor: IBR allows you to file taxes separately as a married couple and it will only consider the loan holder’s income, versus REPAYE which will consider the income of your spouse as well. Since Mr. Debtist also makes a six figure number, we figure that we would have the better deal using solely my income.

Here is an example of how to calculate that:

Let’s use estimates from our personal story to calculate the difference.

Assume that our loan is an even $550,000, my income (the debt holder) is $125,000 and Mr. Debtist’s income is $120,000.

Under IBR, they would calculate our yearly loan payment by multiplying my income by 15%.

125,000 * 0.15 = 18,750

Now we divide that by 12 months to find the monthly payment.

18,750 / 12 = 1,562.50

Therefore our monthly payment would be $1,562.50 under IBR.

Under REPAYE, we need to use the total household income of $245,000 to calculate the yearly payment, however we will only be paying 10% of our household income.

(245,000 – 1.5 * 16,460) * 0.10 = 22,030.85

To find the monthly payment, divide by 12 months.

22,030.85 / 12 = 1,835.90

Therefore our monthly payment would be $1,835 under REPAYE.

As you can see from this example, IBR would be the better payment plan because you would be paying the cheapest amount per month and allowing the program to forgive as much as possible.

HOWEVER, there is a rule with REPAYE that IBR does not have. REPAYE will subsidize 100% of the interest accrued for the first three years for subsidized loans, and 50% of the interest accrued after the first three years, which changes the game. Note, if you have unsubsidized loans or GRAD PLUS loans, they will only pay 50% of the interest accrued, period. Let’s see how.

Under REPAYE, the government will subsidize the interest that does not get covered by your minimum payment. In my case, I took out GRAD PLUS loans, so that would be 50% of the interest that accrues. We have already calculated the monthly payment to be $1,835.90. Let’s convert that to yearly payments.

$1,835.90 * 12 months = $22,030.85 owed this year under REPAYE

This year, based on last year’s income, we owe $22,030.85 in total payments under REPAYE. We also know that interest on $550,000 at 7% is $38,500. Therefore, our payments under REPAYE are not even enough to cover interest, as is usually the case with a loan this large.

So the difference is calculated as follows:

$38,500 – $22,030.85= $16,469.15 * 0.5 = $8,234.58

Which means that for our case, the government will subsidize over $8k per year! You would be missing out on thousands of dollars just by being on the wrong program! We certainly did.

Why We Stuck with IBR in the past

We decided to be under IBR right when I got out of dental school, BEFORE we decided to pay back our loans aggressively. The reason being in my first year, I only worked for the last three months of the year, having waited for my license to be approved after graduating in June. In my first year’s taxes, I made $25,000. So taking 15% of $25,000 would be cheaper than 10% of $145,000. Now in the second year, the numbers completely changed since I started working full time for the entire twelve months. My salary jumped from $25,000 to $125,000. The ultimate question: Why didn’t we make the switch?

In April of my first full year of work, we had decided to pay back the loans aggressively. Meaning, our monthly payments were MORE THAN the minimum amount required. In order for there to be excess interest accrued on the loan, our monthly payments should not exceed the interest gained, which was about $3,000. But since we were paying our debt like CRAZY, we were actually paying $6,500 towards the loans, so no interest was accruing and it did not matter if we stayed in IBR or went to REPAYE.

Or so we thought…

We were VERY wrong!

A Common Misconception

According to Travis Hornsby of Student Loan Planner, REPAYE calculates the difference between the interest accrued and the amount paid back on the loan at the beginning of the year. REPAYE assumes that you will only make your minimal payment each month, which means that they lock in the assumption that $11,500 would be accruing in interest (for our particular example). Every month, they will subsidize a portion of your loan to make up for the interest that will supposedly accrue, REGARDLESS OF THE MONTHLY PAYMENT YOU ACTUALLY PAY. It doesn’t matter if we pay $6,500 towards the loans or if we pay the minimum amount. Either way, REPAYE will subsidize the difference between the minimum payment and the interest that’s being charged. So we have actually missed out on an opportunity here! What’s passed is past, but we are definitely jumping from IBR to REPAYE ASAP!

What Switching from IBR to REPAYE will save us.

We need to make this jump because of the following:

It will save us tens of thousands of dollars in the long run.
Making the change will be the equivalent of refinancing to a lower rate without actually having to refinance! Which then gives us the safety net of staying in a loan forgiveness program. If ever life throws us a curveball (such as an accident, layoff, disability, sickness, or our worlds fall into chaos and we cannot work), then the loan forgiveness program will give us the flexibility to not HAVE to pay $6,500 per month.
After all the money we save, we can cut our repayment timeline down to 7.5 years!

Off course, not everyone under IBR should automatically jump to REPAYE! You have to pick the financial path that is right for you, considering your personality, your goals, your lifestyle, and more. If you are looking for sound advice on how to create a student loan repayment plan customized for your situation, don’t hesitate to contact Travis Hornsby, founder of Student Loan Planner, using my affiliate link. It will be a very rewarding hour! And check out my second podcast episode with Travis, to be released in 2019! Stay tuned.

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: Student Loan Forgiveness Options: IBR VS PAYE VS REPAYE

I remember the days leading up to graduating dental school. I had an incurable case of senioritis, and I was ready to go. I had reached all my requirements with a few months to spare. It was just a matter of time. It wasn’t school itself that was on my mind. All I could think about at that point was the student debt that I knew I had to face once I got out.

I recall that every student at USC’s dental program was required to take an exit course that went over student loan repayment options. They called it a course to make it sound official, but it was literally a one hour power-point presentation in a small classroom with mostly empty seats. I remember sitting towards the front of the classroom, with a notepad and pen, and furiously scribbling notes throughout the entire thing. Meanwhile, classmates grumbled about what a waste of time this was. Some tardily strolled in, halfway through the presentation, just so they can sign the sign out sheets. Those that did come on time sat, and politely listened, but without a pen in hand, sitting back casually until the presenter announced the end. At that time, I thought that I was the only one who did not understand this stuff. It seemed like either everyone either had rich parents, or had a plan. I remember kicking myself for not studying this before, since my classmates appeared bored at best, presumably because they already knew the ins and outs of their loan repayment plans. There was only one other classmate, a boy, who was taking notes with me. I remember him vividly, though we never talked before, because he asked tons of questions that I was too afraid to ask. I also remember him because after the class, the speaker offered to do additional mini-lectures if we had questions. He was the only other person I saw pursue this topic as avidly as I in the upcoming weeks before graduation. I would come in for a one-on-one meeting with the financial advisor, and after I walked out, he would walk in. Or vice versa. We had meetings with the malpractice representative twice, and for disability insurance once more, after the required one. We were the only two students in the classroom during these meetings. He and I sat next to each other at the front of the room, taking notes and writing down numbers and calculations. I must have seen him on 7 different days outside of the required exit course. I never spoke to him, not once. I don’t even remember his name, although we were in the same class. I wish I did so I can hit him up and ask how his path to repayment is going. Meanwhile, I thought everyone else had it all figured out. But I was wrong.

I was so obsessed (afraid? aware?) of the student debt’s debilitating ability to control my life that I even had Mike sit in on some of the meetings. This was around the time we had talked about getting married, and I realized that now my decisions will start to affect someone that I cared about. I wanted him to a) know what he was getting into because once you’re married, you share EVERYTHING and b) not be extremely affected by the loan I was bringing in. I felt a lot of guilt, and it was the first time in my life that I realized that my misguided financial choices will impact a loved one’s lifestyle for a long period of time. I knew I had to get out. I went through projections and extrapolations and Excel sheets with counselors. Then I scheduled an appointment with Mike in order to go over the same spreadsheets and Excel sheets again (because they won’t allow you to take a copy of the real numbers home…). We are numbers people, and I had to have him see the numbers. I remember coming home to late night discussions about our “game plan”. I remember feeling trapped, and slightly depressed, that I could not find a short term solution for this. I got out of dental school and picked up just about every possible side hustle I could muster while waiting for my license in the mail. Before I even started work, I reached out to a CFP because I felt that I needed help. I didn’t know the ins and outs of finances as well as I would hope, and I wanted to make sure that we were doing everything correctly. The one thing I did know was that the only thing on our side was time. The sooner I addressed my financial problems, the less of a burden they will be in the future. I wanted to cut off all compounding problems (read as interests), nip them in the bud persay, before the weeds could grow thorns.

Throughout this entire process, all anyone would say (when I was bold enough to ask them about their repayment plan) was that they were going with the student loan repayment route. In parrot-like manner, almost. Surely, when the exit course was being taught at USC, it was implied that the student loan repayment plan is the way to go. It was the YOLOs of all YOLOs. You only pay a small percentage of your paycheck, for 20-25 years, and then your loan is forgiven after that. Have fun now, enjoy life while you are young, and worry about the debt later. I always felt in my heart that that could not have been the best option. But everyone I talked to at the beginning of our journey said that my loan was too large to realistically pay down the debt in a standard way, unless I was some baller G who landed a five star practice that I owned for myself. I mean, I understand why. A standard repayment required a $6000 check being sent to My Great Lakes, every month for 10 years. That is 120 consecutive payments of $6000. It’s a huge pill to swallow. Mike didn’t believe we could do it given the numbers. Even my financial planner, who first looked at our finances in September, said that it can’t be done according to our current financial situation. (Eventually, we did get to a point where it could be done, but I will save that for a future post). So at the beginning of our journey, everyone we consulted with said we had to choose between the following three student loan repayment options: IBR, PAYE, or REPAYE.

I chose one and then entered the real world, where I learned, that most people who graduated from college did not even have an exit course and have absolutely no idea what they are doing with their student loans. I have talked to numerous professionals, and there has been many instances where they asked a question regarding a fundamental aspect of their loan program because they just didn’t have the answer. I have dentists who have been out 3, 5, 10 years, asking me questions about loans. I am no expert at this stuff, just to clarify, but I did study it for a fair amount of time. I have been thinking about writing this post for a while, but it wasn’t until Mike’s co-worker was talking to Mike one day and said, “You know what Sam should write about on her blog? All the Student Loan Forgiveness options and their clauses. Because no one seems to understand this shit.” His girlfriend is a pharmacist working for the past two years under a Public Service Loan Forgiveness Program, and she says her colleagues have made some major mistakes that have screwed their financial plan significantly. More on that at a later post as well. The take away message here is that, maybe no one actually knew what they were doing as the graduating days neared us. I sure didn’t. I was so unsure about my options that I felt the need to hire a financial planner just to get things straight. Maybe no one still knows. And when it was outwardly voiced that there is a need for this post, then that’s what motivated me to sit down and write it. Additionally, I will walk you through our decision tree, to give you some insight as to why one of these was the option we chose. Please understand that our decision tree does not necessarily predict your own decision tree. It is only meant to show the thought process through which we reached a final decision.

When we went through the student loan exit course, there were numerous slides on that PowerPoint that, in my opinion, were haphazardly organized. As a visual person, here is the best way I could organize this information. There are three options currently, IBR, PAYE, and REPAYE. The following are the differences between the three programs.

IBR VS PAYE VS REPAYE

	IBR	PAYE	REPAYE
Eligible Loans	-All federal Family Education Loan Program, Stafford and Grad Plus Loans -All FFELP and direct loan consolidation loans that do not contain parent PLUS Loans	-All Stafford loans or Grad Plus Loans disbursed on or after October 1, 2011. -Consolidation loans made on or after October 1, 2011, unless they contain a direct loan or FFEL loan made before October 1, 2007, or a Parent PLUS loan. -Direct loan borrowers without loans prior to October 1, 2007 who also had a disbursement made on or after October 1, 2011.	-Any Stafford/Grad Plus Loan -Any direct consolidation loan that does not contain Parent PLUS loan.
Eligibility	-Payments under a 10 year term must be higher than what they would be under IBR.	-Payments under a 10-year term must be higher than what they would be under REPAYE.	-No payment amount limit.
Monthly Payment	15% of discretionary income. The maximum is what you’d pay under a 10 year loan.	10% of discretionary income.	10% of discretionary income.
Married Borrowers	-If filing joint tax returns, both spouses’ incomes and eligible debt is considered. -If filing separate tax returns, only the applicant’s income and eligible debt is considered.	– If filing joint tax returns, both spouses’ incomes and eligible debt is considered. -If filing separate tax returns, only the applicant’s income and eligible debt is considered.	– Both spouses’ income and federal student loan debt, if applicable, is considered regardless of filing status. -Exception for victims of domestic violence or if borrower is separated from spouse.
Interest Capitalization	When calculated, payment is equal to or greater than what it would be under the 10 year term and/or when the borrower leaves IBR.	When calculated, payment is equal to or greater than what it would be under the 10 year term and/or when the borrower leaves PAYE.	As there is no maximum payment, interest will only be capitalized once they leave REPAYE.
Forgiveness	Any remaining balance after 25 years of eligible payments is forgiven and taxed as income. Only payments made on or after July 1, 2009 are eligible.	Any remaining balance after 20 years of eligible payments is forgiven and taxed as income. Only payments made on or after July 1, 2009 are eligible.	Borrowers with undergrad loans only will receive forgiveness after 20 years of eligible payments. Those with graduate loans will receive forgiveness after 25 years of eligible payments. Forgiven amount will be taxed as income.

THE SIMILARITIES

The following are requirements that apply to all three loan forgiveness options:

Discretionary income is adjusted gross income minus 150% of state poverty level for the borrower’s family size.
Loans cannot be in default.
Minimum monthly payments can be as low as $0 per month. For example, if you are currently not working due to disability or maternity leave, you pay a percentage of your income, which is $0.
If payment does not satisfy monthly accrued interest, the Department of Education pays the remained for most subsidized Stafford loans for up to 3 years. For REPAYE only, the agency also will pay 50% of unpaid interest on unsubsidized loans.
Like IBR/REPAYE, payments under REPAYE count toward public service loan forgiveness. If your loan is under FFEL program, you need to consolidate in order to get REPAYE.

INSIGHTS

No Parent PLUS Loans: First thing is first. You’ve got to figure out which student loans you’ve taken out. Once you have that figured out, you can decide which loan repayment programs you qualify for. It is important to note that none of these loan forgiveness programs allow Parent PLUS loans. If you are going to consolidate your loans, you have to make sure that none of the loans that were consolidated are part of a Parent PLUS loan, otherwise, you immediately disqualify yourself from the loan forgiveness programs.
October 1, 2011 is the cut off for PAYE. If you have taken out loans prior to this date, you will not qualify for PAYE.
Payments under a 10-year term must be higher than what they would be under IBR. But does it makes sense to do IBR? This is important if your loan amount is quite small. For example, if you have a loan of $150,000 (let’s say because you worked your butt off to minimize the student loan total) and you make $135,000/year as a dentist, a 10 year repayment plan will have you paying $1718.52/month at a 6.7% interest rate for 10 years. Compare that to IBR where you pay $1687.50/month at the same interest rate for 25 years. Technically, in this example, you will still qualify for IBR, because your 10-year term payments are still higher than IBR payments. But is it worth it? To me, it would make sense to just stick with standard repayment and get rid of the debt in 10 years, rather than prolonging it for 25 years, especially since you pay about the same monthly payment. The shortened debt time will decrease the total money you end up paying, because it decreases the amount you pay in interest. Plus, you will no longer have the debt hanging over your head. Compare that to a dentist who makes the same amount of money per year, but who has a loan debt of $550,000. Now the month difference is $6500/month vs $1687.50/month. IBR works well if you have a huge loan and cannot make the atrocious monthly payment fit with your ideal lifestyle. For smaller loan amounts, it may be best to just stick with standard repayment.
Smaller monthly payments: A good thing or a bad thing? When looking at these programs with a short term mindset, it is easy to think that smaller monthly payments are better than larger monthly payments. However, may I point out that small monthly payments for a large loan may not be enough to pay down the interest at all. For example, with a loan of $550,000, the interest that accrues each month at 6.7% interest rate is about $3,200/month. However, as from the previous example, 15% of a $135,000 yearly gross income is $1687. So every month, you are only paying half of the accruing interest, which means that interest will continually add to your loan total. Over twenty five years, you are increasing your total amount under the IBR program. Because of this, your total loan amount at the end of 25 years will be over $1 million dollars. But that’s alright, because it will all be wiped in the end anyways, right? (PS: In order to equal the accruing interest rate, without even touching the principal balance ever, you would need to be making more than $300,000 / year. Yikes.)
Consider your spouse’s income. It is important to note that under REPAYE, your spouse’s income counts as part of the discretionary income. Depending on your spouse’s income, this can increase your monthly loan payments, which will actually increase the amount you pay long term.
Forgiven amounts are taxed. This is a crucial part of the clause for the loan forgiveness programs. Those who miss this will be shocked at the end of the 25 years. I actually have met colleagues who have been graduated 3 and 5 years who are not aware of this rule. When I told them that the forgiven amounts will be taxed, their jaws dropped. Why? Because none of them knew. This single rule is what made me question whether loan forgiveness was worth it. As mentioned before, under IBR, with a loan as large as $550k, after twenty five years of payment from a dentist with $135,000 income, you would end up with over one million dollars in debt. I think my number was closer to $1,200,000. This was calculated with the assumption that I would be increasing my salary to more than $135,000 as I increased my experience. Either way, at year 25, the loans will be forgiven, and the total amount forgiven will be considered income that you made that year, and will be taxed similarly. So at the end of 25 years, I was expected to pay north of $350,000, in one lump sum, on top of taxes of the income I made on that year. Unless you have a plan to be swimming in some serious dough in twenty five years, I would say it would be advisable to save up for that $350,000 over 25 years. So that’s an additional $1,166 every month you have to save. But what bothered me most was the total amount of money you would pay after loan forgiveness. It turns out, with the taxed income, you would pay more money than the standard repayment. Standard repayment will lead to a total of $720,000 going towards loans, whereas IBR will lead to a grand total of $856,250. Plus, you would have a loan hanging over your head for 25 years, instead of only 10 years (less than half the amount of time). The time may not seem such a big deal, but that is a very large psychological strain to put on yourself for a very long amount of time. Let’s say you were ahead of your class and graduated dental school at 25. This loan would be with you until you’re 50 years old. That’s a really long time.
There is no clause stating that you are guaranteed to be grandfathered in the loan forgiveness program. While I would love to believe that we will all be one hundred percent grandfathered into these programs, we must not be in denial, and agree to the fact that there is no such clause that guarantees this to be the case. This program may be subject to future changes with changes in government. 25 years is a very long time, and the government changes can occur in a short time span within those 25 years. For example, what if a law passes that changes the loan forgiveness program from being 25 years to 30 years? What if you were so far in, that all you’ve done the last twenty years was increase your loan to a point of no return? You would then have to go through with the additional five years, thus increasing your loan total even more, which then increases the final amount you’ve paid for your education. Or what if the programs are abolished completely? Perhaps you would get some help, perhaps you would be grandfathered in, but perhaps they do nothing to help you, leaving you with over a million dollars’ worth of debt in your forties that you must now pay off. People may say, that’s crazy, they can’t do that to us! Unfortunately, until I see a statement saying otherwise, I will continue to believe that anything can happen. That may just be me, being overly cautious. Or realistic, whichever.

APPLICATION: OUR DECISION TREE

So which program did we choose? As I stated before, initially, we were told that this was the way to go, so we decided to choose one category to fall under. Unfortunately, we immediately had to eliminate PAYE because I had student loans that were disbursed before October of 2011, which were my undergraduate loans. So we were down to either IBR or REPAYE. Both will take 25 years before the student loans were forgiven. It may seem as if REPAYE would be the best option, because it only requires 10% of discretionary income to be paid, whereas IBR requires 15% of discretionary income to be paid. However, we chose IBR over REPAYE because of the married borrowers section of the chart. IBR allows Mike and me to file separately, which means Mike’s income is not calculated in that 15%. Whereas REPAYE will calculate Mike’s income into the 10% owed every year, regardless of our filing status. This fact alone makes a huge difference in how much we end up paying. Without giving away the actual numbers, the example below will demonstrate this point. Under IBR, a combined income of $200,000 will yield a $2,500 check per month being written towards student loans, whereas a single income of $100,000 will yield a $1,250 check per month towards student loans. One may argue that it is better to pay down a higher portion of the loans so that at the end of the 25 years, the amount left over that you will be taxed on is less. However, if you choose to do the loan forgiveness program, it will actually benefit you most if you pay the least amount possible. Your total payment will be less in the long run. Notice how filing together will require $2,500 per month to be paid towards your loans, which is still not enough to cover the accruing interest. So even with the increased amount you are paying, the loan total will still be increasing. The numbers ended up showing that it would be better to pay taxes on a slightly larger number, than it is to pay twice as much every month without ever even touching principle. Off course, this is of the assumption that your spouse and you make the same income for work. In order to check what works best for your situation, I would recommend running your own numbers, using your loan amounts and your incomes.

I would like to reiterate that I am no expert. I can’t tell you which plan is better for you, and it is highly likely that I don’t know all the ins and outs of all three plans. But this is what I’ve learned so far, and our method of thinking. If there are ever any doubts, just run projections and calculations and excel sheets, and go with the numbers. The numbers won’t lie. I hope this has been helpful to some, and I hope more people realize the importance of thinking about this early on in their careers after reading this post. If you ever need someone to walk you through it, may I recommend a CFP? I wish you the best of luck in your endeavors, and more future insightful posts on finance to come!

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.

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.
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.
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.
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.
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.