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

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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. 

 

The Importance of Fun Money in Financial Sustainability

We all know that I talk a lot about sustainability, harboring borderline ad nauseam (debatable). Most oft, it refers to an environmental topic, but once in a blue moon, it will refer to something finance related. This is because tackling a student loan of $550K+ has taught me a thing or two about how to set yourself up for success with paying down debt, one of which is that the looming debt seems to most an insurmountable task that very easily deters a person from pursuing a tackling of said giant. And if you were as crazed as I about financial freedom and you did pursue freedom from debt, I would postulate bet my money on the fact that we are looking at a journey long-term. In other words, opportunities abound for insecurities to start kicking in, and there are many forks in the road that either lead you back to where you started from (in our case, on a 25 year loan forgiveness plan) or to a dead end. So we must talk sustainability if we are to expect a level of success. More importantly, we must talk sustainability if we are ever going to c r u s h this game (which we are!)

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Finding Financial Sustainability

Saving every dollar towards achieving a goal can be a grueling task. Most inquiries from outsiders center around how we survive the suffering. Surely, we must be starving ourselves of LIFE in an effort to be free?

ABSOLUTELY NOT.

Firstly, if you think that’s the case, then you don’t know us at all. I think both of us are averse towards doing anything we don’t feel is right. Read also as anything we don’t want to do. And while that seems bratty at best, it’s actually the perfect recipe towards a happy life.

Secondly, I agree. Anyone who is bogged down by the stresses of meeting payment requirements may have difficulty enjoying “the finer things”, but who gets to define “the finer things”? Only you. So while society spends their hard-earned bucks on Rolexes and Teslas, your idea of a finer thing could be a cup of coffee, a morning of solace, a day outdoors, yeah?

And lastly, even when it comes to purchasing stuff, we have the ability to, but with mindfulness. We don’t have a tendency to purchase things right when we see them anyway, and scoff at that on-demand-pull that gets most people to do some regretful spending. What we do have is a category in our budgeting tool (this link will take you to my course on how to set up your own budgeting tool). We have to thank our CFP (who is no longer doing CFP work but who have been invaluable in sending us on our way to a healthy, financially fit life – see The Value of Having a CFP) for teaching us about the importance of having a category for spending on OURSELVES.

Yes! I am talking about a category dedicated towards FUN money.

Sustainability comes from a variety of inspirations and motivations. Just when the going gets rough, one can find the push they need in a community, in the re-evaluation of perspective, in a reminder of the reason WHY we started in the first place. Sustainability can also be found in a bribe – a reward persay … but a calculated reward. This is what fun money is.

How to Set Aside Fun Money

Fun money is literally a category in our budgeting tool. It sits under the “Wants” grouping, and gets allocated a monthly amount. Nothing large by any means. We are talking $50 a month. If we want something more than $50, then we have to save for a few months.

We have our own separate categories for fun money, and we can spend our fun money however we want. Fun money is spent towards things we want but we both don’t benefit from. So, for example, if I want to buy a book about bread, then that will come out of my fun money fund. Or if he wants to buy a video game to play with his guy friends, then that will come out of his fun money account.

There isn’t anything extravagant about the fun money bucket. Because the amount is so small per month (less than 1% of our entire income), there is no guilt associated with it. Because we each have our own category, there is no blame when one spends their fun money. And because we already planned for the spending ahead of time, there is no buyer’s remorse. In fact, the opposite is true. It starts the habit of serious consideration prior to purchasing, because you realize how long it took to build up your fun money fund, and makes you assess whether there are better methods of spending. In fact, I think fun money is a great way to teach kids about appropriate spending habits, especially if the percentage set aside towards fun money is small compared to what they actually receive from birthdays, holidays, and rewarded chore duties.

How Fun Money Helps With Sustainability

So you can buy a few items. Whoop-dee-doo. How does that help with paying down a massive student debt?!

The psychology of working essentially for free and putting all your hard-earned dollars towards a debt that allowed you to work in the first place is difficult to describe. The taxation on the mind, as well as the emotional roller coaster that one experiences, cannot be stressed. Some days, you wonder what it is exactly that you’ve done. You start to question whether it was all worth it. Eventually, you’ll come around. But the hoops you have to go through to continue on this journey … it’s comical how emo the whole thing is. Like I said, the insecurities roll in like a fog. You don’t realize their coming, but they sneak up on you. It is during these times that you may need a little boost of confidence. Moral support does the trick, but there are days when I feel like no one else TRULY understands. Because how could they? We all travel different paths, and no two are exactly alike. An activity helps as well, but only momentarily, as it steals the mind and takes it elsewhere. The insecurity doesn’t fade, however, and soon you are left where you started. Unless the activity spans a long period of time, all you can do is wait.

However, the human mind responds very well to a reward system. In fact, it responds so well, that many people are obsessed with rewarding themselves, so much so that they suffer from excess consumption. No need to go down that rabbit hole now (AGAIN). Reward systems are involved in positive reinforcement, or in bribing people to do what one wants them to do. So really, I guess I’m bribing myself. Or at least, I am psychologically tricking the mind into resetting to a more positive thinking space.

The human mind doesn’t respond to starvation. Nothing lives after that. But the reward system, the mind understands. Fun money allows me to give myself calculated rewards. Things that I have already budgeted for, the purchasing of which is controlled. I don’t need much, as we already know, but occasionally, I need a push. I need breathing room. I need a break. And then, I can keep going.

Fun money makes this work sustainable. Less scary, somehow. More manageable. It makes me less of an anomaly, and more human. Hopefully, it makes me more relatable, and shows people that this isn’t me performing some heroic. It’s something that’s achievable for others too. I hope it gets them to start on their own journeys, knowing that sustainability is possible, and that fun money doesn’t make you less dedicated, nor does it make you less successful. If anything, I will dare to say that it’ll feed your fire, and make you succeed where others only dare dream.

Pictured: My most recent purchase, supporting Two Days Off, an ethical clothing line by Gina Stovall based in Los Angeles, CA.

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?

Property Ownership: Understanding and Improving Credit Scores

It would be nice to buy a home entirely with cash. The transaction would be simple, and there’s only one dotted line to sign. Unfortunately, for many in California, this just isn’t feasible … at least, not any time soon. We debated waiting to buy a home until we can pay for it in cash (mostly because of the fact that I get sweaty palms every time I think about loans) but the trade-off was too great. Waiting to buy a home for cash would have taken us more than fifteen years, since we had to focus on paying down $500,000 student loans as well, which is equivalent in price to our most recent home purchase. That would be fifteen years of paying for monthly rent, which could be equivalent to fifteen years of paying down the mortgage. I ended up wiping the sweaty palms on my jeans, taking a deep breath, and choosing the latter. Meaning, I had to take on a new loan, at the exact same price as my student debt. *Deep breathIf it wasn’t for my husband, I am not sure I could cope with the thought. Reassuring hugs and “we-got-this” fist bumps go a long way.

While I can ignore the nervous sweat and the anxious breathing, there is one thing a buyer applying for a mortgage cannot ignore: their credit score. Credit scores can be supplied by different companies, the most commonly used being FICO, which stands for Fair Isaac Corporation. Each score is calculated by an elusive mathematical equation that evaluates many types of information with the patterns in hundreds of thousands of past credit reports. Simply put, they are trying to evaluate the risk that comes with loaning you money.

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Things to note: 

There are several categories that the FICO score considers, including your payment history, the amount you currently owe, the length of your credit history, any new credits you acquired, the types of credit in use, and the number of credit queries. Here are a few things to note, and then we will go in dept into each category.

  • A FICO score requires that at least one account has been open for six months of more, and at least one account has been updated in the last six months.
  • Although a score can quickly be lowered, it takes time to improve your score. If you are planning to buy a home, and your score is lower than 750, I would recommend starting to improve your credit score NOW. There is no quick fix to improving credit. In fact, quick-fix attempts may backfire. The best thing you can do is to manage your credit responsibly over a long period of time.
  • A score considers all categories mentioned above, not just one.
  • Everyone’s score is calculated a little differently. One category may have more emphasis when determining my score whereas another category may weigh more heavily in calculating someone else’s. It’s impossible to say how important each category is, because it differs from person to person, depending on the overall picture. Therefore, it is important to work on each of the categories. With that being said, the general rule for a majority of people is that the categories are listed in the order of importance, with the payment history usually being the most important and the number of new queries being least important.

With that, let’s get right into it!

Payment History

A good payment history shows the lenders that you will be reliable in paying back the loan. Your score will take into account:

  • Payment history on many types of accounts, including credit cards, installment loans, and finance-company accounts.
  • Public record and collection items, including bankruptcies, suits, wage attachments, liens, and judgements. Bankruptcies stay on your credit report for 7-10 years. A foreclosure, short sale, or deed in lieu of a foreclosure lower your score by about the same amount. These are considered serious delinquencies, so don’t expect to get a new mortgage loan with favorable terms for 5-7 years.
  • Details on late payments: Your score considers how late payments were, how much was owed, how recently they occurred and how many there are. For example, a 60 day late payment is not as damaging as a 90 day late payment. However, a 60 day late payment made one month ago affects your score more than a 90 day late payment made five years ago.
  • How many accounts show no late payments, which will help increase your credit score.

How to improve your score:

  • Pay your bills on time.
  • If you’ve missed payment, get current and stay current.
  • If you are having a difficult time making ends meet, get help. May I suggest a financial planner?

The Amount You Owe

Using credit accounts does not mean that you’ll be a bad borrower. However, using many credit accounts and owing a great deal in each one indicates to the lender that a person may be overextended and is more likely to make some payments late or not at all. Your score will take into account:

  •  The amount owed on all accounts and on different types of accounts.  The total balance on your last statement is generally the amount that is shown on the report. The score will also consider what types of accounts are being used.
  • How many accounts have balances. A large number can indicate overextension.
  • How much of the total credit line is revolving credit, meaning carrying a debt balance month to month. Those who are closer to maxing out on many credit cards may hold greater risk.
  • How much of the installment loan accounts is still owed compared with the original amount. Car payments are a great example. Even if you’ve been paying the monthly dues on a $10k car loan, if the majority has been going to interest, then you may still owe 80% of the car loan when you apply for a mortgage. Paying down installment loans at a quicker rate obviously looks good.

How to improve your score:

  • Keep balances low on all credit cards.
  • Pay off debt as close to 100% as you can.
  • Don’t close unused credit cards as a short-term strategy to raise your score. It won’t work, and it may even lower your score! Long established accounts show that you have a long history, which is good in the eyes of a lender.
  • Don’t open new credit card accounts that you don’t need. I am talking to you travel hackers out there. Put it on pause.

The Length of Credit History

In general, a longer credit history looks good to lenders. I remember when Mike was trying to apply for a car loan. He had no credit history, and had difficulty getting it. It blows my mind that being financially responsible and not having credit history is considered a bad thing by lenders. What a backwards world we live in. Unfortunately, when it comes to borrowing money, a credit history is considered a good thing. Your score will take a look at:

  • How long credit accounts have been established  – the longer “the better”. Also, the more diverse types of credits you’ve been managing, the more responsible you seem.
  • How long it’s been since you used certain revolving credit. For example, an inactive credit-card is given less weight in your credit score than active ones.

How to improve your score:

  • Don’t open a lot of new credit cards. Remember that new accounts will lower your credit score, even if it is temporarily.

New Credit You’ve Acquired

Any credit less than a year old is considered “new”. The score will consider:

  • How many accounts you have. It will especially look at how many of those accounts are new.
  • How long it has been since the most recent account was opened. 
  • How many requests have been submitted for credits. Typically, inquiries remain on your credit report for two years, although FICO only considers inquiries from the last year.
  • The length of time since lenders made credit report inquiries. FICO will ignore inquiries that are more than a year old.
  • Whether your recent credit history is good following past payment problems. Off course, your score will be improved after getting current and staying current.

How to improve your score:

  • When you search for multiple loans, do them all within a certain time period. 

Types of Credit in Use

Usually, this category does not bear much weight in the score, however, it can if there is not much other information on which to base a score. This score looks at:

  • The different types of credit accounts you have. They look to see if you have a mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Off course, this does not mean you should go out and get one of each!

How to improve your score.

  • You can open new credit cards but ONLY AS NEEDED. You don’t need one of every type. Plus you have to remember to manage them responsibly. Meaning, pay each credit card in full at the end of the month. Note that closing credit accounts does not erase them from your report.

Number of Credit Inquiries

Credit inquiries are defined as the requests that a lender makes for your credit score or report each time you try to apply for a new credit line. FICO takes this number into account. Here’s what you need to know:

  • Inquiries do not have a large effect on your score. Typically, this lowers the score by less than five points. That being said, there is a larger impact if you have a short credit history or if you have few accounts. Also, people with six inquiries or more on their credit reports are 8 times more likely to declare bankruptcy, something worth considering.
  • Many inquiries are not counted at all. The following are not counted, although they may appear on your credit report: orders made by you from a credit reporting agency, lender requests for your score in order to make you a pre-approved credit offer, and requests from employers.
  • The score looks for rate shopping. This is why I mentioned before that shopping around for a mortgage or an autoloan should be done at the same time. Multiple potential lenders may pull your credit report, even though you are only looking for one loan. The score counts multiple inquiries in a 45-day period as one single inquiry. Also, the score ignores all inquiries made in the 30 days prior to the scoring.

So there you have it! Trying to understand your credit score can be overwhelming. Score determination is muddled by the fact that each individual’s scores bear different weights for different categories. The most important thing to remember is that you want to prove that you have little risk for defaulting on a loan. So pay back debt, stay current, be responsible, and do this over the course of a long time period. And the best day to start is today.

Good luck!

Dear College Kid: Graduate from Undergrad in Three Years and Save $$$

Dear College Kid is a series I decided to write to my younger self, if I could somehow teleport myself via time machine to my late teens and early twenties. I hope other college kids find these letters, and garner some foresight that I myself had lacked. I hope it changes their lives.

Dear College Kid,

Are you in an undergraduate program trying to plan what classes to take? Or better yet, are you a high-schooler, looking far ahead into your future, trying to figure ways to save? Here’s some advice:

Try to graduate in three years or less, and save $$$!

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The first step: Stop the Negativity!

You may be saying to yourself some of the following negative self-talk, but I want to address them now and talk you out of that nonsense. Nip it in the bud, so to speak.

Avoid the following negative thoughts:

  • “Graduating in three years requires a special program, which my school does not have.” Not true at all! I myself graduated from a four year undergraduate college, in a three year span of time. All you need to do is hit your particular program’s requirements, and that’s it! Just make sure to plan ahead.
  • “Only Einsteins and nerds finish early because you need to be very smart in order to graduate in three years or less.”  You need to be very organized to finish early, not necessarily smart. It may require a bit more effort, but it does not mean that some people are born with the ability to do this and others are not. Everyone should at least try. If you don’t end up finishing in three years, you should be just as proud to finish in three years and one quarter. Every little bit that you shave off of your schooling counts!
  • “Graduating early means I won’t have my FULL college experience! I will miss out on some of the fun my friends are having.” Actually, quite the opposite! Finishing school in three years freed up that last year when all my other friends were still in school. It gave me the chance to work three jobs, and I had a more flexible schedule than my friends who were still in college! While they had to plan for tests and study for exams, I was able to move my work schedules around to make time for lunch dates, or hang out nights. If anything, I was able to experience MORE than they did!
  • “What difference does an extra year make? Shouldn’t I just take classes that I am interested in or that I enjoy FOR FUN while I’m at it? What’s another couple of thousands of dollars?” If I could kick my young self for having this kind of mentality, I would. Back then, I did not understand the value of compounding interest. I did not have a sense of the value of time. I did not realize that something so small now, can make such a big difference later. The money you save from finishing undergrad early can be invested into something that will give you a higher return over time, rather than be taken out as a loan that will be charged interest over time. Instead of losing money, you could be earning money. Time is on your side, and investing early is the way to go!

Ways To Graduate Early

There were many things that I did to allow me to graduate one year early. If I had a do-over, I would do even MORE, to try to shave off a little bit more time. Here are some tips!

  • Take as many AP (Advanced Placement) or IB (International Bachelaureate) courses in high school as you can. I did the work in high – school. I took 11 AP courses in high-school. The great thing about these is that some colleges accept certain AP classes as credit towards general education college courses! I entered my first year of college as a “sophomore” and had first choice in which courses I wanted to take, which made it even easier to plan ahead!
  • Plan your course of action. When I entered college, I was given a list of classes that I was required to take in order to graduate early. I kept that list throughout my whole college career and when it came time to choose classes, I would simply go through the list and find classes that I wanted to take but were also required. It wasn’t until my final trimester (we were on the trimester system) that I took a class that was not a requirement, for fun. Why did I do that? Because it gave me the units I needed to be considered a full-time student, which had a flat rate and which actually made the tuition cheaper than if I paid per unit to be a part-time student. Go figure!
  • Take as many units as you can handle. The minimum units you need to be considered a full time student was 12 units. You can likely graduate in four years taking 12-15 units a trimester. But I had other plans. I was taking 16-20 units a trimester, and one particular trimester, I believe I took 22 units. The exception was my final trimester, where I took only 12 units, the minimum to be a full -time student.
  • Stay focused. You are here for SCHOOL. The biggest excuse I heard recited to not take more than 12 units at a time was that early twenty-somethings want to enjoy life. They don’t want to be focused on JUST school work. They want to have time to go to parties, hang out with their friends, make new experiences. But you are at college for school. Focusing on that doesn’t mean you won’t get those new experiences, or have a good time.
  • Don’t listen to the naysayers. When I told others that I was going to finish college early, there was a lot of pushback. In the early stages, I had a lot of people telling me it would be difficult to do, that I would stress myself out too much and hate college all-together. When that didn’t happen, they said that I was missing out. As it got closer towards the end of my college career, I started having people trying to convince me to stay. “Just take classes for fun!” To which I replied, “I’d rather live life, for fun.” Don’t listen to the naysayers who think you can’t do it. Don’t listen to people trying to convince you you’re missing out. And definitely don’t listen to those who try to convince you to stay even longer, and spend more money or take additional loans. The person you should be living life for is yourself, and your future self will thank you.

If you need further convincing, maybe math will do the trick.

Tuition Costs Saved by Graduating in 3 Years: $8,000

Additional Money Earned by Working 3 Jobs in the Final Year: $18,000

The Difference: $26,000, which I funneled into student loans and credit card debt. 

Hope this helps kick ya in the rear and get you faster towards getting out!

Sincerely,

TheDebtist

 

 

Finances: Why We Are Refinancing and Leaving IBR Behind, For Good!

Before we head off to Portland, OR, we wanted to share with you guys some very exciting news! We are finally pulling the plug on student loan forgiveness, completely! We are in the process of refinancing our student loans, and leaving IBR behind, for good!

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Why haven’t we refinanced sooner, you ask? Well, there is a clause in the student loan forgiveness program IBR that states that once we refinance our loans, we will no longer be eligible for the student loan forgiveness program in the future. Meaning, if something happened, like one of us lost our jobs, we would still need to continue to make the $6,500/month payment from now until forever (or at least until we are free from the loans). If we stuck with IBR and one of us lost our jobs, we could revert back to paying the minimum payment under IBR (which is calculated as a small percentage of your income), until we could dig ourselves out of the rut. You can see why refinancing can be a tricky thing. A life event that changes our financial situation could immediately cause us to get in trouble with the IRS if we cannot maintain that $6,500/month payment. In other words, we were giant wussy pants and scared of what could happen. We were not quite ready to leave the safety of IBR when we decided to pay down our loans a year ago.

However, under the IBR program, my student loan with Great Lakes is charged an interest of a whopping 6.7%! By refinancing, we could lower that down to about 5.5%. It doesn’t seem like much, but on a loan this huge, it makes a big difference. To give readers an idea, for a 10 year refinance at 5.5%, our monthly payment would decrease from $6,500 to $5,300! Or, put another way, if we continued the course of paying $6,500/month, then we will be done with our loans in 7.5 years! I don’t know about you, but both perspectives are extremely exciting and extremely enticing.

I have spoken about us paying down $84,000 towards my student debt of $550k+ in the past year. Initially, we didn’t know at the start of our journey whether we would be able to make the large monthly payments. We wanted to try it out, but were afraid that we would not be able to support the lifestyle we want and still have enough for the loan amount. What we found was that we were able to alter our lifestyle in order to make our payments, and our lives have much improved from it. After one year, we are extremely confident that this is the path we want to take, and that we can do this! We are no longer afraid of the what-ifs and are ready to take a leap of faith (in ourselves) and just turn our backs on student loan forgiveness for good!

So what happens if some life event occurs that dramatically impacts our finances? We haven’t forgotten about the possibility of one of us losing a job, or a natural disaster happening, or a family emergency occurring, although cross our fingers, legs, toes and arms that none of these ever come to fruition. But we HAVE thought through a series of possibilities that could help us in such scenarios.

  1. Have an emergency fund. Over the past year, we have built up an emergency fund that could support us for 2.5 months if one of us loses a job, or for a little under 2 months if both of us lost our jobs. We will continue to add to this emergency fund and over time, it should be a very big safety net for us (or it could help us pay down loans faster towards the end!)
  2. Make use of the lower monthly payments. There are TWO ways we could make use of the lower monthly payments. The first is to pay the $5,300 per month minimum payment, and stash the difference ($1,200) in the emergency fund every month. Although a viable plan, that isn’t the path we are going to take. The other is to continue paying $6,500 a month since we can support that payment, and plan to be done in over 7 years. Because we would be paying extra $$ a month, we would be paid ahead. Meaning, if something were to happen, we would have accounted for future payments already, and would likely have a buffer of time before we are back to our originally determined schedule.
  3. Rely on the loan’s forbearance policy. Loan companies want to get paid. If someone really cannot make payments, then the loan’s forbearance policy will temporarily allow non-payment for a set number of months. The interest will still accrue, but it is a back-up!

Luckily for us, our jobs are very flexible and we don’t really see ourselves without work for long periods of time, but you never know what the future may hold, and sometimes life gets out of control. So, yes, it IS still wildly scary for us to be doing this! Too risky for some. But I believe in our abilities and focus and determination. And we want to inspire other people to feel like they could be freed too.

How about you? Feel like this is too crazy a venture, or would you be willing to try too?

The Value of Having a Certified Financial Planner (CFP)

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

Today, I wanted to pose the question, “Is having a CFP right for you?” When I first graduated from dental school, I was absolutely lost. Along with the feelings of excitement and pride with my recent accomplishments came a subtle (but over-powering) dread, and a very heavy, invisible weight. I knew I needed guidance, but did not know who to reach out to. I did not exactly have adults in my life who could act as good financial role models (my long historical relationship with money detailed here), and there are very few people I know (outside of my fellow graduates) who really had the problem of paying down half a million dollars in student debt at 26 years old. So I reached out to Andrew Davis, the CFP behind SeamlessFP, who happened to be the husband of a dental classmate, and whose work focused on guiding newly-graduated dental students, specifically. I think it was the best decision we ever made.

On the flip side, there are people who would argue that CFPs are a waste of money, and that money could be used elsewhere. Which is a fair argument. I myself am a big fan of avoiding outsourcing tasks as much as possible. It will take a bit of work, but handling your own finances is totally a doable thing! However, it requires time, which I have value over money. Delving into research isn’t such a scary thought for me, but spending all my free time learning the nuances of taxes, S corporations, estate planning, investments, and more is NOT an enticing thought. So what I want to discuss today is the value of having a CFP to us, and then I leave the decisions to you.

The value of having a CFP

The list of pros for having a CFP versus not having one is quite long, which is a good thing!

  • Pro: Outsource financial planning to free up time, in order to pursue interests, hobbies, work, etc.

As mentioned before, outsourcing financial planning frees up a lot of our time. Time is a resource scarcer than money in the modern world. People seem to always be running out of it, but are still quick to occupy it with tasks, necessary or otherwise. When you think about how much your time is worth, in dollars, can you really put a price to it? Time is the one thing you are constantly running out of, and will never be able to replenish, making it an extremely valuable resource. Being intentional with the tasks I choose to occupy my time is very important to me. Spiritual uplifting, emotional replenishing, mental healing, these are the things that matter and make it a life worth living. NOT constantly worrying, thinking, and dealing with money.

  • Pro: Peace of mind that we are hitting our financial goals in a very step-by-step (and legal) manner.

This is for the DIYers out there. I am a lover of DIY projects and take pride in my ability to be self-sufficient. However, no matter how much of my free time I put into studying the nuances of finances, I cannot possibly keep up to date with the ever-changing rules and regulations. Mike used to do his own taxes with TurboTax and that worked sufficiently well, but once we got married, added in an S-Corporation with its own separate payrolls, well things got too complicated. We started asking ourselves, “How do we know we are following all the rules? How do we know about the fine-print clauses that benefit us? Who will be flagging our attention with every change?” A financial planner gives us peace of mind, knowing that we are on track to hit our goals in a efficient (and legal) manner. There are many minute details that one could miss, but it makes us feel better knowing that we have someone else helping us with that.

  • Pro: Keep up to date with new changes.

The new Tax Bill that passed last year is a great example of this. Even now, nothing is quite set in stone as to how these changes will apply to us. By having a financial planner, we were alerted to the possible beneficial change for S Corporations in the upcoming year, something we would never have known, but definitely can impact our financial plan.

  • Pro: A resource for learning more.

This, by far, is the most beneficial to me. Andrew has been instrumental in educating us about our finances and different paths we can take to achieve financial freedom. He has recommended books, blogs, podcasts, and other resources. He was actually the one who introduced us to the FI community: a community dedicated to reaching financial independence by using life optimization “hacks”. We would not have gone so far on our financial road to freedom without life hacks such as co-housing, travel hacking, YNAB, and more!

Financial planning VS Investment Planning – What’s the difference?

It is important to differentiate between financial planning and investment planning. We do financial planning, which requires a long-term life plan, created by the marriage between our financial past and our dream futures. Our first meeting with Andrew was not something we expected to have. It began with a meeting dedicated wholly to gaining a deep understanding of our personalities, goals, and dreams. It almost felt like a therapy session, with questions such as, “If you knew you were going to die tomorrow, what would you spend your time doing today?” Don’t let that deter you. I think that first meeting was essential to setting the foundation on which we created our entire plan. The process continues to be a constant reassessment of life. Initially, we listed our priorities as traveling, buying a house, yoga subscriptions, guitar lessons, sticking with loan repayment program, and working until we were 65 years old. Now our life still includes travel, but our goals have shifted to standard repayment, renting for the next few years, working less hours, being a blogger, opening a coffee shop, and early retirement from our lines of work, which would possibly lead us to newer lines of work. In this respect, Andrew acts as more than just a financial planner. He is a psychologist, therapist, educator, mediator between spouses, confidant, & friend. This is NOT to be confused with investment planning, where someone advises you where to invest your money. That is included with financial planning, but not the other way around.

The importance of being a fiduciary

A fiduciary requires that someone acts in the best interests of a client. It is important that your CFP is a fiduciary in all aspects. Conflicts arise when CFPs have affiliations with third parties that may sway their advice towards promoting something that benefits them. For example, a person can receive a profit for selling an affiliate insurance. The insurance may be great, however, that person has a motivating factor that would make him want to promote that particular insurance. Even though it can be beneficial for you to sign up with that insurance company, the decision was not completely unbiased. We did not even realize the importance of being a fiduciary until we learned the concept from Andrew himself. 

If you are not sure whether your CFP is a fiduciary, ask! Try to find a fiduciary in all aspects. You want to ensure that you are being treated fairly at all times. Do not be afraid to ask how they get compensated, so that you can truly see where they are getting their money. It may seem awkward to inquire about it, but it is your finances on the line.

What a CFP has done for us, so far

  • Budgeting Help: Our CFP introduced us to budgeting, setting up our YNAB budgeting tool, and helped us develop good budgeting habits. 
  • Analysis between two potential jobs: When Mike was considering making the move from one company to another, we needed help analyzing whether it was a reasonable financial move. It was not simply a comparison between the two different income, but also required factoring in 401k investment matching, health benefit options, life insurances, difference in commute, and level of interest in the line of work.
  • Investment Planning: He has given us advice on how to manage our 401k portfolios as well as given us other investment tips when we reach out for help. We retain full autonomy as to where we want to invest and how much, but having a third person to go over the pros and cons at each step has been helpful. 
  • Health Benefits: We needed help deciding on a health plan, and have chosen one that works well for us thanks to Andrew’s help. After an analysis of our options, an HSA option was also open to us, and we decided to take advantage of that privilege.
  • Renter’s Insurance: Prior to our new place, we did not have renter’s insurance. After seeing the benefits of having that extra coverage at a small monthly cost, we decided to sign up for one right away!
  • Connection to a CPA: Taxes for SCorps can be a bit tricky. A CPA is advised so as not to miss a thing. Initially, I was going to go with the same person my parents have used for years. But after an hour-long interview with him, it became clear to me that he did not know much about taxes as they applied to dentists specifically. He did not even know about the different student loan forgiveness programs, or how an SCorp can be used for tax deductions. It was useful to be referred to a CPA who frequently does taxes for dentists specifically.
  • Set up my SCORP: This was so beneficial to me! It is possible to create a corporation easily online, however, he walked me through the pros and cons of having an SCORP so that I could make an informed decision as to whether this is something I wanted to do. The application for the SCORP was easy but we did meet some humps along the way that he quickly helped me to resolve. 
  • Setting up Gusto and ways to automate my SCORP: Once the SCORP was set up, our CFP took care of creating an automated payroll for me. We use Gusto to manage my payroll, and once it was set up, he easily walked me through the different ways that we can keep track of the payroll via my SCORP. All I have to do is wait for my payments, the system takes care of the rest!
  • Introduction to financial life hacks: I learned tricks such as travel hacking from Andrew and it was he who introduced us to the FIRE and FI communities.
  • Analysis of student loan repayment options: This is the part about our finances that has most affected our lifestyle. He walked us through the different student loan forgiveness programs that we qualified for. After a thorough explanation of each, he created an extrapolation of our financial futures under each repayment option. By using physical numbers, we were able to predict the lifestyle changes associated with each student loan option. Once we had our budgeting in order, he brought to our attention that we were able to pay down student loans without the forgiveness program, thus saving us more than $100,000 in the long run, as well as buying our freedom 15 years earlier than planned. That decision itself was so life-altering for the better, and we would have never gotten to that point on our own. 

We personally benefit from SeamlessFP

Andrew Davis is the CFP behind SeamlessFP. He focuses on helping newly graduated dentists create a financial plan. He does work with non-dentists occasionally, or dentists who have been practicing for a long time. I only know this because we have referred people in those categories who now are working with him too.

There are multiple options one can choose when working with SeamlessFP. A person can do a one-time consultation in order to gain help on a particular goal or project, or they can choose the full life-planning package. We chose to do the latter option. I did not want help with simply setting up an SCORP. I wanted a more thorough analysis of all of our financial details. I was determined to tackle as many aspects as possible to optimize our financial situation. After every meeting, he will upload a list of tasks via an online portal to be completed. This is helpful for people who need someone to hold them accountable to ensure that they continue moving forward with their financial path. Together, we re-analyze continually to see what we can change to optimize even further. A yearly re-cap meeting is held as well, where we go over our dreams and goals for the future (5, 10, 25 years out) so that we aren’t dully following a pre-set path. Besides, a lot changes in a year!

What I like most is that he is eager to help clients learn more about their financial options and situations. It is clear that having his clients make their own decisions (given the facts) is important to him. I can ask him one question, and we will go over the entire topic in detail, prior to him answering my question just so that I know the reasoning behind his answer. It’s scarce to find that these days, and I wholly appreciate it.He may give suggestions but he really makes sure you know that ultimately, the choices are still completely yours to make. It’s easy to see that his goal is to help his clients find the happiness they seek, by eliminating financial stress from the equation. It also helps that he is very accessible via email or text. Typically, responses occur within one day. Additionally, if you choose the latter option, there is unlimited access. Anyone who knows me will easily tell you that I am the type to ask multiple questions, always in search of a deeper understanding of all things. So a CFP who embraces that is gold. Off course, you want to make sure that the CFP you choose is right for you, if it’s right at all. If you have any interest in learning more about our friend Andrew, you can easily set up a one-hour phone call to speak with him and see what services he can offer you and which package is best for what you are trying to achieve.

Overall, I just wanted to shed light on how a CFP has changed our life in this blog post. As always, you do you.

 

Finances: How YNAB Helped Us Pay $84,000 Towards Student Loans in One Year!

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

Looking back on it, it seems absolutely nuts that we have been able to pay $84,000 towards our student loans in the last year. Prior to getting our finances in order, you could say that I was not one who was highly motivated in monitoring my spending. Or rather, I may have been highly motivated, but not entirely good at it. Honestly, I did not know where to start.

I was never afraid of budgets. Some people are. They are afraid that it would be too limiting, or depriving, to set financial constraints on their having fun in life. I get it. YOLO, right? But honestly, that’s just the rub. YOLO. You only get one life, and I don’t want mine consistently anchored down by debt. I want to be free. So it was not the budgeting that scared me, but the lack thereof. In fact, I was always in search of ways to budget. However, I had no idea how to do it efficiently.

We used to implement that all-too-familiar way of assessing our spending by guessing, eye-balling, rounding up and down (depending on our mood), or sometimes, ignoring all-together. Additionally, much of our analysis was performed retroactively. As in, “Oops, I spent too much on groceries last month! Roughly $100 too much.” The estimates, off course, were always too low, and the recognition harbored a bit too late, after the spending was already a done deal. Yikes!

Enter YNAB. YNAB is kind of like that high-school teacher that slaps your wrist and sets a vagabond teen straight. The acronym stands for “You Need a Budget“, and is better than an angel on your shoulder keeping your finances in check. It is a very easy system that is based on the age-old envelope system of budgeting. It used to be that, without computers and programs such as YNAB, people would use envelopes to budget their money. Each envelope would stand for a category. For example: “Groceries”, “Rent”, House Maintenance”, “Savings”, etc. With each incoming paycheck, a person would split the cash in between envelopes, allocating a certain amount towards those categories for the upcoming month(s). One can never accidentally overdraw from an envelope, because once the money runs out, that’s it! In order to overspend in a category such as “Dining Out” for example, one would need to proactively choose to take out money from another envelope, thus consciously deciding to decrease spending elsewhere.

With the invention of things such as credit cards, this becomes an obsolete practice, but I think it is one that is very useful. Instead of retroactively analyzing our spending, we should be proactively planning for our financial futures. In YNAB, you can create categories of your choosing that would be equivalent to those envelopes. You can be as precise or as general as you would like. We prefer to be more general, because it makes categorizing easier. Our categories are separated into “Needs”, “Financial Goals”, and “Wants”. A few examples include:

Needs – Rent, Auto Insurance, Utilities, Cell Phone, Groceries

Financial Goals – Student Loans, House Savings

Wants – Activities/Hobbies, Travel, Mike’s Fun Money, Sam’s Fun Money, Dining Out

So as paychecks roll in, we are proactively placing budgeted money into each category. Every dollar we earn is accounted for, down to the last penny. The goal is to budget appropriately, so that none of the categories need adjusting during the month. Metaphorically, you don’t want to borrow from any of the other envelopes. It did take us a while to get a feel for how much we spend in each category, but that’s the fantastic thing about YNAB. It summarizes previous spending in the months prior really well. Over time, we were able to know exactly what number we would need to budget in each category to be absolutely prepared.

A word on those summaries. This is a wonderful way to get a picture of how much of your spending is going towards your “Needs”, your “Wants”, and your “Financial Goals”. For us, because of our student loans, 50% of our income goes straight towards hitting our “financial goals”. We try to keep “wants” to a low 10% of our income, travel included, which is why travel hacking is so important for us. Also, there are graphs to show you how much your net worth is rising, as well as comparisons of “Income VS Expenses”, if those are motivating at all for you.

All of this can technically be done on an Excel sheet, but it would take a lot of time and effort. What I love about YNAB is that it can link to your bank accounts and automatically record every transaction, whether that’s money going in or money coming out. The only thing left to do is to categorize each transaction. Also, YNAB will remember which transactions fall under which category. For example, we frequently shop at Mother’s Market and Whole Foods for our groceries. I no longer have to categorize those things, since YNAB will automatically do that for me, thus making my job easier.

Off course, YNAB comes with a fee, which luckily for us, is waived by our financial planner. The cost to use YNAB is $89.99 annually, which seems like a lot, but when I look at the number we paid towards student debt ($84,000), I don’t feel bad at all! I think that fee is totally justified, plus it makes the whole budgeting process easier and much more motivating than if I had to go through all of our bank accounts and credit cards and physically input each and every transaction, create analytical comparisons and graphs and pie charts, and let our financial situation take up all of my free time.

If you are someone who wants to know where their money is going, wants to plan for the future, or is already doing both but wants a simpler process, try out YNAB. I hear too frequently the saying, “I don’t know where my money goes!” It’d be nice if we never have to say that ever again. Plus, once you know where it goes, you have the power to redirect it, kind of like we have!