(Ep. 144) Is Your Student Debt a Good Thing? | Student Loan Planner

Hello and welcome to another episode of the Student Loan Planner podcast. I'm your host Travis Hornsby and today we are going to talk about whether or not student debt is good. And specifically we're going to talk about whether or not your student loan debt was a fantastic decision, mediocre decision, or bad decision. And I think after you listen to this podcast today you will realize that your decision was a fantastic one. Before you punch me in the face, I want to answer a couple listener questions. First, let's listen to this question about whether or not you should be certifying for PSLF right now. Hi, I just consolidated my student loans with Nelnet and I was approved for the repay plan. When trying to apply for starting the PSLF program, the employer verification form says to send it to FedLoanServicing once it is complete. Well, with FedLoanServicing ending their student loan servicing contract, should I wait until next year to apply until they change the form or still apply regardless of the form stating to send it to FedLoanServicing? So here's my thought on that. FedLoanServicing has to do their job until when they get fired in mid-December. That means that they are still certifying PSLF employer certification forms. There is zero downside to you sending in this form. Worst case scenario, they transfer your loans to FedLoanServicing. In reality, they would get transferred to whoever your new servicer is for the Public Service Loan Forgiveness program anyway. So if you don't mind your loans potentially being transferred twice, that's like the worst case scenario. I don't think that they might actually transfer them at this point. Then, you know, you can go ahead and send in that form. That's kind of what we're recommending as people continue to send in their PSLF certification forms because, again, there's no downside to doing this, right? There's no downside to doing it, so you might as well do it. In terms of some best practices of PSLF right now that we're recommending, so the first thing I would tell you to do is go to studentaid.gov.pslf. So you want to go there and you can look up your employer by their employer identification number. That's the number that's on your W-2. You can look for that number and you can find what your, you know, employer's taxpayer identification number is. That's something that you can put into that PSLF help tool at studentaid.gov.pslf. Now when you do that, what you're going to have happen is your employer is probably going to show up as a pre-approved employer on their giant database of employers searched by the EIN numbers. This is a great innovation. It's hard to call something that happens in a terrible government bureaucracy innovation, right, because it just seems like something they should have done a long time ago. But at least they're trying and it is a good thing to do because it speeds up the process of certifying your ECF form drastically. So what you do is you look up your employer by the EIN number with the studentaid.gov PSLF site. They will probably find your employer if someone has already been approved for PSLF through that employer. So certainly any large healthcare system would already be in there. Any, you know, state or local government would already be in there. Maybe smaller nonprofits might not be, in which case you might have to kind of enter it in manually. But most every employer is going to be there. And so you get that all filled out online with an online process. Then you print that piece of paper out and send that to your employer to get signed. You can take it to your employer to get signed. You can also email and get it signed. What you need to do then is once the employer has signed your form, then you just go upload it onto FedLoan's PSLF payment tracking tool, right? And you can take a picture of that document on your phone and upload it. If you use Google Photos like I do or iCloud, you can do it that way. And then also if you have like a saved copy with the signature all lined up, you can upload it that way too. Other things you might do with PSLF, get your payment history screenshotted or downloaded from the FedLoan website. Certainly you can save that to Google Drive. I don't keep copies of correspondence anymore for anything. I just take pictures with my phone because it backs up to Google Photos. And then if I ever need it, I have a record of it. And that's actually helped me out multiple times. Most recently when we put in an order for, we needed a car, we had no car. And so we had to buy one and they gave me one price. And then 30 days later, they tried to give me a 10% higher price. I was able to show them the picture that I had screenshotted of the quote they had given me and they had to honor it. So it does help you out in more than one thing in life to get into the habit of whenever you get some sort of financial document or something, just take a picture of it on your phone and then throw it away and rip it up. And then the other thing that people will need to consider is disputing qualifying payments. So in the case of our listener today, she is going to be fine because she just consolidated. She's just starting her journey. But maybe you're not. Maybe you've been doing PSLF for a long time. If that's the case, then you might have a discrepancy between the payment count that you think you have and the payment count PSLF FedLoanServicing says you have. If that's true, then what I would do is go to consumerfinance.gov slash complaint slash getting dash started. You can find that simply also by just going to consumerfinance.gov slash complaint or CFPB file a student loan complaint on Google. And you can go to that website. And what you can do is just literally file a complaint. They're going to ask you if you've already tried to rectify it with your servicer. Most people in my experience have. Most people have called the servicer, asked for a manual review. They take way longer than they say it's going to take. They're months into it instead of weeks into it like it should take. And so that's one way, probably the most straightforward, streamlined way to get your PSLF payment kind of updated is simply filing a complaint in the CFPB websites. That's what I would do as my default method. And then if you're having an especially bad problem, I would reach out to constituent services for your congressperson's office or senator's office. Basically, whoever is either on the higher education committee, that would be a good person to reach out to if your congressperson or senator happened to be on that on one of those committees, the relevant committees, you know, because then it makes it a little bit even more oomph. And then if not, then just if you live in a small state, I would probably recommend contacting your senator's office, you know, because they just have more time to help with constituent services issues. And then if you're in a place like New York or California or Florida, then I would just use your representative probably. So hopefully that's some useful information and answers that listener's question. And now a question about cashback cards for student loans. Hi, I love Student Loan Planner and I listen to the podcast every week. It's been so helpful for me as a young attorney. I had a question about companies that offer credit cards with cash back towards student loans. I know that Laurel Road has one. I think Ernest has one too. I was wondering if you had any thoughts you could share on those and how they might help fit into a student loan plan. Thanks. This is a really fascinating kind of setup. So at the end of the day, you need to understand how credit cards work to understand how any of these products might work. Credit cards typically charge merchants 3% fees. If you take your credit card and you buy $100 dinner, then the restaurant's going to pay the credit card company $3 or rather the credit card company will simply withhold $3 from the restaurant and they will pay them $97. The same thing is true for our student loan consult service. So when somebody pays via a credit card for our student loan consult service, we lose, you know, 3% of say $400 just to round up for one example. So that means we would lose $12 as a merchant. So we get paid $3.95 minus the $12 processing fee from the credit card. And then we net a smaller amount. Now, why do people accept credit cards? Well, it's because it encourages people to spend more money. That's a big one. And then also it helps the business get paid faster, which shortens the time for something called accounts receivable, right? Which is just sort of when you earn revenue versus when you get paid. And so from a business perspective, uh, back in the day, I tried not accepting credit cards and it was a terrible decision because basically people were really late, you know, filling things out. It's like pulling teeth to find your routing number. It's just way more complicated. And so people seemingly are willing to pay far more money for a consults if we accept credit cards than if we don't, which is kind of, I don't want to say amusing, but it's interesting, right? It teaches you about kind of human behavior. And to be honest, I'm the same way. If I'm giving to a charity, even if I'm giving like a thousand dollars to a charity, it is just so much easier to go in and fill out with my credit card information and charge that thousand dollar fee to my credit card. Even though I know it's charging the charity, a $30 processing fee, right? 3% of, of a thousand. So I know that that's the case, but it's just so much more convenient than pulling out my checkbook and finding my stamp book and writing the address on the, on the piece of mail, right? It's just so much easier, which is why we do it that way. So that's one thing you want to think about when you're signing up for one of these cards. If you are going to spend a fixed amount of money anyway, then sure, get one of these credit cards from Laurel road or earnest. They would give up maybe a higher cash back percentage towards student loans than, you know, if you just simply do something like a chase freedom card and you get 1% cash back, right? You know, for our business, we pay a, an annual fee to get a 2% card. Cause I know that we're going to have a lot of expenses on our business. And so we're able to get 2% cash back on everything for our business. I know that they pay a 3% fee to the merchant when we, when we pay via credit card, but it's just kind of the way things are done. Now, why is that happening? Well, charging 3%, you know, especially for a business that doesn't get a lot of chargeback requests or a lot of refund requests, that's a fantastic business model, right? There's a reason why Visa makes a ton of money and it's because they charge the same flat fixed fee for everything. And then it's supposed to cover things like, you know, you lost your card or somebody use your card fraudulently and they have to reimburse you. Right. But the reality is, is there's a lot of merchants that are much lower risk than other merchants, you know? So that's kind of why companies can, I get a punch in the face when they, you know, when they accept credit cards, especially things like American express. So the, the fee for accepting American express, I think is like double that of accepting Visa. So why do people accept American express is because that like cute boutique on the corner or that, I don't know, custom auto body shop or something knows that if they accept American express, like that might be correlated to you being willing to spend twice as much money, right. Or 20% more money or 50% more money. And that will be worth it to them. So I guess what I would just say is a caution there, be aware of credit card psychology, be aware that credit cards encourage you to spend vastly more money. And if you at all have a spending problem in any way, then I would highly, highly encourage you to not even use a credit card. Just try to use check or cash everywhere until your spending habit is fixed. And then once you are, you know, you have that under control, then sure, you know, bring out that Laurel road credit card at dinner and be happy about it. I think there's also a lot of other credit cards, depending on what you'd like to do. Just know that sometimes these things are rather gimmicky, right? I mean, it's kind of like we have, I think some of these travel credit cards from before the pandemic. And so now we have like 150,000 miles or something. So we could fly like for a year for free or something like that. But we have like a baby and flying is an absolute disaster right now with the baby. So I would say, if you have to pick one, I guess, get the cashback card and just take advantage of getting your student loans paid off faster. So I want to get into the main topic of today, which is going to be whether or not your student loans are good or not. First, I want to give a couple updates on some random things that have happened in the past few weeks. Specifically, I want to talk about the disability discharge situation. So this is really major news. So we've had for years, people that have had social security disability, reach out to us and sort of say something like I've been on social security disability for the past four years. I still have these loans. What should I do? And there's this total and permanent disability discharge option for federal student loans where you can get your debt forgiven tax-free. Now, it wasn't always this way. Back in the day, it was kind of like murky about having to pay taxes on forgiven debt. And I think back in the day, disabled borrowers did have to pay income tax on forgiven student loan debt. One of the cases in particular that helped spur change in this issue was a veteran that had a traumatic brain injury from serving in the Middle East from an IED explosion or something to that matter, had a lot of debt from a graduate program, a six-figure amount, and it was forgiven. And then the, I believe, federal government in the state of Michigan sent him a tax bill for something like $70,000. And this is a guy that's had a traumatic brain injury, right? So I mean, that is the perfect case study for reforming a messed up system, right? And so we had, a couple of years ago, I think the VA changed the treatment of things in terms of getting people approved automatically. If you're approved by the VA for disability permanently, you also get those files matched with the Department of Education and get your loans forgiven tax-free. But the VA is a rather smaller population, right, than Americans at large, right? Maybe 1% of America is serving in the military right now. That's a fairly small population compared to everyone. So in the, a couple of years ago as well, during the Trump administration, they made a student loan forgiveness via disability and death tax-free for discharge for that as well. That's certainly good news. And now the issue, though, with the disability discharge situation, though, is that still didn't make the process streamlined. They just made it tax-free if you got it. And what you had to do was file an application, and then you had to submit your tax returns or proof of income for monitoring for a three-year period. And if you failed to do that at all during this three-year income monitoring period, then what would happen is your loans in some cases, many cases, would actually be reinstated after being approved for the disability discharge, the loans would get put back. So the GAO, Government Accountability Office did a study, and they found that 98% of the time, people having their loans reinstated during this three-year income monitoring period were having them reinstated because of failing to submit income documentation instead of submitting documentation showing that their income was too high to be approved. So the Biden administration made this decision looking at that data, hey, you know what? We would rather have the process be streamlined and make sure disabled people get more relief rather than potentially risk giving forgiveness to somebody who is permanently disabled but somehow still making a very high income. So that was a policy decision that they made, and I think that it's going to help a lot of borrowers. It's going to help about 300,000, more than 300,000 borrowers receive billions of tax-free forgiveness on their loans, which will start being doled out in September is when they're going to do a match of the federal database of Social Security disabled people with Department of Education people that have student loans, right? So they're going to look that up with Social Security numbers and try to match these borrowers to get forgiveness for these folks. Now, one thing that I didn't know until very recently is there are a small, small handful of states, maybe less than five, that could potentially tax student loan forgiveness at the state level, and that includes even PSLF. Now, before you get worried, these are a very small group of states. So for example, Pennsylvania is one of these states that does not conform to the federal AGI kind of definition, I guess. They use their own number for calculating what you should have to pay based off what your income is in the state of Pennsylvania. So it's a little different. If you live in one of these four states, I would suggest consulting with your tax advisor if you're about to have a bunch of student loans forgiven just to see if you potentially would have to pay taxes on their forgiveness. So the states are Pennsylvania, Mississippi, Arkansas, and Alabama. I believe New Jersey is excluded from this list because they have an exclusion from income for cancellation of debt. So it's really Alabama, Arkansas, Mississippi, and Pennsylvania. You may or may not actually owe taxes in these four states, but you should still check with your CPA just to make sure of that. So what does this mean for people more broadly? What if you're not disabled? What if you hopefully don't plan to become disabled? I mean, nobody, I think, plans on it, obviously. But what if this might not apply to you? How does it apply more broadly? Well, this is the kind of action I think we're going to continue to see from the Biden administration. At the end of the day, they have 50 votes in the Senate. They have a very narrow house majority. So to do anything major has to either go through reconciliation or it has to get passed in Congress, which means it has to have widespread bipartisan support, and student loan forgiveness does not. And the alternate route is doing actions through regulations and executive orders. And since the reconciliation bill seems like it's student loans out of the equation, and the infrastructure bill seems like it's going to leave student loans out of the equation, and we don't know that for sure, but it seems like it will, then what would you have to do if you wanted to make changes to the student loan system? Well, you're going to have to come up with those changes via the regulatory process. And so you're going to have to come out with things that you can get through the regulatory process that are somewhat narrow so that they don't get struck down by a court or something like that. So what would that example look like? Well, interpreting the rules to make the process more streamlined and generous, right? With cancellation for disability, cancellation for death, cancellation for people that went to for-profit schools or people that were defrauded by their schools. The administration has wide latitude to accept requests for cancellation in those instances. The administration also might be able to take action making forgiveness programs more generous. So think about when Secretary Betsy DeVos made it so that religious workers could get qualification for PSLF. That was a regulatory process where she issued that rule where pastors, imams, rabbis, other religious workers that are involved in sort of proselytizing work is what the government describes it as, previously were explicitly not included in forgiveness. Now they are, for PSLF purposes, they can get forgiveness. That's an example of some changes around the edges that don't require a massive wholesale reform effort that we might continue to see. That's kind of what we've been calling for a long time. If you listen to our show, if you read our newsletter update that we send out every Thursday, you kind of know this, is we've called for no broad cancellation, not saying that we're calling for it not to happen. We're calling for that it won't happen. A lot of times people send me angry emails, angry comments. It's like, hey, don't shoot the messenger. Our job's not to make policy. Our job is to interpret what we think is likely to happen so we can give you the straightest advice possible about what to do. We don't think broad cancellation will happen because of political constraints. We have felt that way for the past several months, just trying to read the political tea leaves and trying to interpret things. But we do think that these targeted cancellation attempts will continue. So one thing I've been kind of thinking in the back of my head, like, what other things might they do? Well, they could try to change the employer definitions a little bit around the edges, maybe try to approve a couple of places that like these for-profit physician groups employed at non-profit hospitals. You might see some action around that, where they try to say, well, let's say they're qualifying after all. We might see some stuff around FFEL loans owned by the Department of Education. Perhaps the Department of Education might try to make a distinction between loans that they own versus loans that commercial entities own. We saw this distinction happen during the CARES Act forbearance, where loans that were owned by banks that were FFEL loans required interest and payments to continue, whereas loans that were FFEL but owned by Department of Ed did not require that. So we might see situations like that too. It's always hard to predict, but I think that we will continue to see more executive orders like this, and we will monitor them and let you know when we see them. Now, let's talk about why student loan debt is good. So if I said student loan debt is good debt on Twitter, I think some people would probably reach out that don't know me and say, what an a-hole. This guy's a piece of work. What a jerk. Sometimes I get, I guess the student loan cancellation crowd obviously doesn't research what we do and trying to help people that have student loan debt. It's kind of like, would a cancer doctor want cancer to not exist? Yes, because the cancer doctor can go do something else. That's kind of how I feel. Student loan debt all gets canceled. I'll go do something else. Great. People will not have to deal with the problem anymore, right? But until that happens, we need to provide relief and advice and help for people so they don't have to feel anxiety and worry about the topic. So anyways, when I say something like that, the student loan cancellation crowd on Twitter comes at me. It's like, you only want debt to exist because it personally profits you, you bleep, bleep, bleep, bleep, bleep. Man, I don't know. Twitter's a scary place, y'all. The ad hominem attacks that I've sort of been subjected to the past several months, I'm like, should I even stay on this platform? I don't know. Would people say this to me if we were sitting in the room? I don't know. But that's neither here nor there. I've even thought about saying, I thought about the title for today's show. I almost said student loan debt is a first world problem. I'm going to get a little serious for a second. The stuff happening right now across the world in Haiti and Afghanistan has me reflecting a lot, like personally too. I mean, I've had stress moving my family, trying to find a place that hasn't gotten flooded out because our family got flooded out of our apartment when the water main broke in our apartment building. The process of trying to find anyone to do anything, like fixing a broken toilet or something like that, it's just crazy hard right now. But holy cow, hit the pause button, Travis. There are people literally that fell from airplanes because they were so desperate to try to get out and live a life of freedom and freedom from worry, freedom from fear. And I'm worried about how long it takes me to get my toilet fixed. I had to tap the brakes a little bit the past few weeks and just thinking about that and reflecting on that. And I felt a little ashamed just because it's sort of like, wow, the level of comfort that I experience is so insane compared to my grandparents, but even compared to anyone now around the world, it's unreal, right? So one thing that I went through that was stressful a couple of weeks or a couple of months ago was the IRS audited my tax returns from like three years ago. And I was like, what? I'm getting contacted by this now? Why? And so I looked through it and found that basically I reported some income under the wrong employer identification number. I reported the income, so that's the good news. I just reported it the wrong way. And luckily, we didn't owe any extra taxes or penalties or anything. Initially, they said we owed a ton of penalties because they thought that I hadn't reported it at all, but I had. But it was a stressful process. It was a little scary. But at the same time, you know what? Worst case scenario, you make a mistake on your taxes and you owe some money compared to literally people whose families are at risk. And I'm not saying that to minimize your stress around student loan debt because I know you listen to this podcast because you probably have student loan debt and it probably caused you anxiety. And those are real feelings, right? I'm not trying to gaslight anybody. Those are very real. By the way, gaslight, I'm still trying to figure out what that word means. The reality is that, yes, those anxiety, those feelings are real, but you have to think about it contextually. Otherwise, you're going to get not the perfect picture of things. So why do so many religions around the world talk about the importance of being content and not coveting, right? Not wanting what other people have. So one thing that I hear a lot of is people's real dissatisfaction and sadness about their debt. And I think a lot of times it's because we look at our classmates that had mom or dad pay for school or they came from wealthy families, right? Or had a wealthy spouse that helped them pay for living expenses while they were in school. We look at that example, we compare ourselves to that example versus the fact that we are actually all top 10% financially secure individuals in the rest of the world and probably even top five or more percent of the rest of the world. So consider that the United States, what is 5% of the world's population, something like that. And by virtue of you having a professional degree, you have probably put yourself in the top quarter of Americans in terms of income plus stability plus benefits, right? The combination of those three things means that you're in the top 25% of Americans. So 25% of 5% is 1.25, right? So let's just say 1%. Now, obviously all Americans aren't wealthier than the rest of the world, right? But if you're in the top quarter of America from a financial security perspective and your typical American is far richer than the rest of the world, so you're really very, very well off even with the student loan debt. Another thing to be put in perspective. Remember in 2008, people were so stressed. The stock market was crashing. I heard people talk about 401ks and sermons at church. You never hear that, right? Because it was causing people all this anxiety watching their retirement evaporate. You know what people in the developing world did not have to worry about? Stock market crashes because they don't have any investments. What do people in poverty in the United States not have to worry about? They don't have to worry about the S&P 500 level because they don't maybe own stocks and they're not participating in that. So by the very nature of you having a professional degree, getting an employer match, starting to invest in the stock market, you are already so much better off than you ever thought you were, especially compared to the rest of the world. Another thing that I'm going through right now is friends reaching out that are having mental health crises. I'm having friends contact me with this Delta wave. I guess it was just their breaking point and they are contacting me and sometimes multiple times a day. I'm trying to help them, trying to get them connected with resources, but it's really hard and it takes a big toll to try to help somebody who is going through a mental health crisis. At times I haven't known what to do or say. When that happens, when I listen to someone that's going through that, I think, oh my gosh, I am so blessed just to have anxiety be the primary mental health problem that I have and only that. That's such a blessing that I have the tools after talking to a therapist to try to help myself get on a better path from a mental standpoint without having to take any medication. Not everybody's that lucky. When I say all these things, it doesn't help. You're comparing me to somebody who's a lot poorer than me in another country, but that's not me. I'm me. I have $500,000 in student loan debt. I feel like I can't start a family. I feel like I can't buy a house. I'm not at a good place. How is debt good? How can debt be good? I want to give you a couple more examples of why student loan debt can be a good thing. If you don't take out student loan debt, you still have to pay for school if you want a path to a better life because we don't have a free college system in America yet. That's just how it has to happen. If you want that security of a high income and a high level of job security, you got to borrow money or you got to pay for it. Those are the two options. A lot of examples that I see are very frequently second generation Americans whose parents immigrated to the country. They're very frequently from, I would say, in terms of the people that do it this way, disproportionately from Asian or South Asian cultures where parents will borrow a bunch of money against their house to pay for school, and the kid will be expected to take care of the parents later in their lives. The problem with that is in that case, student loan debt would have been great debt to take out because instead of doing that and mortgaging the parents' retirement, what you can do instead is borrow the maximum and pay 10% of your income and then go for loan forgiveness. Then the parents get to keep that equity in their home. The student can still help support the parents, but in ways that don't involve having to pay a giant mortgage payment for them. That's a far better path. I'm reminded of a student who went to a California dental school who took out $550,000 of student loan debt and didn't even want to be a practice owner, wanted to be an associate dentist making $150,000 a year. She decided she wanted to pay her debt back anyway, even though the math was very much against it. I guess the two points there would be federal student loan debt would have been a great thing to keep in her situation. She made the wrong decision. The thing is you can still make the wrong decision and still come out okay financially because she was limiting on rice and beans so that she could throw like $70,000 a year on her loans to get them done in eight years or so, eight or nine years. That's not possible if you go work a $50,000 a year job with a bachelor's degree. It's just literally not possible. Let's talk about net income post-student loan debt. This is going to highlight this idea of student loan debt being good debt better than anything else. What percent of your income is your student loan debt payments? Pretend they're started up again. What is your actual payment as a percentage of your income? It's not 10%. You might think it's 10%, but it's not. The reason it's not is because first off, they take 10% of your discretionary income, not your total income. Your total income is one number. Your adjusted gross income is a lower number that adjusts for saving for retirement. Then your discretionary income is your adjusted gross income minus 1.5 times the poverty line for your family size. What that means is once you take 10% of that smaller number, the payment divided by the total income that you earn is less than 10%. Why is that? Well, remember that if you just took 0.1 times total income divided by total income, that's 10%. But if you take 0.1 times the quantity total income minus retirement minus 1.5 times poverty line, that numerator number is going to be smaller than 10% of your income. What is that number going to be? Well, you just have to do the math and calculate what the percentage actually is when you take the total actual payment required of you divided by the total income that you earn. The true number for most people is 6% to 9%. One big part of what we and why people pay us money to give them advice on student loans is you can do a lot more to get that percentage of your income even lower. It's like if you have a lot of complicated income sources, you can hire a CPA and get that tax number way lower. One of the things we do is we help people figure out how to file separately for taxes or not, or doing the community property breadwinner loopholes, or doing alternative documentation of income, or doing the pay repay combined double debt loophole. There's all kinds of things that we do for folks to try to get that number to be as low as possible. If forgiveness is the right call overall, that means you want the number to be as small as possible instead of as much as possible. And on top of that, you also have to save for the tax bomb. Now, if you're going for public service loan forgiveness, there is no tax bomb associated with that. If you're going for forgiveness over a 20-year period though, then it is considered taxable income at least at this moment. You would want to put aside a few hundred dollars a month for most in a mutual fund account or investing account with ETFs, for example, through a place like Vanguard, or Wealthfront, or Betterment, or Fidelity. And you could put money into that a few hundred every month, and eventually you'll have enough to pay your tax bond with. Now, the best way to think about this is as a percentage of your income as well. So we can model with our tools, we do this for clients, we can model what percent of your income you'll need to save to cover your tax liability when loans are forgiven. For most people, we see this number is anywhere from one to 4% of your income. I would say 3% to 4% is pretty common because we deal with very high debt loads compared to most. But it can be as high as 10% of your income. For example, if you're making like 30,000 a year and you have 500 grand of student loan debt, then yeah, you'll need to save probably 10% of your income for the tax bomb instead of like three or four if you're making a Now, the exciting way to figure this out in terms of what it means for you is to take the required payment as a percent of your income, that's six to nine, and then add it to your tax bomb percent of income, usually three to four, and you get a range all in of how much your required student loan payment and your investing for the tax bomb payment, that combined amount represents your actual cost of student loans. So six plus three is nine, nine plus four is 13. So for most people, nine to 14% of your income would really represent the total cost of covering your student loan burden from school, no matter if you have 100,000 or if you have 500,000 or six or 700,000 of student loan debt, it doesn't really matter. It's either going to be that amount, or it's going to be a monthly payment, whichever is better for your situation. So worst case scenario, your student loan debt represents a percentage of your income unless you're making so much money that you decide it makes rational sense to remove that structure and refinance to a lower interest rate to have a low payment that's known that you'll be paying off over time because you're going to make, you know, a lot of money compared to the debt that you have. So what is net income after adjusting for loans? It's income minus, it's basically the income minus the percent going to the debt. That gives you the net income as if you had zero debt. So for example, a dentist is making 120,000 as a new associate with 400,000 of student loans. We're going to assume in this case that they have 8% of their income that's pledged to go to pay as you earn, and then 3% of their income that's going to the account. So that's 11% total of their income that needs to be pledged to student loans. So if you take away 11%, 11% is about 13,000. So then that means 120 minus 13 is about 107,000. In other words, because student loan debt is basically forgivable as a percent of your income, it's essentially a tax, unless it makes sense to not have it be a tax because you're making so much money that that's a bad deal for you because you're just going to pay it back over time anyway at a much higher than necessary interest rate. That's why people refinance because it's not a good deal for them to have it be treated as a tax. But in this case, this person loses 11% of her income to student loans and she's netting 107. So the real question is this, would it have been better for her to graduate only with her bachelor's degree in let's say biology or chemistry and just do that and go into the workforce, or would it have been better to do dental school and net after student loan debts considered 107,000 versus say 50,000 for a bachelor's degree? That's a slam dunk decision. It is so much better for this person to go to dental school, even with challenges with reimbursement rates, even with lower incomes, even with competition from DSOs. Those are real problems. I'm not saying those are not problems, right? But going back to the earlier part of the podcast where we say it's a first world problem, it is. There's ways around these problems. You can go work in a more out of the way place. You can go work in a place with less competition. You can intentionally design your lifestyle in such a way that it doesn't compete as directly with a place like a DSO, perhaps having a different kind of a model or making your practice a lifestyle practice instead of focusing on how much money you can make because you don't need to make as much money as you think you need to make. If you have a lot of student loan debt, it's a big misnomer that we see all the time. Physicians have it even better than dentists in a lot of cases because the student loan tax, if you will, lasts for fewer years. 10 years of PSLF versus 20 for pay as you earn without PSLF. People often ask me, what's the difference between an MD and a DDS? Which one's better? Well, dentists have an easier path to business ownership, I think, and an easier path to having significant upside by owning multiple practice sites. You, I think, generally have to deal with a little bit less red tape as a dentist compared to a physician to be a practice owner. It's a little bit more straightforward. But there's definitely lower risk in the physician path because many people are just very smart, want to do what they do, what they learn, do not have to think about the business aspect of things. What about lower income people? I mean, I think the same thing is true for a lot of people out there that make lower income. If you are making 35,000 years as a social worker, you might not make a monetary higher payment for the education that you received, but what you are receiving is a higher social psychological payment for what you're doing, I hope. Now, I'm not to say that every day is rewarding as a social worker. It's not. It's very challenging work. But people that do that hopefully chose to go into that field and chose to go into that field because of the potential to make a difference in people's lives instead of just sit at a desk and pump out meaningless reports all day. So that's just something to think about. The counterpoint too is people will say, well, if I had been a Facebook engineer, then that would have been way better than becoming a physician or a dentist or a lawyer and taking out a physician assistant, taking out all the student loan debt. Well, yeah, but that's not realistic for everybody to be a software developer at one of the top jobs in the country. That's like comparing the top 5% of people in software development to the 50th percentile for dentistry. That doesn't make any sense. You'd want to compare the top 10% earners in a profession to the top 10% earners in another profession. I will say I've had clients in dentistry make as much as $900,000 a year. That's stunning. $900,000 a year working in an out-of-the-way practice, single site location, by the way. And how do you do that? Have no competition. Have little involvement with insurance companies, which you can only do if you're the only game in town. And be confident in the procedures that you can do and basically get yourself into a position where somebody can work with you or they have to drive two hours to go to a specialist. I mean, that's what this guy basically did. He was really making a ton of money from it. Physicians, I've seen physicians making seven figures in some cases, people that own their own centers. I had a plastic surgeon once that called us that had $1.5 million in income, and it was a bizarre call because he was like, I want 10 minutes of your time. That's it. I have $300,000 of student loan debt. Can I do anything better than what I'm doing? And it was like, wow, we identified that he was paying too much in interest. We identified his mortgage interest rate was way too high, that he was probably not taking advantage of the right kind of depreciation schedules for his business deductions for the practice that he owned. I mean, I was like, this is a very clear financial planning case that you need to go get help. There are a lot of people that make a ton of money with their professional degrees, which they paid for with student loan debt, by the way. The problem is, is I think that we look elsewhere for our contentment, and we always have this grass is greener mentality. I certainly am guilty of this. I'm going to say that very straightforwardly, right? When I was in St. Louis, I wanted to be in the Southeast. And now that I'm in the Southeast, it's like, oh, I want to be closer to college football with the school that I went to, right? I mean, it's like, as humans, we're sort of designed for this negativity bias where it's like, if only I was fill in the blank, right? If only I was single, if only I was married or something, like one kind of interesting thing that this mentor told me once is he said, you know what the problem is as young people? He said, all the single ones complained to me, they wish they were married. And all the married ones complained to me, they wish they were single. And I was like, wow. Like, so basically we're not content creatures. I think the way to combat this is trying to be super optimistic. I don't know if anybody's watching Ted Lasso and Apple TV. His character is like, he is outrageously optimistic. And this breath of fresh air helps this team that would never be expected to do anything perform better. So I think that there's something to that. There's some secret sauce there in viewing this burden that is student loan debt. That is a burden. Yes. But it's also this massive opportunity that has been given to you by living in the richest, most free country, probably in the history of the world. And that's not to say that we're not extremely flawed. We are. Should people have opportunity to go to college for free that don't currently? Probably yes. Right. But given that this is the situation that we're in, given that we don't have a perfect system, what can we be grateful for? Because I think that's going to make you happier. Yes, you could have a degree from an international school with low debt, right? You could have gone to dental school in Poland and have the very same knowledge or very similar knowledge to what you have here in the US. Except in the US, your extremely outrageously expensive professional degree gave you the right to practice law, medicine, be a PA, PT, occupational therapist, dentist, veterinarian, nurse, social worker, teacher, et cetera, chiropractor, pharmacist. And that's gold. It's the most valuable asset in the world right now. One thing that people don't get about treasury bonds is they're the ultimate safe asset. The price of treasury bonds is insanely high. And why is that? In an unstable world, you pay a huge premium for the most safe asset that you can find. The same thing is really, I think, what's driving demand in pricing in higher education. In an uncertain world with AI and with automation competing away all of these jobs, eliminating a whole field overnight, eliminating union benefits, union wages, because of forces coming in from global competition, there are not a lot of great options. And getting a professional degree is one of those options that can help protect you, right? I mean, if you even think about the power of lobbying, the power of lobbying from professional organizations is way more powerful than from working class organizations. What's one example? Radiology. There's probably a world where radiologists in India could replace radiologists in the United States. I'm not saying completely, but you could certainly see a lot of that happening. Or telemedicine. If you have telemedicine, there's no reason why you couldn't get telemedicine from a doctor halfway around the world that's a tenth of the cost. Why do we not do that? Well, because insurance, Medicare, those kind of things limit reimbursements to people licensed to practice medicine in the state where you are. How does that happen? Well, partly it's safety of consumers, partly it's lobbying by professional organizations. Don't feel guilty or stressed or weirded out by any of this stuff. Some people might disagree with me there, it's fine. But that's an extremely valuable asset in an uncertain world. So that's why it's worth it to pay up for these fields. It's worth it to pay up for this skill set that you've gotten because it gives you security. It gives your family security. It gives you employment security. Or the next time the economy crashes, or the next time there's some new invention that comes out that eliminates another industry overnight, that's not going to affect you more likely than not financially. If you think about student loan debt, at its very worst, it's a percent of your income. And what percent is it usually? Usually combined, it's 9% to 13%. We can do tricks and loopholes sometimes to get that much lower. But in general, think about 9% to 13%, that's including the tax bomb being considered. And so a 9% to 13% tax rate, that's kind of similar to what the tax rate is in California. And people live in California all the time. And people that are having mental health challenges, stress, anxiety, depression, it's very uncommon for them to cite income taxes as the reason behind that. What I'm saying is your student loan debt is effectively only that. It's an income tax. So given that it's an income tax, was it a smart income tax or a dumb income tax? In almost every case that people are sending to this, it's going to be a smart income tax because it gave you access to skills in a free nation to go out and earn the most money that you want to with those skills and to try to fulfill your full potential, helping people in the best way that you can with the skills that you've learned and have acquired. I hope this helps you. I hope this encourages you. This has been a really hard week. I've mentioned this in email newsletter last week, but I had two people somewhat close to me that passed from COVID in the past couple of weeks, both in their thirties, both my age. And that was a real wake up call. So please get your vaccine. If you haven't already, please talk to your healthcare provider about this. It's kind of like, I was thinking about an analogy. People like to say, well, only X percent of people will actually even get sick enough to go to the hospital from this. Well, it's like, well, yeah, sure. Only a minority of people get in severe car accidents every year. But if you get in one and you're not wearing a seatbelt, there's a lot higher chance you're going to die versus you wearing a seatbelt, there's a far lower chance that you die. And I hope people kind of look at it from that perspective, that the most motivating factor seems to me is to protect yourself. That's what motivates people to get the shot more than anything. And, you know, I hope that a lot of people will share stories, maybe personal stories of people that are close to you that have been affected by COVID that that would inspire others to realize, wait a second, this could happen to me. I'm going to go get my shot. So I really hope that happens, you know, in terms of other stuff like student loan stuff, because y'all know I like to stay on my land, but it's been a hard week, right? We've certainly got to pray for troops, families, and the victims of the terrorist attacks in Afghanistan, victims in Haiti, man, there's just so much need around the world. And I think that if we're not optimistic, then it's just, it's so harmful. It's harmful to our mental state. It's harmful to our ability to help others. So I hope that you can be optimistic about your future in the sense of you're coming from this position of enormous strength and enormous financial security, both now, which you didn't realize, right? Because student loan debt's just an income tax. So you're actually already probably have a positive net worth. Ignore the student loan debt completely. You probably already have a positive net worth. That's fantastic because your student loan debt shouldn't be considered in net worth. But maybe we'll do another whole another episode about that. You can help so many people and your financial future has already been secured by even listening to a show like this and caring enough about your future to invest in yourself by trying to further your understanding of personal finance. So you're already going to be fine. What I would ask of you is how can you help others? What can you do to give your gifts to others and make this a brighter world and make sure that you feel optimistic about your future because you have every reason to. So last point, studentloanplanner.com slash voicemail if you want to ask a question like the folks did today. And I hope everyone has a wonderful Labor Day weekend. I hope you have a good end of the summer and hopefully kind of a reset button. If your kids are back in school, I hope everything's going okay with that. I've certainly had some friends that had to cancel dinner party plans backdoor patios because people are just going through, people are going through a lot of stress with kids going back to school and everything that's involved with that right now with the extra precautions with COVID and everything. So thoughts to those going out and dealing with back to school stuff, but keep your head up. It's going to get so much better. It's and being optimistic about your future is going to really help keep you in the right head space to make a ton of progress in this coming rest of this year and as we go into 2022 with brighter days ahead. Thanks everybody.