Are Student Loans good debt or bad debt?

Hello and welcome to another episode of the Student Loan Planner Podcast. I'm Travis Hornsby and today we are going to talk about whether or not student loan debt is good debt or bad debt. This is a very controversial topic because a lot of people will tell you this in the financial aid offices of universities everywhere. For example, one of the most common explanations that I hear from people when they went to visit their financial aid office, they recount what the guidance counselors were saying basically. And the common refrain from people is that, don't worry, don't worry, student loan debt is good debt. That's what we hear all the time. People tell me that story, probably you've heard that dozens and dozens of times. Is that true or is student loan debt terrible debt and they're just lying and they don't know what the heck they're talking about? So that's kind of why I wanted to do today's episode is just to talk about this and talk about different ways that student loan debt can be good debt and bad debt and how you can even change student loan debt from bad debt into good debt. So the first thing I want to talk about is student loan interest and how it accrues instead of compounds. This is a very, very important thing to know. So student loan interest is the only kind of interest that I know of for a type of debt that grows at a linear rate instead of a exponential rate if you're not paying all of it every month. So let me explain what I mean by that. So if you have student loans, you have principal, and then you have accrued interest, right? Maybe you've looked at your studentloans.gov login and you can see the breakdown in the two different columns. What does that mean? Maybe you've heard about capitalization of interest, how your student loans will capitalize with the interest and then all of a sudden your principal goes up. The reason for that is they have a way of calculating the interest where they'll just take a percentage of your principal balance every year and they're not going to actually consider that accrued interest if you're signed up for an income-driven repayment option. The reason why that's such a big deal is pretend that you have 300,000 of student loans, okay? Just enter this kind of fairytale in with me for a second. And assume you have 50,000 of income and the debt is at a 7% interest rate, okay? So with the student loan interest accrual rules, interest accrues at $21,000 per year for the next 20 years if your required payment is zero. Now if you're paying on an income-driven plan, maybe you're paying less interest than that or your interest that's accruing is less than the 21,000, but that's the interest charge. Obviously you're paying $300, $400, $500 a month if your income is 50,000 and you're adjusting it upwards for inflation. So what does that look like if your interest was like a credit card instead of a student loan? How much interest would you be paying at the end of those 20 years for say like a pay-as-you-earn plan? How much would the interest cost actually be? So we know that if you manage everything the right way, that in 20 years the interest cost on pay-as-you-earn would at most be $21,000 because you would have never have let any of your interest capitalize, right? Because you're managing your student loan smartly, you're remembering to certify your income every year on time, and in that case that interest would never capitalize. So that means that the max interest charge would just be based on the original principal balance when you entered repayment. So that would be the $21,000. Now if you had credit card-like interest where it was compounding, which is the normal way that you have to deal with interest, then that interest charge would be instead of $21,000 at the end of the 20 years, it would be $65,000 of interest charges, which is really crazy. So for this example that I gave you, the person that started off with $300,000 of student loan debt with a $50,000 income, her final debt would be after 20 years about $618,000 with the way the interest accrues on student loans, and if it compounded, then her interest would be $935,000. That's really interesting because the difference between those two figures is more than $300,000, which means that one simple weirdo rule that you probably never really thought about could account for this person owing more interest than she actually borrowed initially. Obviously, her balance of $618,000 at the end of 20 years is more than what she would owe if the interest was really a lot lower than 7%. But the point is, is this is one reason why it's kind of, I don't want to call it amusing because it's not amusing to think about this, but I get a lot of these emails from people and they're like, I think I found a mistake in your calculator. The interest costs should be way higher and the tax bomb amount when you're being forgiven should be way, way higher than what you have on your sheet. And I'm like, well, do you understand student loan interest accrual? And they're usually like, well, no. I tell them, well, you need to read our blog post. I'll link to that in the show notes. Remember, you can check out our show notes for any episode by going to studentloanplanner.com forward slash the number of the episode. When the person realizes that, they're like, oh my gosh, this is amazing. I had no idea that student loan interest accrues instead of compounds. What's interesting with that is it makes a huge difference because a lot of people really make mistakes mentally with what their balance is going to be when the loans get forgiven. A lot of them owe say $300,000 and they'll say, well, I don't want to owe a million dollars in 20 years from now, or I don't want to owe $2 million 20 years from now. Basically people are very afraid of what they don't know. And because student loans can be so complicated, people are very, very afraid out there. Maybe you're afraid of your student debt, or maybe if you're not now, maybe you were at one point. I want to give you an explanation for what happens when you're paying less than the required interest on your student loan debt. It's called negative amortization. Negative amortization is a little fancy term for when you're paying less than what you actually owe on a debt. With student loans, the interest piles up on your accrued balance if you're on an income driven repayment plan. Now, if you use forbearance, that's not the case. If you use forbearance, that interest is going to capitalize, it's going to compound, it's going to grow. When you switch repayment plans, that interest capitalizes. There's all kinds of things that can cause interest to capitalize. If you miss a certification based on your income, if the loan servicer screws up and makes a mistake, that's another popular reason. That's just something to think about for why it's important to fill out the forms on time every year so you don't have this interest compounding on yourself. A very common email that I get is, help, I borrowed $30,000 or $50,000 10 years ago when I graduated, and now I owe $100,000 or $150,000 or something. How could they do this? How did this happen? I don't want to ever blame somebody because I don't think that's helpful. It's not their fault for not knowing all the rules. In reality, when you do forbearance, you're shooting yourself in the foot unless there's a specific reason. The only reason that's okay to use forbearance is if you have no emergency fund or a lot of credit card debt, you need to fix that ASAP. That's really the only reason. That is how interest can balloon that quickly. If you have a 7% interest rate on your loans, and you're compounding that by making a bunch of silly mistakes, then based off of a doubling rule, there's this doubling rule where you take 72 divided by the interest rate. That tells you how many years it'll take to double something. For example, a 7% loan that's compounded, divide that into 72, that's about 10. In about 10 years, with making a bunch of silly mistakes, you could compound your interest and you could double the size of your student loans in 10 years. Now, this is why credit card interest is so toxic. If you have a 0% credit card that you're using balance transfers with, stop being cute and get rid of it. Because here's what happens. Eventually, those 0% balance transfer cards go away, and you can't transfer to another one that has a 0% rate. Then all of a sudden, your interest is 25%. Well, remember that doubling rule that I said, 72, right? 72 divided by the interest rate. If you have a credit card debt and you're only paying the minimum $25 a month payment, then you can take the interest and that's a 25% rate and divide that into 72. That's about three, roughly. That means if you're paying the minimum on your credit cards, your credit cards are going to be doubling every three years. In six years, you'd owe four times what you initially borrowed. This is if you don't have a continuing problem. This is if you've already stopped bleeding and you don't have expenses greater than your income anymore. That's why credit cards are far more dangerous than student loan debt in terms of how much it can wreck your finances. To top it off, the credit card balances will hurt your credit score so that when you go around to try to buy anything else in life, like a house or a car or something else that you need loans for, you're going to pay a higher interest rate because your credit score is worse because you had credit card debt. Even if you do have 0% balance transfer cards, you're wrecking your finances by having that because you're wrecking your credit score, which is going to cause you to get a worse interest rate on other things. If you get a mortgage, buy a house for a 30-year term at a 1% higher rate than you could have gotten otherwise because the lender doesn't consider you a prime lender because you messed up your credit score with your credit card usage. That really hurts. That stings. Another thing that people don't understand with student loan debt is the fact that, okay, I got a 7% return. If I pay extra money on my student loans, that's like getting a guaranteed 7%. It's actually a lot more complicated than that. It's great to say that on a podcast or radio show as an emotional way to get somebody motivated, but mathematically, it's not correct. If you look at the compound equivalent return of paying down debt, what does that mean? Basically, if you have a 7% student loan and you got a 10-year payment period, if you are going to have to make the decision between investing or paying down debt because of student loan interest not compounding like other kinds do, and also because debt pay down doesn't get you the same compound return. In other words, if you put the money into an investment that grew at a compound rate of interest, then paying down a 7% interest student loan over 10 years is like earning a 3.37% return on investment. That's significantly lower than 7% return. Now, that's after taxes, which means that if you're going to get that return, you got to earn more money in terms of your take-home pay. Return might be 3.37%, but if you adjust it for taxes, you might look at that's 3.37%. It's probably more like 4% or 5%. Basically, as a general rule of thumb, knock off 2% or 3% off of the interest rate on debt, and that's approximately what you'd have to beat in investing to justify investing instead of paying down the debt. In other words, if you think that you could get a 4% or 5% return in investing, like say in a retirement account, then that would be technically and mathematically a better decision than paying down a 7% student loan. Now, 4% or 5% is certainly more than you're going to earn with a bond fund, like putting money in bonds. It's probably not better than putting money in stocks, but basically, I wanted you to think about with this big question, is student loan debt good or bad? There's a lot of stuff about student loan debt that is good. That's not to say that taking up the debt is a good idea in all cases. I'm just saying that if you think you're wallowing in misery and you're feeling like the weight of the world is on your shoulders, realize that there's other kinds of debt that you could be in that are just way, way, way worse. I'm trying to say this to encourage you, to make you feel better and make you feel happier about the situation that you're in, because you shouldn't feel as down as you might feel. Now, if you'd go talk to your uncle and ask him, what is a good amount of debt to have after exiting a graduate degree program or undergrad program? They're going to tell you, and this is probably true for a lot of the personal finance personalities out there as well, because this is the traditional way of looking at student loan debt. If you have debt when you graduate that's below one times your expected income at graduation, then that's probably a decent decision financially. That's what the typical wisdom is. If you're going to go get an MBA and your income after you graduate is going to be $120,000 and you're going to come out with $100,000 of debt, then that's probably a pretty good financial decision, so long as you want to do that job that pays you $120,000. And by that metric, most graduate school programs, or I would say a lot of them at least, are bad investments based off of that traditional metric. So under the traditional model of thinking about student loans, then that means that basically nobody should become a dentist, or a physician, or a veterinarian, or a chiropractor, or a pharmacist. Basically any profession almost out there that requires three or more years of schooling after undergrad is not a mathematically wise thing to pursue if you want to make that one times your income rule hold up. So if you want to be able to easily pay back your debt, then that's a good rule to follow. But what if you feel called to one of those professions? What if you feel like that's the only option for you because you love that job, you want to do that work? That's how you can take student loan debt that would have been defined as bad debt and turn it into good debt. So I want to have a period here, we're going to go through a couple different ranking factors. There's about six of them in total, and these six factors are things that I like to look at when I'm trying to decide what kind of debt is good or not. So it's helpful to use these different tips, these six different tests, if you will, to figure out if the kind of debt that you have is good or bad. And you can apply this to more than just student loans. So the first test is that student loan debt has to be, well if it's going to be good debt, good debt is tax deductible. So this would be like business interest if you have a private practice. This would be mortgage interest in some limited cases. For student loan debt though, student loan debt is not tax deductible for the most part. You only get a max write-off of about $2,500 if you have an income below $80,000 as a single person or $165,000 as a couple. And that's functionally for most of you listening, that means you're not going to be getting really tax write-offs for your student loan debt. Some of you might get that limited write-off, but it's not a big deal. So that means that on that test, student loan debt would not pass that test in terms of being good debt. The second test is, is the debt backed by an income producing asset? So as an example for this, if you buy a rental property and you put down 20% and the rental property has good characteristics, you expect the prices for the property to increase at least the rate of inflation, and it's in a good neighborhood, there's not any big expenses you're expecting, and it rents for 1% of the purchase price or better, then if you took out debt to finance that, the income that you're expecting from that rental property is expected to cover the debt payments. So in that case, you'd have a income producing asset that you borrowed to purchase. That kind of debt is good debt. So if you go out and you buy a business, then that debt could be fantastic debt. Many of you listening want to own your own private practice, or you want to have your own little shingle, you'll hang out there and run your own law firm, or there's different things that you can do that might require you to take out loans to cover the cost of operating the business. As long as you have a really good business plan, and you can feel confident that the business would produce income, which is actually a very high probability if you're in the dental or medical space, because the default rate on some of these practice loans, especially in the medical field, is unbelievably low. So that means your chances of success are super, super high. So if you go out and you pay a fair price for a dental practice, for example, then that's probably fantastic debt, because not only is it backed by an income producing asset, it's also, for business cases, it's tax-deductible interest, which means you get to write off that interest on your tax return and you don't have to pay tax on that. So that's fantastic. So by that test, is student loan debt good debt? The answer is technically yes, in the sense of the income producing asset is the skills that you picked up in that program. It's your earning power that you learned and that you can now utilize from having that degree. So basically, you don't have an asset per se that a bank can seize when you have a student loan debt, but in terms of, do you have an asset that's valuable from the education? In some cases, yes, you do. You'd earn a lot more money by going to this program than by not going to this program. And then in some cases, the asset that you bought was actually not worth that much. It's not worth what they charged. And that's the case for a lot of programs and even entire careers, they're charging way more than the actual earnings that you can get. So the third test for is good debt or bad debt is this kind of debt that you take out increases your earning potential. Now, I want to say something that's going to be kind of controversial. So when you have a lot of student loan debt relative to your income, the way that student loans are set up in America right now is that it's a percentage of your income that you have to pay. So in other words, above a certain debt to income ratio, your debt no longer becomes debt. If it's federal, it becomes a tax. So you get taxed more by having a lot of student loan debt than somebody who doesn't have a lot of student loan debt. That is the worst case consequence of taking out a lot of student loans that you cannot afford to pay back. So let's think about whether or not student loan debt would increase your earning potential and whether or not that increase was worth it. So right now, I want you to guess what income threshold, what income percentile that you would be in if you were making $100,000 a year of household income. So I'll pause for a second and let you think about what that level would be. The answer is that if you are earning $100,000 of household income, then you're approximately in the 70th percentile nationwide of all income earners if you're earning $100,000 as a married couple or as an individual because they look at it as households. We're going to link to that in the show notes about that study to show you the different household income brackets. What happens if you earn more than that? So $100,000 a year, you could basically have more than that if you're just a couple physical therapists making $60,000 a year each. And that means that you're basically almost in the top quarter of all families in America in terms of your income. That's pretty cool. Now, the question is, could you have made that income if you had not pursued that degree? Well, maybe that's true, but could you have made that income doing something that you love if you did not pursue your degree? So let's say that you would have made $60,000 as a physical therapist if you did your degree program, but you would have made $30,000 or $40,000 if you had done a corporate route and just done working for some business somewhere. So then you maybe had a $20,000 higher earnings threshold. Remember that these income driven programs take about 10% of your income, then that would mean that you lose, at worst case, you lose about $6,000 of that 60 towards your student loan debt. Was it worth it to get a 60K income that you lose an extra 10% of on that student loan tax, you can call it, versus the 40,000 of income that you might make without the degree? In that case, the answer would be yes. So by that test, student loan debt could be really good debt. And I want to talk to the dual couples out there. They're both professionals making very high incomes. So let's say that you're making $200,000 each, working in some sort of healthcare field, probably, or maybe legal, or corporate, or something like that. So $200,000 a year each, that's an income that is very, very high. And how high is it? What makes you a one percenter? Guess in your mind, what makes you a top one percent income earner? In America, if you make around $400,000 a year as a family, then you're in the top one percent. You're one of those people that Occupy Wall Street gets mad about. Now, $400,000 as a married couple, what's amazing to me is a lot of dual physician couples or dentist couples will think that they don't make that much money because they have a lot of friends who make more than them. And so they're comparing themselves to their friends instead of every other American out there. So if you went to dental school and you own a private practice, and maybe you own the private practice, but your husband's an associate or something like that, then you're making $400,000 a year combined, then that means that the degree program that you chose puts you in the top one percentile of families with earnings in the entire country. Now, pretend for a moment that you are in a place like Sweden with a tax rate that is in the 70th percentile, or they take like 70% of your income. I don't know. I'm just making that up actually, but it's very high, I think. Would you pay a higher tax rate in order to make more income? A lot of the folks that I know that went to dental school, they claim at least that they would have just gone to some corporate job and made 50,000, 60,000 a year if they hadn't gone to dental school. Well, in that case, is paying a tax worth going to make income that puts you in the top one percentile of American families? The answer is abso-freaking-lutely. So when you're looking at your student loan debt, does that student loan debt increase your earnings potential? Since we have student loan debt that's not treated as debt in America currently, if you take out federal student loan debt, then if your debt to income ratio is not great, then that means that you're basically paying a tax. And if you can take that debt out and get a lot higher earning situation, then that was probably a good decision. The fourth test for whether or not student loan debt is good or bad is does it have minimal impact and stress on your life? Now, most people that consult with us say that they feel like the weight of the world's been lifted off of their shoulders when they're done with getting a custom plan. So at the risk of tooting our own horns, studentloanplanner.com forward slash help. If you are stressed right now with your student loan debt, and it's really weighing on you, and it's something that you really think about a lot, and you spend a lot of mental energy running through all these scenarios in your head, and if you've ever even lost one night of sleep because of it, and you haven't already gotten a plan from us, you need a plan from us probably. If you have more than one and a half times your income in debt, or you live in a community property state, or you are just unsure about whether or not PSLF is worth it, or whether you should refinance, or if you're wondering is 20 to 25-year loan forgiveness smart for me, or if you're trying to figure out how to file taxes, then that's a big impact in your life, and that probably causes you some stress. So I think that if you're looking at whether or not this makes student loan debt good debt, a lot of times you can take student loans that are bad debt that are causing a lot of impacts on people's lives, and then you can turn it into good debt by having a consult and a plan, so that somebody knows exactly what to do, and they don't have to stress anymore. That's one of the reasons why I love doing student loan planner, and I love this business, is because we can have that kind of impact on somebody. So for example, maybe you've thought about having student loans and how it hurts your desire to own a house, or maybe you wanted to delay having kids because of it, or maybe you have not gone on some vacations that you wanted to go on, or maybe you've waited to buy a dental practice, or a veterinary practice, or a private practice in medicine, human medicine. Maybe you've delayed those goals because of your student loans. If that's the case, then this student loan debt right now would be bad debt because you're letting it influence your life because you don't have a plan. So whether or not you read our site, listen to our podcast, and get a plan that way by figuring it out yourself, or you decide that you need to refinance, like a studentloanplanner.com forward slash refi, R-E-F-I, get your cashback bonus, start paying it down really fast, or if you hire us to do it, it doesn't matter how you do it, you just need to get a plan so that the debt does not have a big impact on your life, and then you can make bad debt and turn it into good debt. Number five, remember I said there's six tests for whether or not student loans are good or bad. The fifth test is, does it have a low interest rate? In approximately 2006, 2007, the government changed the game and turned student loans into a high interest category. Prior to that, a lot of people had these loans that were really cheap and artificially low in terms of the interest rate. So it's not unusual at all for somebody in their 40s or 50s to have debt from the early to mid 2000s, or maybe even before that, and that interest rate would be under the FFEL loan program, and it might be at a 2% or 3%. Maybe you've heard some friends or family or older people, colleagues of yours in your profession that you've talked to, and you're like, well, did you have student loans? And they say, well, yeah, I only had to take out about 100,000, and they gave me like a 2% or 3% interest rate. So I'm just paying the minimum and just taking the full time to pay it back. That kind of approach, they're doing that because that is very good debt. If you can take out a 2% or 3% loan, and you can put it on a long-term 30-year type of repayment plan when inflation is probably going to be 3%, then that basically means you're floating free money around. And you can take that money and put it into retirement or brokerage accounts or basically anything, and probably get a better return because of that thing I taught you in the very beginning of the podcast about how when you pay down loans, you get a lower compound equivalent yield, basically, because you can beat that because of the way these math things are calculated when you figure out what the compound equivalent return you have to get is for investing instead of paying down the debt. So in a lot of cases, though, with student loans today, basically, the government raised the interest rates. So now the interest rates are 7% or 6% or 7% or 8%. And that means that student loan debt does not fit that categorization. So then in that case, it'd be bad debt based off of that test. And bad debt at a high interest rate like that, you have to figure out exactly what to do, whether or not it needs to be paid off or not. Number six, the last test that I have to ask whether or not student loan debt is good or bad debt is, are you required to pay it all or not? I don't know any debt that you can just not pay without doing some sort of bankruptcy or settlement or something like that. And then that hurts your credit score. So you might have a debt that's bad debt. Let's say you have a ton of credit card debt, more than you could ever hope to pay, or so much medical debt that you just could never pay it off. And you can turn that bad debt into good debt by basically talking to a bankruptcy attorney and figuring out whether or not it makes sense to discharge that. Now with student loans, you know, you cannot really bankrupt student loans in most cases. I've got a couple of friends that are student loan attorneys and in some cases have been able to get stuff discharged, but it's extremely difficult. And that means that for most people though, you don't even really need to worry about it not being bankruptable because you can use income driven repayment options and IDR loan forgiveness or public service loan forgiveness, and you might be able to not pay the full amount. So if you have a low income relative to your debt, then you're probably not going to be required to pay the full value of that debt in today's dollars. You might pay more than what you borrowed, but if you paid over 20 or 25 years, or even 10 years, then that means your cost in today's dollars is lower. So is student loan debt good debt? Well, if you can stretch it out over a long, long period of time and pay a fraction of what you borrowed, then that's good debt. If you can use public service loan forgiveness as a physician in a 501c3 hospital, and you can get your payment capped under the right repayment program, and you can have a balance that's forgiven of hundreds of thousands of dollars, then that's good debt. So what happens if your debt is not good debt? What kind of situations would you have to have to have your student loans be bad debt? I already mentioned not having a plan can pretty much turn this into bad debt. I've got so many examples of people losing tens of thousands or even hundreds of thousands of dollars projected under the current loan rules by just making bad mistakes. For example, I had somebody who was in default on their loans, or they were close to being in default, and this person's spouse was on an income-driven plan, and both of them worked at an not-for-profit facility. Well, he didn't realize that if he switched their payment plans and they filed jointly for taxes and amended their tax returns, that they could pay about the same amount of money every month and be eligible for public service loan forgiveness for both of them. So we took really, really bad debt for him, which is default to debt destroying his credit score, and set them up on a plan where they could have that loan forgiven with no additional cost because of the projected rules of the PSLF program. So I can't say that, obviously, we didn't save that money for him right away, but under the rules that exist, we saved them probably $200,000 or $300,000. Now, other kinds of ways that you can make student loan debt, you can really comfortably define it as bad debt, is if you could do anything else but your degree program and be happy, then you should probably do something else because it's probably not worth it to become a physician financially. It's probably not worth it to become a dentist financially. There's better ways to make money than doing those fields. You can make a lot more money if you go to Wall Street and major in math and economics, and you go to a top school, and you go to one of the big banks, and you trade bonds. I can confirm that because I would go out dinner sometimes with Wall Street folks back when I was a bond trader, and the top-earning people, they were regular people. There wasn't anything shocking about them in terms of their life story, but they were making, in some cases, like low seven figures just because they had worked their way up inside a big bank. And don't get me wrong, it's an incredibly difficult job to do and do well and keep your job. But if you want to make money, go work in tech or go work in some other startup or try to go down and get a job in New York and work in finance. Work in a field where making money, work in sales, work in something where you don't have to take out a huge amount of student loan debt. So that's when student loan debt is bad, is if you go get a degree that you think, oh, shoot, well, I didn't really need to do that, or I wish I hadn't done that. Well, then yeah, student loan debt can be bad. But here's the nice part is if that is the case, you can kind of turn that bad debt and kind of turn it into okay debt by realizing that, again, what's the cost of that decision? Well, you have to pay a tax on your earnings for decades. So you have to lose 10% of your earnings for 20 years because you went to that degree program. You can't bankrupt it. So if you went to a absolutely useless program that didn't give you any higher earnings prospects, currently, at least for most of these graduate school programs, they're not letting people discharge the debt. And you just have to pay the 10% of your earnings for the 20 to 25 years, and then you're done. Now, what if you have a 5% interest rate on $100,000 of student loans and you live in New York, and you're paying 40% in taxes, federal, state, and local taxes. So your interest cost is $5,000 per year. But if you can't deduct student loan interest, that means you have to earn more money than $5,000 in salary to pay that $5,000 in student loan interest. So if you adjust that upwards for the money you have to earn in your paycheck to pay $5,000 in student loan interest, that means that the interest rate is like 8.33%. So that's really ugly looking, right? So if you're making $200,000, $300,000 in income, and you have $100,000 in student loan debt, you're in the private sector, then student loan debt can be bad debt just based off of that debt-to-income ratio. So that 8% interest rate is just way too high, and that means you really need to focus on your student loans before you focus on other kinds of debt like a mortgage or a car or something like that that has a lower interest rate. So here's a little general rule of thumb. If you have a tough time paying down your loans, then good debt is federal debt and bad debt is private debt. Because the private debt, you can never put it on an income-based program, you don't really have forbearance options, you don't have flexibility, whereas the federal debt gives you all kinds of flexibility. Even though the interest rate kind of stinks, the flexible options that it allows are tremendous. So that is something to really think about. Federal debt, you always want to take out federal debt, not private debt, if you can at all help it on the front end if you're kind of unsure what your life's going to hold. Now, if you have an easy time paying down your loans, if you feel like, oh, I can easily pay the loan, the 10-year or the 15-year payment without too much of a problem, one way to think about this is if you have 1% of your student loan balance, that's the 10-year monthly payment approximately. So if you can have an easy time paying that monthly payment and you work in the private sector, then the thing you need to do is refinance. So check out our site, get the refinancing bonuses, studentloanplanner.com forward slash refi, and refi your debt, get $200 to $1,000 to do that, and then maybe you start off with a 10 or 15 year and then you refinance again to a five or seven year after a couple of years to get a lower rate. So that is an example of somebody who has bad debt that they need to get rid of. And there's obviously the huge exception, if you're going for PSLF or you have some sort of loophole with, we talked about the breadwinner loophole for community property states in a prior episode, maybe you have these exceptions. So that's one of the reasons why people consult with us is because it is very difficult to give you all the examples and all the scenarios in a limited amount of time. But in general, if you're in a good financial situation, you want to have the lowest interest rate loans and get rid of them as quickly as you can, if the math makes sense. And if you're in a bad financial situation, you really want to have federal student loans and try to get rid of them as slowly as possible, because the federal student loans, you can have forgiveness options and you can really have a lot of flexibility and pay less than what you actually owe. If you can easily make the payments and you're in the private sector, you're not missing out by not having any loan forgiveness. Trust me, most of the clients that we talked to would prefer to be able to pay down their debt and get rid of it and do it on their own. They don't want the help of some forgiveness program that the government offers. Now, if it exists, it's kind of dumb to just not take advantage of it at all. But if you can get rid of the debt, get rid of it. If it's the smart thing to do, run the math, use our calculator, make sure that you're not making a massive mistake that could come back to haunt you later down the road when you don't have enough in retirement savings. Now, if you've listened to this and you've decided for sure that your debt is bad debt and you want to get rid of it and you want to pay your loans off, then there's a few things that you could do. I would suggest that you look at your car expense, your housing expense, and whatever your third item is on your budget that's the biggest line item on your budget. Usually, car and house are up there. And I'm excluding student loans, obviously. So maybe the third place thing is vacation. Maybe it's going out to eat. Maybe it's daycare. You can't really cut that necessarily. But you're looking at car, house, whatever your number three biggest spending item is, and you need to drastically cut back in one of those three things. One of the other ones of those three, you just need to make modest cuts. So for example, let's say that you live in a really big house, you have a very expensive rental payment, you have kind of a relatively modest car payment, and you go out to eat a lot. Then one of those three things has got to have drastic, drastic reduction so that you can get rid of this bad debt and just pay it off and be done. So maybe you have to go into a cheaper housing arrangement. Maybe you have to house hack and rent one of your rooms out to somebody that you know, like and trust. Maybe you need to get rid of your car and trade it into a CarMax and downgrade your car to something that's five years or newer with over 100,000 miles on it. Maybe you need to learn how to cook at home by checking out Pinterest and seeing all the meal plans that are out there on how to feed your family for $2 a meal or something like that. There's a lot of really good guides out there. And if you have bad debt, not because you know you need to get rid of it, because it's not tax deductible, it's not going away, it's something that it's not producing income for you, you just need to get rid of that debt. If you don't need to get rid of the debt, and you have student loans that are bad debt because you don't have a plan, or you're confused about what's going on, we'd love to help, just reach out to us, podcaststudentloanplanner.com, and we'll get you set up with a plan. So to recap, student loans can be bad debt, and it can be good debt. It depends on what's going on in your life. It depends on all kinds of different things. But the most important thing is to know what's going on, understand the student loan interest accrual, understand how student loan debt differs from other kinds of debt, know about refinancing, know about forgiveness. Also know that if your student loans gave you a much higher income and put you in one of the top earning income percentiles in America, then that's pretty awesome. You should feel great about that. Focus on having retirement savings instead of just throwing money at loans if you're going to have those loans forgiven, then that's not smart, right? Make sure your loans have minimal impact and minimal stress on your life. And if your student loan debt doesn't have a low interest rate, and you're going to have to pay it all back, then that means you probably need to refinance and get a cashback bonus for doing so. So hopefully that helps you all reach out if you have any questions and thanks so much for listening. If you're ready to schedule your custom student loan plan, visit studentloanplanner.com forward slash book and pick a time that works for you. The show notes are available at studentloanplanner.com forward slash the number of today's episode. Finally, if you love your student loan planner podcast, help us out and leave us a review or share it with someone who owes more than you.