Wondering if financial independence with student loans is an option? Full confession: I’m a part of something called the financial independence community (abbreviated FI). The goal is to hit a point where paid work becomes optional. Many people in this world also dream of early retirement. When someone tells you that they are FIRE, it means financially independent retired early.
Student Loan Planner happened in part because of my discovery of a blog called Mr. Money Mustache in 2013 which helped me learn how to become financially independent. He advocated saving 50% of your income and was a testament to the possibilities with his insane 30-year-old retirement age. The idea of no longer going in to work at 6 am inspired me to quit my job trading bonds at 25 and travel the world.
I founded this company because I wanted to help people like my wife who had huge student debt but nowhere to turn to for excellent help paying it back. It’s also a heck of a lot more fun than sitting behind a desk somewhere while we’re working towards a large enough investment portfolio to ensure that neither one of us would have to do traditional work again unless we want to.
I was cool with a $20,000 a year living standard in retirement as a bachelor, but as a married man, we’ve amended that goal to $60,000 a year since we want to have kids and provide them with a comfortable lifestyle.
I’ve been thinking about how someone with six figures in student debt could achieve financial independence. I’ve got exciting news: There is life after debt and early retirement in your 30s or 40s is possible no matter how high your student loans.
First Case: You Know Your Student Loans Need to Be Gone
The most obvious situation is a high-income professional who wants to be debt free as soon as possible. If you want to reach financial independence (FI), you need to pay down your loans as if they were an emergency.
If you want to work until 60, by all means, take your time.
That means choose a 5-year variable rate loan and try to pay it all back in less than 3 years with repayments. This might be next to impossible for most people.
Here’s the thing though, you’re not most people. Take Jonathan from the ChooseFI Podcast for example. He paid off his $168,000 in student debt from pharmacy school in no time because he had a very specific goal in mind: not having to be a pharmacist for the rest of his life.
If you want to be debt free with early retirement on the table, then you should max your retirement accounts along the way at the same time. Yes, by saving for retirement while paying off your student loans you’ll be living like a sophomore in college drinking Natty Light and eating Ramen noodles, but you won’t be doing it forever.
Most people don’t know that you can use this loophole to access retirement funds way before 60 years old too.
Second Case: You Have Way Too Much Debt to Pay Off
What if you were a veterinarian with $250,000 of student debt making $70,000 a year? Let’s give a name to this hypothetical person and call here Teresa. No way could Teresa ever reach FI or retire early, right? Wrong.
Imagine that she worked for about 10 years and only had inflation level salary increases. We’ll assume she invests $1,500 a month in her 401k plan. That will only cost $1,170 a month in take-home pay because these retirement contributions would’ve been taxed at a 22% rate.
Let’s pretend she signs up for the REPAYE program, so she pays about $285 a month because she gets a break on her payments since she’s lowering her adjusted gross income with her aggressive retirement savings.
At year 10, Teresa stops working, dropping her REPAYE payment to $0 a month. She would have a large remaining balance at the end of the 25-year repayment period, on which she’d have to pay taxes.
Here’s how this REPAYE example would compare to a 10-year refinancing at 4.5% on the $250,000.
Notice that she only pays a total of about $34,000 towards her loans over 25 years (!!!)
At year 25, she needs about $180,000 to pay the tax penalty with REPAYE. Since this sum is needed in 25 years and not now, she could shoot for having about $85,000 in her brokerage account in 10 years. This sum should be able to grow into $180,000 at the end of the payment period assuming a 5% return.
Once she has what she needs in her taxable account for the “tax bomb,” her student loans are taken care of.
Then, she needs enough assets to pay for whatever spending she would need to support her lifestyle.
How Could Someone Save a Ton of Money for Early Retirement While Using a Loan Forgiveness Strategy?
With the new tax bill, Teresa’s take-home pay on $52,000 of taxable income (post-retirement savings) would be about $3,700 a month. What if she could live with two to three roommates in a lower cost of living area and pay 400 a month in rent? What if she paid cash for a $5,000 car and only carried liability insurance?
I suggest that it’s possible for a highly motivated individual in this situation to live on $1,500 a month. That figure might be nuts to someone with kids, but as a single person, it would be possible. If you have a partner, imagine doubling that living standard to $3,000 a month while achieving economies of scale for things like food, rent, and utilities.
Imagine that Teresa does this and puts the remaining $2,200 a month into an investment account at a place like Vanguard, which offers low-cost index funds at 0.1% a year in expenses.
Remember she also has $1,500 a month going towards retirement (plus another few thousand from an employer match, but let’s avoid counting that).
We’ll assume a relatively modest 5% return and that she saves for a total of 10 years.
Assuming Teresa has to pledge about $85,000 of her brokerage account savings to the tax bomb, that leaves her with about $247,000 to spend on not having to work anymore.
Her total assets are therefore about $473,000 including her retirement savings. Remember I told you there was a loophole where she could convert some of her retirement savings to a Roth IRA over time. She could do this and only lose about 10% of the $226,000 she has in retirement so that it is accessible too.
Most people seeking early retirement plan to spend 4% of their total portfolio, with that lasting the rest of their lives. That means Teresa could plan on spending about $18,000 a year and not run out of money.
Radical Early Retirement is Not Out of Reach If You Want It Bad Enough
If Teresa works 5 to 10 years longer and retires at the ripe old age of 41 or 46 instead of 36 (assuming a 10-year working career post vet school), she could live on $30,000 to $50,000 a year.
While I assumed a crazy low spending amount and no kids, I also didn’t assume that she picked up extra shifts, received a production bonus, or had a partner on the same page as her financially working towards the same goal.
Maybe Teresa doesn’t want to retire early. After all, she worked for years to work in her dream job. That’s fine, the point is that once work is optional, she can practice however and whenever she wants. If she makes some money while doing that, awesome it’ll make her even more financially secure.
If she had parental help watching kids, made more money, had a spouse with a decent income as well, received a generous retirement match, or picked up a hobby that happened to produce an income on the side once she quit her formal job, she would be even better off than I’m modeling.
She would also have a much higher investment balance if she earned a higher rate of return on her savings.
The Powerful Impact of Saving As Much As You Can
Most American workers, even those with no debt, are servants to their employer’s wishes. Why is that? Many barely have $1,000 in the bank.
A typical middle-class family stores its wealth in the value of their home. That’s a recipe for the “normal scenario” of working until 65 to 70.
If you save half your income, the sky is the limit to what you could achieve. Work will be optional sooner than you realize, and you’ll be able to have the flexibility that few ever do.
This is true whether you are rushing to pay off your student debt or you have so much that preparing for the tax bomb and using PAYE or REPAYE to go for loan forgiveness is your only choice.
Yes it’s more difficult to reach financial independence with six figures of student loans, but it’s way more possible than you would ever think if you love putting your earnings in index funds instead of buying whatever advertisers tell us to.
Further Resources to Learn About Financial Independence
If you want to be a part of the FIRE movement and reach financial independence with student loans despite how much you have, I suggest checking out the FI subreddit and read some of the blogs you see on the sidebar there.
If you’re a fan of podcasts, I suggest searching ChooseFI on iTunes or Stitcher.
If you’re a physician, read Physician on FIRE and learn how one anesthesiologist went from a maxed our shift schedule to working 8 days a month and traveling for weeks at a time to Hawaii, Europe, Latin America, and other exotic destinations while donating hundreds of thousands to charity.
If you owe six figures in student debt and would love to make work optional, set up a consult with us and we’ll show you how.