In today’s exciting episode, hear questions directly from the Student Loan Planner audience, covering topics ranging from financing a car to mortgages to preparing for a massive student loan bill after you graduate, with each question answered by Travis.
In today’s episode, you’ll find out:
- Is financing a car ever a good idea?
- How to best prepare for the tax bomb on an income-driven plan
- How student loans can affect buying a home
- Should you pay down student loans before buying a house?
- Should you wait until after your grace period to refinance?
- Whether to go for a physician or traditional mortgage
- How to prepare for a large student loan bill after graduation
- Is refinancing a mortgage worth it, despite closing costs?
- Why it’s often good for dentists to buy their own practice
- Why getting a custom plan from us could be life-changing
- YNAB.com (You Need A Budget)
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Episode 39 Transcript
Travis Hornsby [00:00:04]Welcome to another episode of the Student Loan Planner Podcast. I am so excited today to do something we have never done before. Our listeners reacted and responded well when I asked you to leave a message at StudentLoanPlanner.com slash voicemail. So we had a good number of you do this. So, we’ve selected a couple key questions that I think are really going to be a lot of fun to answer on the show today. And I’m just going to give you my two cents.
Travis [00:00:31] And obviously, you know, we would love to get more of these messages. So, if you have a question — it can be about anything. You know, a lot of our people that listen to this show have a lot of student loan debt because we’re called Student Loan Planner. So, it makes sense. But if you don’t have any student loan debt, that’s okay, too. I mean, I try to do early retirement. I’m into the financial independence community. We talk about some of these things in the show sometimes. And sometimes we talk about the intersection of people who have a lot of student loan debt and want to be financially independent. So, you don’t have to have student loan debt to listen to our show, although most people do because that’s who the audience is that we’re really targeting, is these people who, you know, maybe like you have a lot of student loan debt out there because nobody else is talking to you or at least not talking well enough.
Is financing a car ever a good idea?
Travis [00:01:09] So to jump right in. Our first question today is from Allison. Let’s listen.
Voicemail No. 1: Allison [00:01:15]Hi, Travis. This is Allison and I live in Raleigh, North Carolina. I was listening to the podcast on sweating the big stuff, and I was particularly interested in the part about buying a car. I know at the end that you said that you shouldn’t finance a car if you can help it. And the reason you gave is because it makes you think that you can buy a more expensive car than you otherwise would. And I was just wondering if you would still give that advice, even if it doesn’t change what kind of car you buy.
Voicemail No. 1: Allison [00:01:44]A lot of people in my parents’ generation I think believe that. And I’ve gotten this advice from a couple of people that you should finance a car, even if you have the money to pay for it, because of good rates that are out now. So, I want to get your advice on that. If you’re going to be buying the same car either way, do you think that you should put the money down if you have it? Or should you get financing if it’s just, you know, 1% or 2%? Thanks.
Travis [00:02:14] I really, really love this question because it is such a fascinating thing when you delve deep into it and it really just makes sense. And like, the first time you understand this kind of thing, it just — for the rest of your life, you understand how businesses trick people. OK.
Travis [00:02:29] So, have you ever seen somebody dancing on a street corner with a going-out-of-business sign for a furniture store? OK. And then have you ever seen that same person there where the going-out-of-business sale lasts for years and years and years somehow? OK. And then have you ever seen an ad on TV where that furniture is listed at a 0% interest rate?
Travis [00:02:47] Now, if the interest rate is 0% — so if you’re getting financing for free — why shouldn’t you buy something that you’re going to buy anyway from their store? And the reason for that is markups and also dealer fees. So, if you are financing a vehicle, you almost — you probably are going to a dealer to do it. OK? Now, if you can get financing somehow — 1% or 2% interest rate to buy from a private party — then OK, fine. You know? I mean, that’s something that I’m not going to tell you that you can’t do.
Travis [00:03:17] But usually what somebody does is they buy the car from the dealer used. So, I just picked an example of this. I picked a 2017 Honda Accord. I picked a silver one with standard mileage, like 60,000 miles. No extra options or anything like that. OK? And then this is for the absolute kind of bare-bones model. OK? So this might be, like, you might go into Kelley Blue Book later and look this up and say like, “Wow, Travis. You’re an idiot. I got a way higher value than you did.” So, just know that it depends on what part of the country you live in and what options and packages, you know, you include — like leather seats, stuff like that.
Travis [00:03:54] So, without any of that extra stuff, a trade-in value for a Honda Accord is going to be between $11,000 and $12,000 for a 2017 with 60,000 miles in good condition. Now, what’s interesting is if you look at a private-party value, then the Honda Accords you’re going to find on Craigslist, you’re going to be somewhere between $14,000 and $15,000. And if you’re looking to buy one from a dealer, they’re probably going to want $18,000 to $20,000. OK?
Travis [00:04:22] Now, why does the — you know, when they do a trade-in — why do you sometimes get a lot more? Like, you might say, “Well, I got an offer that was way above my trade-in value in Kelley Blue Book.” Well, that’s because they’re going to knock off the margin they’re making on the new car, and they’re going to basically give — They’re going to make a loss maybe on that end to sell one of their newer cars where they’re making a higher profit margin.
Travis [00:04:45] And so since they have a much higher profit margin on the new car they’re selling you, they can afford to take a little bit of a loss or make no money on the used car that they’re buying from you at an inflated valuation. OK? So, they’re never going to give you a good trade-in offer at a dealer if you don’t also buy something at the same time that they’re making a lot of money on the back end for.
Travis [00:05:03] So, the reason why it does not make sense really to ever finance a car is, not only do you have to deal with just debt and have a required monthly payment where you’re going to have less money to set up for automatic investment, you’re also going to have the problem of you will almost certainly pay margin to whatever group sold you that vehicle. I have friends that are in the dealer business. You know, I talked to some people, and apparently, one of the new things that dealers a lot of times will do is they’ll have extra fees baked in because everybody on the internet now knows the price of cars.
Travis [00:05:35] So, in other words, you know, you can tack on, like, five to 10 different fees for random things, like all kinds of different — You ever been to a dealership and bought a car, you notice that you see this long list of fees. So, there’s all kinds of, like, hidden stuff that gets baked into that financing that you’re not aware of when you finance a vehicle because all you’re thinking about is the monthly payment, even if it’s at a 1% or 2% interest rate.
Travis [00:05:55] I can make a killing off of you if I mark my car up 50% and then give you a 1% or 2% interest rate. Because then that’s kind of the same thing as buying the car at the same price but having, like, a 15% interest rate. You know I mean? So, the dealer doesn’t care if they make the money on the profit side from the interest or from the margin — right? — I mean, if they’re also the one lending you the money.
Travis [00:06:16] Now, you know, this is — I don’t want to make this like a car show. But, like, I just want you to see that that’s why I always recommend people buy their cars on Craigslist. Go for something that’s five years old. If you’re a dentist or physician making a lot of money, buy something that’s maybe two years old because you can buy a car in cash. If you can afford it, buy it.
Travis [00:06:35] If you are, like, a teacher, a social worker, you know, a physical therapist, something that makes a lot — maybe some lower income, then I would buy, you know, a 2011 to 2014 Toyota Camry or Honda Accord. Or if you feel like you have to have a thing that drives in the snow, then you get a 2013 Subaru with all-wheel drive. Right?
Travis [00:06:54] So, buy a car online. Unless you’re really wealthy, in which case, sure, if you want to go to the dealer and buy a car in cash because you’re a millionaire, do that. But don’t do that until you are a millionaire.
How to best prepare for the tax bomb on an income-driven plan
Travis [00:07:05] And now we have a question from Olga.
Voicemail No. 2: Olga [00:07:06]Hi, Travis. I’d like you to talk about how students can best prepare to pay for the tax bomb if their student loans are forgiven through one of the income-driven repayment plans.
Travis [00:07:18] So with a tax bomb, I like to tell people that most people can put $500 to $1,000 a month into an investment account and feel fine about their future tax bomb. The tax bomb is something that probably will not happen because of the fact that it’s not going to be collectible. Your average American is living paycheck to paycheck, even professionals. About maybe a third of professionals live paycheck to paycheck.
Travis [00:07:41] So, is the IRS going to foreclose on millions of people’s houses? Probably not. But I’m only telling you this so you can just calm your anxiety level. I still want you to prepare for it because that’s the law. So, prepare for it by putting $500 to $1,000 a month into an investment account. And if you’re really worried about it, save more than that, and you’ll be extra safe.
Travis [00:07:57] If you put that in the bank, you’re going to get 2% interest on it, [and] you’re going to have to save way, way, way more. Now, 20 years to 25 years, stocks beat savings in the bank 100% of the time. Now, your market value of your investments is going to go up and down, and it could crash in a recession. That doesn’t matter. You need the money in 20 years, not tomorrow. So, why are you worrying about what it’s going to be tomorrow, right?
Travis [00:08:19] So, start an account with Vanguard if you love investing and want to do it yourself. If you hate investing, do Betterment. And you can do StudentLoanPlanner.com slash Betterment, if you want to use our referral link and thank us for the show content. And then just use one of those places. Or if you want the full service, hire a CFP (Certified Financial Planner) fee-only fiduciary financial planner. Do one of those options and just put $500 to $1,000 a month in that account, and you have nothing to worry about the tax bomb.
How student loans can affect buying a home
Travis [00:08:46] Now we have a question from Tiffany.
Voicemail No. 3: Tiffany [00:08:48]Hi Travis. Thank you for your podcast with awesome content. Here’s a quick question for you. Hopefully it’s fast. My husband and I just graduated with over $200,000 in student loans. They’re mostly private and some government. We both went to school to become helicopter pilots, but we were unable to finish funding our flight training. So, we probably will be trying to pay off our debt with a lower-paying job than we originally planned.
Voicemail No. 3: Tiffany [00:09:15]We’re currently renting and living with a roommate because, despite our high credit scores, our debt-to-income ratio doesn’t really allow us to buy a house. And there’s really no end in sight for that, I think. We’ve put off having kids because of this, and now that we’re graduated, I’d love to buy a house and start a family. Maybe not have a roommate anymore and have cheaper living expenses. In our area, it’s cheaper to own than to buy — I mean, than rent.
Voicemail No. 3: Tiffany [00:09:42]I heard from a banker that when your loans become due, your debt-to-income ratio changes based on what they’re having you pay — instead of while your loans are in deferment, they’re counted as a whole. Is that true? And is any hope for us — or are we doomed to be renting and putting off our lives until we get this under control? Thank you so much.
Travis [00:10:03] This is a really interesting one. This is tough because private loans are really, really difficult to pay back, especially when you layer on federal loans on top of it, and here’s why. If you take out — So, say you have $200,000 in loans, and you have $100,000 [in] federal, $100,000 [in] private. If you have $100,000 of private loans, that payment is basically going to be $1,000 a month, probably. And then the federal payments are going to be based on your income.
Travis [00:10:26] Well, the federal loans don’t care if you have private debt at all. So, if you have two separate loans where half of it’s private, half of it’s federal, you’re going to pay 10% of your income on the federal loans, plus $1,000 a month on the $100k private loans. That is a very difficult situation that you’re in, if you’re in that kind of a situation. And you also have it compounded by the fact that you didn’t finish the program, so you don’t have that extra income that you were anticipating to pay those loans off.
Travis [00:10:51] One thing I can tell you to encourage you is I’ve had a lot of clients come back from this before. And so here’s generally the advice that we like to give. Your federal loans can be put into forbearance. That’s not the best thing in the world, but I would much rather you have an emergency fund with six months expenses and no credit card debt. That’s the first step. I think that you absolutely need to do that before having kids.
Travis [00:11:11] So, get to six months of your monthly expenses in the bank. And the way you can do that is track them. So, go to Mint.com or go to YNAB.com (You Need A Budget), and sign up for one of those budget-tracking things. First, figure out what you’re spending. Multiply it by six. That’s what you need in the bank. And then your earnings minus your expenses, that’s what your — a monthly amount that can go into savings as.
Travis [00:11:32] So, if you’re looking at two years until you have an emergency fund, that’s not good enough. You’ve got to increase your income — and maybe drastically. So, you’re going to have to work your tails off. You’re going to have to pick up extra jobs if you don’t have kids yet. You can do this. So, you’re going to both want to work probably crazy hard and have multiple jobs until you can get to the point where you have six months expenses in the bank and no credit card debt.
Travis [00:11:54] Anybody can do that, even if you have mass — If you have massive credit card debt, you might do bankruptcy. But if you have, you know, a reasonable amount of five-figure credit card debt — seems kind of funny saying that — but that is something that can be paid off. So, pay that credit card debt off. Get the, say, $20,000 in the bank. That’s kind of the first step. Or $10,000 in the bank if you have low expenses.
Travis [00:12:12] What you can do to get there is do a forbearance or deferment on your federal loans. You get up to three years for that. So, you put it up to three years, and while you’re doing that, you want to attack your private loans like your life depended on it. And the reason for that is you want to get to a point where you can refinance those private loans, probably into a 20-year term. Our site StudentLoanPlanner.com slash refi now has, like, 95% of all of the refinancing market available there, and you get the cash back bonuses if you qualify.
Travis [00:12:40] So, you probably have a high interest rate on the private loans. Most of the time I see people, like, 9%, 10% from, like, Sallie Mae or something, for places, like, you know, pilot school. So, you want to try to refinance that if you can. You can do that with the cosigner, so maybe there’s a generous family member who’s got a good income that will help you refinance to a 20-year term where you can actually afford to make those payments.
Travis [00:13:01] And in that case, you know, I would still probably try to pay down your private loans as fast as you can and then sign up for federal income-driven repayment options on your federal loans. You can also put your federal loans on a 30-year plan by consolidating them if the income-driven plan is basically not that helpful because the payment is still pretty high.
Travis [00:13:21] So, you can definitely come back from that. You just have to kind of know what steps to take. And generally, it’s getting financially stable, working extra jobs and then getting to the point where you have an emergency fund and no credit card debt, and that you’ve at least tamed the private debt where it’s not terrible and stressing you like crazy. And once you do that, the banker is just going to look at your total debt — when they add in the mortgage, needs to be below, I think it’s like, 40% or 45%. And they’ll look at your Pay As You Earn (PAYE) payment for that. Or your Revised Pay As You Earn (REPAYE) payment.
Travis [00:13:49] So, you can definitely qualify for a house. Just aim for one that’s two times your joint income or less, and if you don’t like what kind of house you can buy for that, you need make more money. Alternatively, you need to move to a lower cost-of-living place, if you’re in, like, San Francisco and you can’t afford to buy a house.
Travis [00:14:05] And then if you want to have a kid, you could totally have kids. You just need to figure out a way to get help with child care. Maybe that means bringing in-laws or parents where you are, or maybe that means moving to where they are. But if you don’t have a very high-paying job, then there’s no real excuse for not living near family support to try to lower costs. And you have a roommate right now, so at least you’re doing a lot of things right. So I would just encourage you, Tiffany, just keep up the good work.
Should you pay down student loans before buying a house?
Travis [00:14:27] Now Joanie has a question about housing.
Voicemail No. 4: Joanie [00:14:30]Could you please discuss paying down student loan debt against saving for a house and buying a house? Currently I’m finishing up medical school, and I have a pretty significant amount of student loan debt as you can imagine. But hopefully we’ll be ready to buy a house in the next, you know, three to five years. And it just seems almost unachievable to have the money saved for a down payment while making all the loan payments. So, if you have any advice on that front, I’d really appreciate it. Thank you.
Travis [00:15:01] Thanks, Joanie. That’s a great question because everybody wants to buy a house. And I think part of this is because our culture and marketing and movies and Hollywood all tell us that once we buy a house, we’re an adult or successful. I’m not trying to say that that’s not a good goal. I think that’s a wonderful goal. In fact, I want to buy a house one day. If you’re going to live in a place longer than five years, I think it’s great to own a home as long as you can find a house that’s two times your joint income or less, and you can find something that you like and you plan to live in for at least five years.
Travis [00:15:32] That said, housing is a lifestyle decision. It’s not something that, you know, is an investment. That’s just mathematically something that I can prove in a whole episode if I get a bunch emails — Podcast@StudentLoanPlanner.com — that people want to hear that episode.
Travis [00:15:46] But here’s some thoughts in terms of deciding what you do first — put down the loans or save for a house. You mentioned in your question that you’re going to medical school. So right now, banks are falling all over each other, and they are literally willing to sacrifice their first born to lend to physicians right now. It’s just obscene.
Travis [00:16:03] One of the reasons why I’m worried about the economy is because whenever we have environments like this where banks are falling all over each other to give credit to people just based off of credentials alone — that’s kind of a little bit of a worrying sign, right? But use it to your advantage. That will probably be the case even if we have just a mild recession. Like, I would expect that to continue. If it was like a severe recession, you know, it might be tougher to qualify.
Travis [00:16:25] But I would say in general — The reason I’m saying that is because physicians can get doctors mortgages. And doctors mortgages, you can put down, like, 3% down or 0% down, even, in some cases, and still get a mortgage for whatever you really want to get. And you also don’t have to pay PMI (private mortgage insurance) with physician mortgages.
Travis [00:16:41] They also will look at your required payment under an income-driven payment program instead of your 1% of the principal balance like they used to. So, that means you’re going to get a mortgage. You’re going to get approved. And that’s not going to be a problem, even if you only have $10,000 saved for a house.
Travis [00:16:57] So, I would prioritize your emergency fund before either one of those two things. But if you know for sure you’re going to pay down your student loans, you know, you could put it towards that. I mean, honestly, the right answer is do either one. Just don’t spend the money. The savings rate is way more important than either one of those two decisions.
Travis [00:17:14] So, if you’re doing one of those two things, you’re going to do really, really well. And just know that, you know, you’re going to be able to qualify for a very low-down-payment mortgage without PMI by virtue of you going to medical school. And a lot of people like, you know, dental school, pharmacy school, a lot of other banks will lend to you with a lower no-down-payment mortgage with no PMI by virtue of your credential.
Travis [00:17:34] So, that’s some good news. You don’t have to worry about qualifying for a mortgage despite your big student loan debt.
Should you wait until after your grace period to refinance?
Travis [00:17:40] Now for a question from Deniah.
Voicemail No. 5: Deniah [00:17:42]If I refinance my loan, I’ll get a lower rate, but I’m currently in my grace period. Should I wait until the grace period ends to refinance, or should I just refinance now while I know I have a lower rate?
Travis [00:17:54] So Deniah wants to know: Should you just let your loans be deferred and just take advantage of that six months grace period after your graduated, or do you want to just go out and refinance and lock in a lower interest rate now? The real answer to that question, I guess, assuming that you’re positive that refinancing is the right choice — which, by the way, I would say a lot, a lot of people come to us that are sure that paying back their loans was definitely the right thing and they’re wrong at least 50% of the time.
Travis [00:18:20] So, assuming that you’ve done that due diligence, you know that you need to refinance, you know that you need to pay it off, what I would say is I think that we’re asking the wrong question here. The answer is, when are you ready to refinance psychologically and financially? So, when you refinance, it’s going to be very difficult to — it’s going to be — Well, you can’t really stop that payment unless you lose your job. You can stop it for, like, three months, but it’s not nearly the protections of the federal government.
Travis [00:18:45] Yes, you can lower your interest rate. I would say that for deferment, I like to tell people to refinance as soon as you’re in a good spot to do so. Meaning you’ve got the emergency fund covered. You can easily afford the payment. You know, paying 1% of your balance is going to be very easy for you. You have a plentiful savings amount. You’re already maximizing your retirement accounts. You are putting a little bit of money away into brokerage accounts. You are stable financially. You know, if you lost your job, you have a pretty good expectation that you’d be able to pick up a new job without too much trouble.
Travis [00:19:14] So, you’re probably in a health-care field or you’re in a highly sought-after role like, you know, engineering or corporate something or other. I would say refinance. Go ahead and refinance. Don’t wait on the deferment period if you know that’s what you need to do because paying extra towards interest is basically just paying extra to the government for no reason as long as you’re sure that you need to refinance.
Travis [00:19:34] Just realize the deferment period for most people is when you’re at your most financially vulnerable. You just graduated. You don’t know a lot about if you’re going to like your job. You may or may not be in a relationship. Maybe you’re thinking about getting married or having kids. That deferment period and then doing an income-driven repayment option for the first couple of years, especially since Revised Pay As You Earn has some interest subsidies, that can be really helpful sometimes.
Travis [00:19:57] So, go ahead and just refinance it, if you know you need to do it. StudentLoanPlanner.com slash refi — r-e-f-i — and get the cashback bonuses.
Is it better to go for a physician or traditional mortgage?
Travis [00:20:06] We’ve got a question from Shosh on physician mortgages, buying a house and some really interesting stuff about whether or not you should pay it back or go for forgiveness.
Voicemail No. 6: Shosh [00:20:15]Hey, Travis, big fan of the show and the podcast. Keep up the good work. Avid listener. Hey, quick question — or maybe not so quick. I am 35, and my wife is 40. She’s a physician. Combined we have $381,000 in student loan debt. Most of this is for that very expensive medical degree. These are all federal consolidated loans. Interest rate is about 6.4%. We have only $180,000 in savings, and we are expecting a newborn. To make life easier, we will now be relocating close to my in-laws for free child care in a third-tier city in the Midwest in the next six months. Post-relocation, combined pretax income is expected to be up around $370,000.
Voicemail No. 6: Shosh [00:21:03]So, here’s the question. Do we go for a doctors mortgage with 0% down on the house that we want to buy and dump about $120,000 of our savings to reduce the student debt? Or do we pay 20% down and continue on the REPAYE plan that we are for the federal loans and make approximately $2,500 of extra payments a month to accelerate the repayment term from 15 years, which is where it stands currently, to a more manageable eight years?
Voicemail No. 6: Shosh [00:21:34]Lastly, bit of an odd question: Does it make sense to fund a brokerage account with this additional $2,500 month for the next 15 years while we are on the REPAYE minimum plan payment plan? Or does it make sense to completely pay off the student loans in the next eight years and then fund a post-tax brokerage account with almost $7,000 a month after eight years of repayment? We are maxing out our tax-deferred retirement accounts. Their balances are expected — They’re pretty much close to zero. We’ve just started. Retirement is 25 years away.
Travis [00:22:06] Good question, Shosh. So, this is my thought. Got a Midwestern city, cost of living is probably going to be kind of low. You know, your dual-income family [is] going to be making some serious money. And if you’re working at a private practice, you know, you’ve got the $300-something-thousand of loans.
Travis [00:22:23] So, it really depends on the math at that time. So, if you’ve got a surgeon spouse [who’s] making $300k, $350k type of income in a private sector environment, you know, what you’re going to find is, if you — as long as you save a lot, that’s not going to matter a ton. So, if you wanted to pay back your loans super aggressively in the private sector, and it makes sense from a math perspective, yeah, you can do it.
Travis [00:22:45] What I would say is this: In terms of your first part of your question — I’m just going to break it down in two parts. So part one is physician mortgage or pay down 20% and do a conventional. So, when you do a physician mortgage, you get to deduct the interest on your mortgage if you’re itemizing in your taxes. Meaning that — the translation of that is — probably as a physician and putting a bunch of maybe charity away, you know, that kind of stuff, you probably would take a deduction higher than $24,000, if you added on mortgage interest and charity and miscellaneous deductions.
Travis [00:23:16] So, that means that your mortgage interest could be tax deductible while your student loan interest is not tax deductible. So, that means student loan debt would be more toxic in that situation. So, you’d rather have more debt that’s tax efficient and less student debt, which is tax inefficient.
Travis [00:23:30] So, for that $100-something-thousand dollars that you’ll have, you could keep an emergency amount that’s adequate. So maybe $50,000 to $60,000, let’s say. And then the rest of it you could use towards paying down your student loan principal balance and then refinancing. And that’ll just help you where you can maybe start off with a 10-year refinancing and pay about $2,800 or $3,000 a month, which should be manageable if you’re making the $300k-or-up type of income as a couple there.
Travis [00:23:58] And then for the mortgage, you know, it doesn’t really — just shop around and you probably will get a decent rate there. And then for the brokerage account question, you know, again, my math from different analyses that I’ve run says that as long as it’s kind of a wash between refinancing and going for a loan forgiveness strategy, then it doesn’t really matter if you stretch it out and put all that extra cash flow in the brokerage account or if you refinance it into a short term and pay tons of money towards that and have, like, $500 a month going to the brokerage account. Then all of a sudden you have massive amounts of money going into the brokerage account.
Travis [00:24:33] Now, if you think you’re an amazing investor, then sure, do the minimum payments and put the extra money away. I will say psychologically it’s a lot easier for people to just pay their debt off because that required forced savings does not allow you to go take that money and spend it on other things. So it — Debt is an enforced lifestyle prevention mechanism. So that is maybe one of the reasons I might lean towards you doing the eight-year pay off versus stretching it out.
How to prepare for a large student loan bill after graduation
Travis [00:25:00] We’ve got a question for you from Taylor about loans while in school.
Voicemail No. 7: Taylor [00:25:05]Hey, Travis. I’m currently in my second year of a four-year Doctor of Physical Therapy program. I’ve refinanced my student loans from undergrad before I realized I could do any kind of income-based repayment or anything like that, so made a little mistake there. But that’s currently at $98,164. I’m at a 6.625% interest rate. Those are currently in deferment while I’m in school.
Voicemail No. 7: Taylor [00:25:29]I also have some federal loans. They’re Navient. Two Direct Grad PLUS Loans. The first is at — for $6,005 at a 7% interest rate. The second is for $7,000 at a 7.6 interest rate. And then I also have two unsubsidized loans from my doctorate program. The first is for $21,000 at 6% interest rate, and the second is for $21,000 at a 6.6% interest rate.
Voicemail No. 7: Taylor [00:25:59]Coming out to about $56,000 for grad school so far, and I expect that to just about double as I finished my program. I also have a small Perkins Loan for $3,000 at Heartland ECSI for a 5% interest rate that’s currently in deferment as well. And my wife also has about $35,000 in student loans.
Voicemail No. 7: Taylor [00:26:25]Large bill — I’m sure you’ve seen larger. But I’m looking to kind of set everything up for when I graduate with my Doctor of Physical Therapy. I’ll likely be the only one working as my wife will eventually stay home with the kids.
Voicemail No. 7: Taylor [00:26:38]But I kind of want to get your thoughts on, you know, what to do, whether income-based repayment for the federal loans is best? Should I refinance that SoFi loan again and get an interest rate, and if so, what would you recommend for the terms of that loan? Do you recommend going with a longer term while in school and then refinance again maybe in two years when I graduate to a different term? Or maybe a shorter term while in school, then switch that over to a longer term when I graduate? Any help would be beneficial here. Thanks a lot. Appreciate it, Travis.
Travis [00:27:10] Good question, Taylor. This is a real fun one because you could really do a lot of good or a lot of bad with this. So, this is kind of my thought. You’re married, I’m assuming. Got a spouse. Seems like that’s — You’re going to have a wife staying at home with kids when you have kids. And you’re in school, and you’re borrowing federal loans right now. You realize, “Man, wish we could take back that refi that we did.” But you can’t cry over spilled milk.
Travis [00:27:31] So you’ve got the $100,000 of private debt. That is debt that — no if, ands or buts — is going to get paid back. If your spouse is going to stay at home, here’s some thoughts about that. I heard $30,000-something of student loan debt. That’s, like, an average student loan debt for an undergrad. So, $35,000 of student loan debt, plus probably — I’m going to guess — $100-something-thousand or more for you for federal. So that’s like $130,000 [to] $140-something-thousand.
Travis [00:27:52] Your debt-to-income ratio when you graduate — not including the private loans because you can’t, in terms of income-based payments — what is that going to be? It’s going to be more than 2-to-1 because physical therapists typically make, like, $60,000 [to] $70,000.
Travis [00:28:05] Now, if you take out the max while in school, let me tell you something that will get you a massive hate mail from a taxpayer advocate kind of watchdog group. But it’s just the law of the land, and so I’m just going to tell you. So, if you have kids while in school, then you can get way more money from your federal aid office.
Travis [00:28:23] So, the secret solution to increasing America’s birth rate is have a bazillion babies while in school because then you can get massively more money to cover your family expenses. And if you’re going to pay an income-driven plan anyway, your payment is going to stay the same, and the only difference is going to be the tax bomb that you’ll have might be marginally higher.
Travis [00:28:40] That’s actually going to be a lot cheaper, hilariously, than having kids after school because then you won’t be able to take out student debt that can be paid based on your income. You’d have to take out, you know, credit card debt or something terrible like that. Again, hilariously, the incentive structure that we’ve designed in America because we’re brilliant is rewarding a system where people have tons of kids while in school, load up massive sums of student loan debt at taxpayer expense and then optimize it with a group like ours to go for forgiveness.
Travis [00:29:05] I mean, that’s just kind of the truth, unfortunately. Don’t hate the messenger. Don’t shoot the messenger, y’all. Just do the roles that are on the page. You know? So, again, like, you are anti-Medicare, anti-Social Security? OK, well, great. You paid the taxes for it. You might as well use it. Right? That’s kind of my philosophy on this kind of stuff.
Travis [00:29:25] So the answer for you is, if you’re going to have a lot of kids, I would suggest getting started sooner rather than later. And if that’s not an option, then here’s what I would do. Again, you can put the federal loans into forbearance when you graduate. Now, you probably shouldn’t do that the very first year you graduate because you should be able to consolidate your loans and get it set up with a $0 monthly payment under one of those income-driven plans if you certify it before you start getting your first paycheck. Certainly for a year one, you should at least not use forbearance. So that’s going give you a full year when you graduate to tackle that private loan debt hard.
Travis [00:29:55] And you’re going to make $60,000 [ to] $70,000. So, assuming you don’t have any kids yet because you didn’t do the have-kids-in-school route, you’re going to have a lot of extra money to use. And that extra money needs to be piled on your private loans. Get your 401(k) match. Get a little bit of emergency fund, like, $5k to $10k. But shovel money at the student — the private school loan debt like your life depended on it.
Travis [00:30:14] I would refinance that right away — as soon as you possibly can. I would apply every six months, you know, through our links because they’re the best links on the internet as far as I’m aware. Try to get a lower interest rate. Apply everywhere. See if somebody will cosign for you. Get a 20-year fixed rate to keep that monthly payment low because if you’re thinking about having kids, you’re going to need as low of a required payment as possible. Even if you’re shoveling money at it, you know, getting a 1% lower rate isn’t as good as having a lower required payment just from an anxiety level.
Travis [00:30:39] So, go hard on the private loans. [Forbearance], you know, maybe after year one. You know, you get three years after year one of $0 required payments. So, you get up to four years of paying zero on your federal loans, at which point you could go get them on a long-term forgiveness type of plan. And that would give you plenty money left over to do everything you want to do.
Is refinancing a mortgage worth it, despite closing costs?
Travis [00:30:58] Now we’ve got a question [from] Jeff on mortgage refinancing.
Voicemail No. 8: Jeff [00:31:01]Hi, Travis. This is Jeff. I have a question about mortgage refinancing. I have a 30-year mortgage – 28 years left. The balance is about $166,000. My payment is about $1,300 a month. My current rate is 3.99%. I’m wondering how much of an improvement in rate would be worth me refinancing, given that I’ll have to pay closing costs on a refinancing of that loan. Thanks.
Travis [00:31:39] OK. Full disclosure here, y’all. I am a student loan expert. I’m probably one of the — definitely top 50 most knowledgeable people in the world on student loans and student loan refinancing and forgiveness and all that stuff. I am probably one of the top 5 million people in the world about knowing about mortgage refinancings. But I do know more than the average person, so I’m going to take a stab at this.
Travis [00:31:59] What I would tend to look at is something called APR (annual percentage rate). So, APR is the all-in interest rate for a mortgage, if you carried it over the full 30-year term. But the problem is, is not very many people do that at all. People tend to sell their homes. They tend to refinance their mortgages into 15 years, sometimes, if they want to pay it off early. They tend to prepay their debt and pay it down earlier. Right?
Travis [00:32:23] And whenever you have an upfront charge like that — if you do anything like prepay a mortgage or sell a house or do something like that — then those savings that you had from the mortgage refinancing basically evaporate. And so that’s why a lot of people tend to give advice that you want to refinance your mortgage every time you can cut the rate by 1%.
Travis [00:32:41] So, that’s really good tried-and-true advice. You know, if you can get an APR, you know, 1% lower than what you currently have, n-brainer to refinance. Do it for sure if it’s less than that. It’s kind of a little bit of a — you know, oh, I don’t know. Like, should you or should you not? Like, if you can get over a half [of] a percent lower rate, you could certainly consider it.
Travis [00:32:58] And what I would do with that is ask yourself the question, you know, are you going to be prepaying the mortgage really aggressively? Are you going to be selling the house soon? Are you going to be refinancing to a 15-year at some point? If the answer is yes to any of those things and that APR that you’re looking at is not going to be as good as you though it [was] going to be because you’re going to have to pay these closing costs — which is basically, if you want to kind of spread it out over the life of the loan, it could even end up making your interest cost higher than what that 3.99% that you already have is, Jeff.
Travis [00:33:29] Maybe you’re asking the wrong question here. Maybe it could make sense, instead of refinancing to a 30-year, you know, you might look at doing a 15-year. Your $1,300 payment, I just took a look at that — so actually, I’m going to have amend my advice here. I’m wondering if you have a 30-year mortgage or a 15-year mortgage because that monthly payment kind of seems like it matches a 15-year better than a 30-year.
Travis [00:33:53] So, if you have a 15-year mortgage, the best rates that I’m finding right now online are like 3.1%. So, if you’ve got a 3.99% and you can get a 3.1%, then yeah, I’d refinance your mortgage. You know? And then your 15-year mortgage, you’re out of debt probably sooner than your student loan debt, if you’re doing a forgiveness-based plan. So, you know, if you’re doing a 15-year refi with a 3.99%, I’d go for it. But if you’re doing a 30-year refi with a 3.99%, I probably wouldn’t.
Why it’s often good for dentists to buy their own practice
Travis [00:34:17] For our last question, we’ve got one from a dentist — Doctor Shim.
Voicemail No. 9: Dr. Shim [00:34:20]Hi, Travis. I took your student loan plan, of course. And over there you mentioned a little bit about how it’s beneficial for dentists to buy a dental practice, not only because of the low default rate but also because it could lower your repayment if you’re on REPAYE or PAYE. Can you talk a little bit more about how it would lower the payment? Thank you.
Travis [00:34:44] OK, great question. So this is why I like people becoming business owners with their labor instead of working for W-2, being an employee. All things equal. For example, if you are a dentist that owns their own dental practice and also owns the building, you can do something called commercial real estate depreciation. So, you take the useful life of the building – I think it’s, like, 39 years for commercial buildings. Maybe you’re getting, like, 2% of the building’s value, and then you get to deduct that off of your income every year.
Travis [00:35:13] So, you’re growing your wealth. You’re putting money away. Growing your future final wealth that you could sell and retire with that money one day. But you’re not having to pay income taxes on income that you’re earning right now in your dental practice because you’re writing off income that you’re earning as a dentist, as an owner with the depreciation expense.
Travis [00:35:31] Now, is that expense a real expense? Kind of. Eventually, if a building is bazillions of years old, you’re going to have to tear it down and rebuild it. Right? But there’s all kinds of loopholes in the tax system, right? So this depreciation thing is a big loophole because yeah, you have to upkeep the building and maybe repair the lead pipes if it’s 100 years old. Or you make code updates and everything. But in general, a lot of people for commercial real estate just update something, and it might last 100 or 150 years, even.
Travis [00:35:56] So, the IRS is basically giving you the sweetheart deduction when you’re a practice owner. And when you’re an employee, you’re not getting any deduction to lower your income except for retirement savings. And frankly, even retirement savings as a business owner are way, way better because you can setup a 401(k) and do profit sharing. And in some cases, you can get a $19,000 deduction for you, and then you can contribute a matching contribution as the employer. In some cases for really high-income dentists and physicians, you can even set up a private pension plan and write off, like, tens of thousands of dollars extra on top of that, I believe. So, the available pretax deductions on the retirement side are far larger as a practice owner.
Travis [00:36:34] And then the available write-offs from things like depreciation expense are something that’s going to lower your much, much higher income. And it’s going to make your finalized income on your tax return, which is your adjusted gross income, it’s going to make that a lot lower. For example, you’re going to be able to write off the value of your chairs, right? Your operatories. You’re going to be able to write off the value of, like, CAD/CAMs or CEREC machines or things like that.
Travis [00:36:58] Obviously, I’m not a dentist. You know, you might be able to tell with the way I’m saying stuff. But you know, these really expensive, $100,000 pieces of equipment that are valuable, that would be sellable as an asset to some other dentist or group, you know, that’s something that you can write off that against your income.
Travis [00:37:13] And so, imagine being a practice owner. You’re making $300,000 a year, but you have $100,000 of write-offs between retirement and the business. The business interest on the practice loan, you know, maybe any kind of consulting deals that you strike to help you grow the value of your revenues. And so your net income is $200,000 because you have $100,000 in write-offs.
Travis [00:37:32] And meanwhile, you’ve got an associate that’s busting their butt working crazy, long hours, and they make $220,000. Well, they can maybe have a $19,000 write-off, and they’re making about $200,000 — about the same. And guess what? Both that owner and that associate would pay the same exact amount of money on their student loan payments. But the practice owner is going to be way richer than the associate long term because of asset growth.
Why getting a custom plan from us could be life-changing
Travis [00:37:56] All right. Just to wrap up. So, remember that investing course that Dr. Shim mentioned? So that’s available every six months for enrollment. Right now, we have it closed. The link to that is StudentLoanPlanner.com slash investing. You know, some of you probably already bought that, in which case go on and take that course because it’s going to change your life. We’ve gotten so much good feedback on that thing. So go and take that course, and if you want to sign up for it, you absolutely can.
Travis [00:38:20] But you are prevented from doing so until January because that is when a lot of people change things about their life. And if I limit enrollment, you’re going to actually have a lot more incentive to actually complete the course, which is what I want. And then also, obviously, you know, when you limit something, everybody starts beating down your door for it more. So there’s obviously business reasons to there.
Travis [00:38:41] So, in terms of this question-and-answer stuff, I’ve had such a blast. I hope you’ve learned some stuff. I hope you’ve gotten some insights into my ways of thinking. And I’m not going to tell you that everything in here is going to be right, but this is just my two cents.
Travis [00:38:55] If you want more than two minutes of this for your situation, obviously book a plan from us. StudentLoanPlanner.com slash book is the link for that, and you’re going to get myself or, like, this very, very select group of consultants that has, in some cases, more credentials than I have. Lauren, Rob, Justin: These consultants are absolutely amazing, and I trained them for a really long time to make sure that they have all the student loan knowledge. And then they pair that with their background as CFPs and CFAs (Chartered Financial Analysts) — and people that have been in the industry for years that just know a lot about everything in general about managing your finances.
Travis [00:39:29] So get a plan from us if you really like this because this is what we do. And instead of just me shooting the breeze doing it for two minutes, we do it for like an hour, and we go into a lot more detail than just what we can cover in a quick show for a quick-hit session.
Travis [00:39:42] So that said, also, if you are totally broke, or if you just are not totally broke but you just want to be featured on the podcast or somewhere in between, I want to hear from you. Go to StudentLoanPlanner.com slash voicemail and leave us a voicemail. We’ll use it for a future show. Just remember to leave a lot of detail. Give me something good, juicy that we can talk about. Maybe something super controversial, make it fun. And we’re going to do this more. I might sprinkle some of these questions in between longer episodes about specific topics just to break it up for you all.
Travis [00:40:10] But I hope you enjoyed this, and if you did, leave us a review on iTunes or something, just to make more people see this. Because I think that this kind of a show could be absolutely life-changing for the 44 million people that have student loan debt. And it would be really life-changing for the 2.7 million that owe more than $100,000 of student loan debt. So, when there’s 2.7 million of you out there that owe more than $100,000 of student loan debt, you are not alone.
Travis [00:40:37] That’s today’s episode. Thanks so much for listening.