Most people are committing financial sins of omission — not doing things because they’re too complicated. In this episode, see how anything from bad website designs to having too many options can cause financial inertia — and how setting up automatic plans can help.
In today’s episode, you’ll find out:
- How is Vanguard’s website design costing people money
- Why people use robo-advisers instead of companies like Vanguard
- Why developing the habit of investing is important
- How a “nudge” works in finances
- How student loans could be more simple to deal with
- What financial sins of omission might you be committing right now
- How the economy shifting pushed people to start investing
- Why automatic financial plans are so important
- How to avoid having complexity cost you money
- How schools convince people to borrow so much money
- Examples of people unable to handle so many financial options
- Is taking time off from Public Service Loan Forgiveness OK?
- How alternative documentation of income works
- Why it’s important to not let student loans dictate your life
- Refinancing rates are lower than they’ve been in a long time
- Why you should book a student loan consultation now
- Why you should apply for the Student Loan Planner scholarship
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Episode 40 Transcript
Travis Hornsby [00:00:00]So, today I’ve named our episode “How Vanguard and Other Robo-Advisers are Costing Americans Billions of Dollars.” And it’s a little bit of a jokingly named, click-bait title, if you will, because I do not at all mean that there is some sort of nefarious activity going on with Vanguard or robo-advisers or any kind of other big mutual fund companies.
Travis [00:00:20] What I’m instead saying is — The other title for this podcast was going to be “sins of omission.” What are you doing instead of sins of commission, which is what you’re doing that’s wrong? What are you not doing that you should be doing that’s putting you in a bad position?
How is Vanguard’s website design costing people money
Travis [00:00:34] For example, here’s kind of the premise of today’s episode. And I want to set it up kind of like this. So recently, I wanted to increase my automatic contribution to my Vanguard investment accounts because we’re doing pretty good here at Student Loan Planner this year. We’re helping a lot more people than we ever had. We’re having tons of people refinance, and — knock on wood — the income went up a little bit because we’ve been helping more people.
Travis [00:00:54] So, OK, you’ve got more money. You can spend it and, you know, buy a — I don’t know. What do rich people buy? A fancy car or something? So, you can do that, or you can save it and invest it. And so if you have plenty of money in the bank, then it’s probably a good idea to invest your excess savings in some things.
Travis [00:01:09] My wife and I, we’re maxing our retirement accounts. So when you have maxed your retirement account, the next thing you need to do is put money into non-retirement accounts. Which means that you have to go out somewhere and literally set up an investment account that you are in charge of. Or you hire somebody to tell you to invest with them, and they’re going to be the ones that are going to be setting that up. And you’re going to have to manually make that decision to do that. And then you’re going to have to set up a recurring transfer, if that’s the way you want to do it.
Travis [00:01:37] Alternatively, you might just put a bunch of money in the bank and realize, “Oh shoot, I got $100,000 in here” — I’m talking to my redneck voice here — “I’ve got $100,000 in the bank, and I guess I better put it to work.” So, that’s kind of like my, you know, some of my extended family members. They just wait until they have a randomly large amount of money in the bank, and they realize that they need to invest it after the market’s already gone up a bunch, which is not the way you want to invest.
Travis [00:01:58] So the premise is, why is supposedly the website design of Vanguard, I think, costing Americans a lot in savings? Here’s why. It is extremely difficult — and I hope somebody is listening to this podcast from Vanguard. That would be great. Again, I love you guys. [It’s] not critical. I’m just trying to make a point.
Travis [00:02:15] On their website, it’s so difficult to increase your automatic contributions. You have to go to “my accounts,” and then you have to click on “account maintenance.” And then you have to click on this random tab, [which is] kind of almost hidden in the bottom right-hand corner. It’s called “automatic investment.” Then you can only do that for their mutual funds, so you can’t use ETF easily for automatic investments. And so the setup is so clunky.
Travis [00:02:38] What does this really do? This is why it’s fun to have such a large sample size of people that we’ve helped because we really see some interesting data. High-income professionals — especially ones employed at places like hospitals — they have great benefits. They’re so good at maxing retirement accounts, by and large. Like, everybody gets the idea that you’re supposed to put a lot of money away for retirement, and so they’ll put 10% in there. And if you’re making $200,000 grand, you’re going to hit that $19,000 cap.
Travis [00:03:02] What’s interesting is those very same people, they might be doing backdoor Roth IRAs. They might be putting a ton of money away in their retirement accounts. But they just don’t know that there’s this thing called investment accounts that they can set up and have big automatic transfers, just like they transfer it out of their paycheck.
Travis [00:03:17] And that’s the reality, is things that are easy are very doable and always happen. OK? So, for example, the way that United Way got super popular was because they were one of the first organizations that figured out deducting money from employees’ paychecks to give to charity. Honestly, they just made giving to charity simple. That’s why they got famous as a charitable organization, not because they were a great organization — maybe they are — but just because they made something positive very easy to do.
Travis [00:03:45] So if I want to increase my automatic contribution with my Vanguard mutual funds, it’s difficult. The website design is — again, it looks like it’s something out of the mid-2000s.
Travis [00:03:54] But why is Vanguard the best option for do-it-yourself investors? It’s because their fees are the lowest. So they are the cheapest. And in reality, if you have the internal motivation to put money away for your future and realize that when you’re spending an extra $2,000 a month on investments, you’re buying back a couple of years’ worth of your life — or maybe up to five years’ worth of your life — that you can spend doing whatever you want.
Travis [00:04:17] Because they’re the cheapest, that’s why I use them. Because I know that any money I pay extra in fees to an investment company I’m reducing my long-term returns, in a lot of cases by a lot. So, because I’m focused on my internal motivation behind saving and investing, that’s how I get over that hump.
Travis [00:04:33] But for most people, it’s not that easy because you have other things going on. And you’re not, you know, in love with investing and managing your money because you like doing medicine or dentistry or [the law] or business or whatever it is that you’re doing. Physical therapy. There’s a lot of different options, and we’ve got a wide variety of listeners. I better say veterinary medicine. Hopefully, you know, if you have any hate mail, feel free to send it to me — Podcast@StudentLoanPlanner.com.
Why people use robo-advisers instead of companies like Vanguard
Travis [00:04:56] But how are other places doing this? How are other places preventing people from saving money because they make it too hard? So think about robo-advisers. I love robo-advisers. This is Betterment and Wealthfront. So we have a referral link. You know, you can go to StudentLoanPlanner.com slash Betterment. Better like “better” and m-e-n-t. if you go there, you’ll get a little bit of time managed for free, basically, if you go through our referral link.
Travis [00:05:20] So, why would you use something like a robo-adviser instead of something like Vanguard? The main reason I can think of is convenience — because they have a good website, and they make it a little easier to save more money automatically.
Travis [00:05:31] And that’s — if you get nothing else out of this, today’s episode, it’s a little bit of a random episode. But I wanted to do it because there is this field of behavioral economics and just inertia and just things being too complicated that prevents you from making good decisions. And that’s what I wanted to tackle in today’s episode, is how to make good decisions by making things very simple.
Travis [00:05:48] OK, so with the robo-advisers, they make things simple. So the key is to not care about what they’re investing in and just giving them money automatically. I know that sounds kind of crazy, but that’s the right thing to do, is literally just increase your automatic contribution as much as you can. I tell people all the time, “Start off with $100 a month because they have no minimums.” So, there’s no reason why you shouldn’t open an account today with $100 a month. I think Vanguard requires, like, $3,000 to open a mutual fund.
Travis [00:06:15] So, if you have absolutely no money, I want you to develop that habit of putting recurring $100-a-month transfers away into some sort of investment account that’s not your retirement account. And the reason is — if you are trying to listen to the radio, OK? You’re in the car. Everybody puts on the radio sometimes in traffic just to see what’s on, right? If you want to turn up the volume because your favorite song came on and you don’t know where the button is or the dial is to turn the volume up, how are you going to turn it up? You’re not going to know.
Why developing the habit of investing is important
Travis [00:06:41] Same thing is true for investments. If you don’t develop that habit at an early age — putting money in on a recurring basis — then by the time you develop that habit and realize you should do that, you have $200,000 in the bank. You know, $400,000 of student loans. Very little in retirement and very little in investments. And you’re just wondering what the heck is going on and what happened with your, you know, the past 15 years of your professional life.
Travis [00:07:01] So that’s what we’re trying to avoid by making things simple and encouraging you to invest more. You know, I think that a lot of times things can be very, very simple, and you just have to have that internal motivation to make them as simple as possible. That’s why — And again, I have to tell you this legally: You have to consult your own fiduciary, licensed financial adviser before you make an investment decision. Right?
Travis [00:07:22] So that disclaimer out of the way, when somebody asks me — like, a friend or family member — what kind of investment approach that I would recommend, keep it super easy. Take VTSAX, which is the U.S. stock market, and then VTIAX, which is the international stock market. Those are two Vanguard mutual funds that cost almost nothing to own them, like 0.05%, I think — or less even. They’re almost free to own, so there’s almost no management fees. And then split your stock money up between the two of those 50-50. And then for the bond part, you just want to take your age minus 20, and that’s the percentage you want in bonds. And then the other percentage you want in stock.
Travis [00:08:00] So, for example, a 30-year-old could want — 30 minus 20 equals 10 — so 10% in bonds, 90% in stocks. A 50-year-old would want 70% in stocks and 30% in bonds. You could also replace bonds with cash if you want to. It’s not super critical, just needs to be in something very conservative.
Travis [00:08:20] And then sometimes instead of VBTLX — total bond market index fund — You know, if somebody is in a 40-something- percent tax bracket, then I recommend municipal bonds, which are tax-free. Do you have the discipline, though, to put that money away automatically, and are you going to keep doing that?
Travis [00:08:36] So, for example, if you go into — and this is any financial institution — but, you know, Vanguard’s site, the robo-advisers, especially, like, brokerages that make a lot of money on commissions, options — Don’t even get me started on, like, options brokerages. They make things super complicated.
Travis [00:08:49] So, that’s a great way to make a lot of profits. Just know that a lot of times, people try to make things really, really complicated when it’s not that complicated, and they do so for reasons of profit.
Travis [00:09:00] Perhaps we’re guilty of this sometimes when maybe some people could just manage it on their own. But I do think that student loans are very, very complicated, especially when you know everything there is to know about it.
How a “nudge” works in finances
Travis [00:09:12] Managing investments and doing well in investments — particularly, like, outperforming the market is extremely difficult — but saving a lot in investments and having a high net worth is actually relatively easy. And it’s easy if you make it simple because there’s this thing called a nudge.
Travis [00:09:28] So, this is a good kind of topic of the week to think about. A nudge is this term that was basically invented, if you will, by Richard Thaler, who won the Nobel Prize from it. And it’s basically a behavioral finance strategy for getting people to do something that’s good for them by making it really, really simple.
Travis [00:09:46] For example, you might have heard of a target retirement date fund. That is an example of a nudge, and that kind of idea came about because of Dr. Thaler’s research. So that idea is, OK, in retirement accounts, you offer 20 different options, and if you offer 20 different options, most people just put a bunch of money in all of them and have a really bad investment allocation. Or it paralyzes them from having so many choices, so they do nothing.
Travis [00:10:11] So, another way that you can see this is in the supermarket. When you have a bazillion different choices, you’re going to choose to consume less. So, for example, I think they did a taste test, and they offered different numbers of choices. And people consume the most when they had, you know, two or three options or something like that. It’s a little overwhelming sometimes, the decisions that we have to make in our lives — which is why something like having a high savings rate, which is so important, can be made so much better if you make things simple.
How student loans could be more simple to deal with
Travis [00:10:38] Just as an aside, how could you make things simple for student loans if you were a policymaker? Well, you probably would want to make automatic income-driven repayment enrollment for people, so you’d have to opt out of paying based on your income instead of having to opt in.
Travis [00:10:55] So that’s an example of a nudge, and that’s kind of what we see a lot of these problems with sins of omission, of people not signing up for the right income-based plan. Right? Or they don’t send in their income paperwork, and all of a sudden, their interest capitalizes. Oh gosh, do I get a lot of emails about that. You know, “Screw those people at the loan servicer. They capitalized my interest!” Sorry, I guess all my angry voices are redneck today for whatever reason.
Travis [00:11:16] But, you know, “Oh, they capitalized my interest because, you know, I forgot to send in my paperwork.” You know, sometimes people are kind of — They know that they messed up. But regardless, like, why should you have to do that? Like, why shouldn’t it be automatic? Why would — Why do you have to actively do something when it should be kind of sought out for you?
Travis [00:11:33] So, for example, like, there was just an announcement that President Trump is automatically forgiving all student loan debt for disabled veterans. And they’re searching a database at the VA (U.S. Department of Veterans Affairs) to find the veteran who has 100% disabled rating. And then they’re using that to cross-reference against the Department of Education data to see if they have student debt, and if they are, they’re automatically being forgiven.
Travis [00:11:53] Now prior to that, only about 20% of veterans were getting their debt forgiven if they were 100% disabled, and that’s because there was an application that they had to fill out. Right? You had to fill out the application. And it took a lot of time, and it was kind of confusing. And so people didn’t do it. And so that’s a sin of omission.
Travis [00:12:10] For example, going back to the name for today’s episode — like, Vanguard’s website costing people billions: So, if Vanguard simplified their website, made it easier to save and invest more; if whenever you logged on you, were encouraged to just save a higher percentage of your pay into the total U.S. and international stock markets, that would be a wonderful thing because America would be billions of dollars richer because of it.
Travis [00:12:34] But instead, we have the system where, you know, I’m not saying that they’re doing this on purpose, but the website is complicated — and other people’s websites are not great either, necessarily. I don’t want to pick just on them. And because of that, people are like, “What do I do? Like, how do I invest?”
Travis [00:12:49] More people pitch you options trading and things like that on TV instead of explaining why you should just have a high savings rate. Like, E-Trade and, like, all the dancing baby commercials or talking baby commercials, instead of just making it clear that they’ll make it really convenient for you to save and invest more, you know, the pitch is, you know, we have the best commissions. Like, we have the best prices. And to be honest, I think it would be in people’s best interest if you just made it super easy. That’s certainly what we find with so few people having brokerage accounts, even people with higher incomes.
What financial sins of omission might you be committing right now
Travis [00:13:22] So, what other sins of omission are you committing right now? So, if you are not saving enough money, then you are committing a sin of omission. You are not doing something that you need to do for your future. Most of us are not going to have pensions. A lot of us that are counting on — A lot of us know that [we] probably shouldn’t be counting on Social Security because they’re paying out way more in future benefits than they’re going to receive in payroll taxes, unless they really raise the payroll taxes or cut benefits or both. Right? Because Americans — [the] number of kids [that] we’re having per person is going down.
Travis [00:13:56] And so naturally, you’re going to have fewer people paying into the system. And so, you know, older people are going to have a harder time getting income if you have fewer people paying into the system.
Travis [00:14:06] So, a lot of us are committing these sins of omission where we’re not preparing and saving enough for our future. So, you know, your kind of man on the street who makes $40,000 or $50,000 a year can kind of get away with having all their savings be in their home because Social Security is going to replace a much, much higher percentage of his earnings than those of you listening who are making more money than that. You know? And if you’re obviously married, then that would apply to a higher-earning spouse if you’re married and have that spouse making a higher income.
Travis [00:14:34] Maybe you’re in a lower-earning profession. We see that often. Right? Like, a teacher married to a dentist or physician married to a social worker or something like that. A lot of times, people that commit sins of omission do so because of scary things that happen around them.
How the economy shifting pushed people to start investing
Travis [00:14:48] I’ll give you an example. How many of us were investing in 2008? Not a lot of people. Not a lot of us, at least, were investing in 2008. Or if we were investing — you know, I was investing in 2008, but I was investing my lawn-mowing money. My first stock I bought I invested, like, $300 that I’d saved mowing my granddad’s lawn. You know? I mean, that was not a lot of money to lose if it went down 50%.
Travis [00:15:12] And so in 2008, I remember there were retirees coming in droves to the university I was at to listen to any business school professor that would talk about what was going on. My mentor and professor that I was a teaching assistant for at the time, he went to give a talk at a men’s Bible study, and the pastor there told him [there would] probably be like 20, 30 people there. And this is the middle of, like, the Lehman Brothers situation. And instead of 30 people, he walks in the church expecting to sit down and just kind of talk casually about the economy, and there’s a thousand people staring back at him freaking out about the markets crashing.
Travis [00:15:46] Then those people probably get afraid to contribute money for their future, and then they sit around and don’t do anything. And they missed out on one of the greatest stock market booms in history if they did that.
Why automatic financial plans are so important
Travis [00:15:58] So that’s why automated plans are important. That’s why when we’re doing a student loan plan for somebody, I want it set up in such a way where you can think about your student loans once a year instead of constantly. So that’s one kind of thing: If you’re thinking about your student loans constantly where you’re losing sleep over it at night, you definitely need our help because that’s something that should never be happening.
Travis [00:16:19] I get nervous about my taxes. I think about my taxes, but I do so generally about once a year. So that’s what we should have for you, is something straightforward enough where you’re worried about it, you know, once a year, and you don’t have to stress about doing something every day. That’s a bad decision.
Travis [00:16:33] You want — Again, you want things to be simple. You want to avoid committing a sin of omission and doing something that’s really good for you by making it really easy and simple. Sounds like a simple concept, but it’s actually a lot more profound than that.
Travis [00:16:44] So, the reason why I know that whenever companies — like, really good companies like Vanguard — make things hard and cost people money by having their savings rates be lower, I know that this is a problem because — let me confess to you for a second — I do this myself. I get really worried sometimes when the market is high, and I feel like, “Oh, shoot, if I put a lot of money in, then maybe it’ll drop.” I mean, I’m human. I’m subject to emotions. It’s important to realize that we all have those emotions.
Travis [00:17:14] And so sometimes, I will wait to put my cash to work in my brokerage account. Maybe it’s just because I have other things to do. Maybe I’m visiting my parents or going on a vacation, and I forgot to invest it and forgot to keep that recurring plan. Or maybe I’m just thinking about market timing.
Travis [00:17:29] So that’s an example of — if I’m doing that sometimes, somebody who is not in finance definitely needs to be doing that, where they have an automatic recurring monthly contribution.
How to avoid having complexity cost you money
Travis [00:17:38] So, a perfect set-up to avoid having complexity cost you a lot of money is max your retirement accounts. Take $19,000 a year, which is the maximum for 401(k)s and 403(b)s and divide it by the number of paychecks you get a year. That’s what you want to make sure you’re putting aside every paycheck.
Travis [00:17:55] For your non-retirement accounts, select one of these companies that we talk about on the podcast all the time and just set it up where you’re doing $100 a month initially. And then once you have six months’ expenses in the bank and you don’t have any other big financial goals, take leftover money and increase it automatically where you’re putting in at least, you know, a significant amount of money every month. And then you can always decrease it or increase it if your income goes up or down.
Travis [00:18:19] You know, I think that for financial services companies — In general, when you’re thinking about what kind of companies to work with, you either want to go with one that is really low cost and does a very good job for what you pay — because it’s the cheapest. Because you have the internal motivation to learn how to do it all yourself, and you just want a little bit of extra service to do something very basic.
Travis [00:18:40] So, for example, if you have $5,000 a month you want to put into mutual fund accounts, you don’t care if the website is really lousy. You just want to make sure it costs as little as possible because you already have that internal motivation.
How schools convince people to borrow so much money
Travis [00:18:52] It’s kind of interesting the way this stuff works. Because with degrees — I mean, I’m going to be kind of honest for a second — you know, a lot of degrees kind of market that they’re so different, when in fact they’re just commodities. So if you’re listening to this before you borrow, I always tell people go to the cheapest in-state school you possibly can. Because ideally, I would like everybody to be able to make enough money to pay back their debt and for the math to make sense to pay back their debt.
Travis [00:19:16] I mean, I don’t think forgiveness feels good, which is why we have so many people call us freaking out. You know? I mean, refinancing and paying your loan debt off — You know, if you’re on our email list, I sent this video out of this woman who paid off $220,000 grand, and she was dancing in, like, this weird, glowing spandex suit. Like, people don’t do that for putting money away in mutual funds. I sure wish they did, though.
Travis [00:19:36] Getting back to this idea about degrees: One of the things, I think, that tricks us into borrowing so much money for student loans is because schools kind of tell us about the difference. Right? The fill-in-the-blank difference. The university-of-so-and-so difference.
Travis [00:19:50] And what they’re trying to do is basically take a commodity and try to convince you that it’s this brand. And people pay more for brands because of marketing and perceived value. So, for something like ibuprofen, we buy the cheapest one. It’s the same freaking thing, right? It doesn’t get any more generic than pharmaceuticals.
Travis [00:20:07] You know, if you’re going to go with some other ideas or other options — I mean, there’s all kinds of examples of this, where a commodity is you [want to] either buy the cheapest one, or you want to buy the one that’s the highest convenience. Maybe if your school is super convenient, then maybe it’s worth a higher price.
Travis [00:20:22] But let me give you an example. What do you call a dentist who graduated from the College of — Dental College of Georgia versus one that graduated from NYU (New York University) dental? They’re both called doctor. And the main difference is $300,000 to $400,000 of extra debt for the one [who] went to NYU.
Travis [00:20:38] That’s just kind of an example of being careful. Making things simple. Like, don’t overthink things and don’t over-assign value to things. If you’re thinking about financial services companies of where you should get the best help versus the cheapest help, you want to get convenient help at a fair price. Or you want to just get something. And it’s a commodity at the cheapest price. So, like, index funds, you want to buy the cheapest index fund because that’s what matters, is low cost.
Travis [00:21:03] Now alternatively, if something’s really convenient you know you might pay up a little bit for the convenience factor. So, for example, if you were going to put your money with some place that makes it really easy to save, then I think that that’s OK to pay out for. So, as much as I hate it when people pay a lot of extra money for financial products, like financial advice or disability insurance or, holy cow, life insurance — man, do I have a lot of people that are paying way too much for that.
Travis [00:21:28] The reality is, if you would not have done it otherwise, then that convenience factor of those people that hunted you down and made you do it, marketed to you and got you to actually buy the thing that you probably needed to buy, that was a good thing, even if you’re paying too much.
Examples of people unable to handle so many financial options
Travis [00:21:42] I want you to think about right now, what are you not doing in your life right now that you should be doing that you’re not doing financially? So, here’s a couple of the most common examples of people dealing with the complexity of a billion different options and not going with any of them.
Travis [00:22:00] The first is to put at least 5% into your retirement accounts and eventually maximize it. OK? So, that’s 5% of retirement. And then the second thing is recurring non-retirement investing. So again, StudenLoanPlanner.com slash Betterment. Or Vanguard. Or something else. I don’t care. But set up something where you’re putting $100 a month into a non-retirement account and 5% of your pay into a retirement account. And then before that, you want to have no bad debt and [have] an emergency fund. OK?
Travis [00:22:25] Those are some, just [practical] examples from today’s podcast that you could apply if you’re not already doing those things. Because if you’re not doing those things long term, you are hurting yourself. And hopefully, you can help people make things really simple with their finances by just sharing [with] people that — Pay off your bad debt. Start your retirement accounts. Contribute something that’s not retirement accounts. And then with your student loans, figure out if it’s a tax or if it’s a debt. If it’s a tax, you’re going for forgiveness, and you’d rather pay 10% on your income on your loans rather than paying it off with a huge required monthly payment.
Travis [00:22:59] So, here’s just kind of a tip of my — what I’m thinking about Student Loan Planner, you know, in terms of whether or not I want it to be the cheapest or the highest quality or whatever. You know, I want us to be the highest quality convenient option for a fair price to get student loan help. Don’t necessarily want us to be the cheapest.
Travis [00:23:14] Part of the reason for that is, do you want the cheapest ophthalmologist doing your eye procedure? Probably not, if it’s important enough. And boy, oh boy, is your financial life important. And it is really, really easy to mess this stuff up. So, if you would not trust the cheapest ophthalmologist messing around with your eyes, why would you let a financial person who has no idea what they’re doing with your student loans make big decisions in your financial life? That’s kind of my thought about Student Loan Planner.
Travis [00:23:40] You know, if you’re suffering from not taking key actions in your life financially that you know you need to take, then you probably need somebody to make it easy. And so, if you’re not going to have this magic solution where somebody is presenting you with the easy button, whether just automatically signing up for income-driven repayment and it’s just one option and it’s very easy to do — If that’s not the case, then, you know, you probably need some help to figure out the different complexities that are out there and figure out how to boil them down and make it simpler.
Is taking time off from Public Service Loan Forgiveness OK?
Travis [00:24:10] Today we have one little bonus question for you in today’s episode. Remember about StudentLoanPlanner.com slash voicemail. You can leave a recording with your question. And we’re going to record one today — or we give you one today from Jillian.
Voicemail: Jillian [00:24:23]Hi, Travis and team. I’m a physical therapist in the San Francisco Bay Area. I’m making about $100,000 per year. I have $220,000 in student loan debt. I am about a quarter of the way through Public Service Loan Forgiveness. My husband and I just had our first child, and we plan on having about one or two more. Day care runs about $1,800 per month, per kid here.
Voicemail: Jillian [00:24:49]That being said, I think I’d like to take about five years off of working full time to care for my kid and my future kids. That would probably be in one to two years, once future kids are here, and I should have four to five years of Public Service Loan Forgiveness under my belt. My husband is able to support the family on his paycheck, and we have about $60,000 in savings right now. We do have a mortgage, but our cars are paid in full. I know my time off will not count towards Public Service Loan Forgiveness.
Voicemail: Jillian [00:25:18]So, my question is, is this a really bad idea? I know I’m not going to regret taking time off to raise my kids, but I just — I fear losing Public Service Loan Forgiveness (PSLF) or just really extending the life of my loans and paying way too much extra. My husband and I file taxes separately, so will my payments be zero if I’m not working? Or do I need to go into forbearance or deferment, if that’s even an option?
Voicemail: Jillian [00:25:44]I’ve already scheduled a consult with Rob, so I know my more specific questions can be answered. But I’m hoping that this question can help some other folks here.
Travis [00:25:54] So, that is a great question because, you know, what happens if life comes at you and derails your plans? And then all of a sudden, something that you are kind of planning on doing — which is PSLF in Jillian’s case — is something that you suddenly feel like you can’t do? Or, you know, there is this huge monkey wrench thrown into the plan?
Travis [00:26:11] For Jillian, you know, kind of to keep with the theme here, she has a Centerville mission going on, which is that you don’t actually need to worry about having basically periods of time counting towards PSLF that are not linked. And here’s kind of why.
Travis [00:26:30] So, the worst -case scenario is you’ll be paying extra payments that are not counting, but the total cost will still be a lot less if you pursue PSLF. And just for example, if you’re doing married filing separately and doing Pay As You Earn, if you just keep that payment going for the full period while you’re off or while you’re not working rather — or you’re real working in the home versus out of the home in any kind of paid market — if you just keep the payments going, you will just have, at the worst, just payments that didn’t count towards PSLF and just a little bit longer loan life. Right?
Travis [00:26:59] So here’s an example of this: Let’s say that — Jillian’s number was about $100,000 of income, $200,000 of loans, give or take. If she’s single, that’s a payment of like $600 or $700 a month under something like Pay As You Earn after deductions. And then let’s say — let’s say Jillian’s husband makes about the same income, about $100,000. She’s filing separately, then her payment is $700 a month, give or take.
Travis [00:27:20] And then if she stops working completely — let’s say she’s lives in New York for a second. Then that would be a non-community property state, which means that they would have to pay a ton of taxes to file taxes married filing separately. So in that case, you could just file taxes jointly.
Travis [00:27:38] And what you could do is you get three years’ worth of forbearance on your loans in total. So, she could certainly use, of the five years she wants to take off, she could maybe use up all three years of forbearance during that period and let the loan grow to avoid making payments of $700 a month.
Travis [00:27:53] Then for the last two years of those five years of her kind of in-between period raising kids, she could just file taxes jointly and do $700 a month in payments. And then just know that, you know, your total cost is going to be way cheaper than if she actually paid it back.
Travis [00:28:08] Now, if she lives in a community property state like California, here’s kind of what would happen. So with filing taxes separately, that equalizes your income in community property states. So, for example, if she’s making $100,000 and let’s say her spouse is making $80,000, then that’s $180,000 of total income. And [in a] community property state, you divide that income by two on each person’s tax return. So, $90,000 and $90,000.
Travis [00:28:33] But what if she stops working completely? Suddenly, you’re going to have an income of — if you’ve split it equally, you would take half of the income, of the household income. So that’s, you know — $80k divided by two, that’s $40k each. So, that would make it a little cheaper honestly to just give them your tax returns and do Pay As You Earn and pay, like, $200 or $300 a month during this period of taking time off, and it would be totally defensible.
How alternative documentation of income works
Travis [00:28:54] Now, the way around that is something called alternative documentation of income. This is kind of a really gray area. There’s not really been in any determinations as to what’s OK and what’s not OK with this. But from our interpretation — our interpretation is basically that if you believe that your income is not [an] accurate reflection on your tax return of your true income — Right? So, in other words, your tax return income doesn’t really mean that’s your true income — if you believe that and you’re going to testify to that, then you can use quote unquote alternative documentation of income, which is basically a bunch of list of things, including saying, like, “I don’t have an income right now.”
Travis [00:29:28] And if you equalize your income on your tax return, that eliminates most of the filing separately penalty. And then if you’re submitting pay stubs or lack of pay stubs to get a $0-a-month payment, you could even avoid doing forbearance during this time and literally pay $0 a month.
Why it’s important to not let student loans dictate your life
Travis [00:29:42] So, that’s a very, very complicated case, but it’s a perfect illustration of why that you should never let your loans dictate what you’re doing with your life. You should always make your life be set up first and then have your loans match your life — and not the other way around.
Travis [00:29:59] That’s kind of a classic case where — to make it simple, to try to boil that down to a simple answer — if Jillian just focuses on having a high savings rate and the worst, worst-case scenario if she filed taxes jointly, she would pay a few hundred a month. And is that price worth staying home with your kids? Sure it is. I mean, if that’s what’s important to her.
Travis [00:30:18] Now, she can obviously also have to counter her lost income and what the net is after deducting for day care and those kinds of things. But that’s a complicated situation, so I just want to make things as simple as possible and just say that the — Like, if I’m trying to bake that question into the theme of the podcast — keeping things simple as they can be.
Travis [00:30:36] I mean, if it’s complicated, it’s complicated. And then just not taking an action that you know you want to take. So, I guess for lack of a better word, a sin of omission in Jillian’s case would have been if she really wanted to be not working and staying home with her kids, and she didn’t do that because of her loans.
Travis [00:30:51] So, that would be being overwhelmed by complexity and having a lot of different options that you could choose from preventing you from being able to navigate a choice and make a choice because you’re paralyzed with all these different options, and then you just don’t do anything. And that’s not good for anybody.
Travis [00:31:05] So, a couple last little things for you today: Really had a good episode. I just wanted to kind of talk about this because I thought it was just a really interesting idea when I was trying to put my money away in Vanguard and just realized, “Man, this is hard. You know, this is really hard to set up this automatic contribution, and if this is hard for me, it’s really hard [for] everybody else.”
Travis [00:31:22] And how many customers does Vanguard have? Millions. And so that means that millions of people are saving less money because it’s so hard to get to the automatic investment button to have Vanguard pull the money out of my bank account every month. You just have to focus on making things simple and taking behavior out of it. If you do that in your financial life, it’s going to pay off big time.
Travis [00:31:43] So, if you have questions like Jillian, I want to hear them. Basically, just visit — Type in your browser StudentLoanPlanner.com forward slash voicemail, and you can record something 30 seconds, a minute, minute and a half, whatever. Just tell us details about your situation, and we’ll feature you on the air. More importantly I think, you’re going to help somebody who’s going through something that you’re probably going through.
Refinancing rates are lower than they’ve been in a long time
Travis [00:32:05] A couple other points: Refinancing rates right now are the lowest I’ve maybe ever seen for rates 10, 15 and 20 years. So, the fact that you can get a rate lower than 5% in a lot of cases is just absolutely unbelievable for a 20-year term. I mean, I’ve never seen that before that I can remember. Maybe one other time, rates got below that level. Maybe, like, back in, I think, 2016 or something, when I started doing this. But it’s been a long time.
Travis [00:32:32] So, if you need to refinance, check out StudentLoanPlanner.com forward slash refi — r-e-f-i. And I can confidently say now that we have the best cash-back bonuses anywhere on the internet. Our collection of lenders, now that we also have — CommonBond and Earnest are the two that a lot of people use. Laurel Road people use. LendKey. I don’t want to mention all of them. But also even SoFi now is available through Credible, so we — Our lenders’ cash-back bonuses — we basically have cash-back bonuses that cover, like, 95% of the refinancing market.
Travis [00:33:03] And so, to kind of eat some of my own medicine, we have, like, seven lenders, I think, now on our table. Maybe that’s too many. Maybe I should only put, like, three or four up so that you’d be forced into making a decision. And maybe that’s preventing some of you from taking the action to cut your interest rate and stop paying the government an extra 2% every year on interest for no reason.
Travis [00:33:22] So, if that’s causing you to not save money on your student loans, man, maybe I need to do another episode called, you know, Student Loan Planner costs people millions of student — in student loan interest by making it too difficult to refinance your loans on the site.
Travis [00:33:33] But just know that if you ever do refinance your loans through our links, you’ve got to, got to, got to make sure you use a brand new email address that’s never been used to apply before after clicking that button, which is what tracks you for that cash-back bonus.
Travis [00:33:46] So, we do have sometimes people that are like, “Where’s my $500 bucks?” Generally, that’s because you opened an account to apply with them already. You know, they don’t give double credit out for who referred somebody for a loan. So, the way around that, just go to our links and click on that link and just put in a new email address, just to make sure that you got tracked correctly, and then you’ll get those cash-back bonuses and, more importantly, lower interest rate.
Travis [00:34:07] And that might not apply to you, obviously, if you need to go for forgiveness. Please make the decision based on math. That’s certainly what we do for our clients.
Why you should book a student loan consultation now
Travis [00:34:15] Personal note, too: I’m going to be taking a little bit of less consulting work in the future. Starting around the end of September, I’m going to be pulling back a lot, in terms of the amount of consulting work that I’m going to do. So, if you listen to this, definitely book in September because it’s going to fill up, and there’s not going to be any space, I predict, probably by the first week of September.
Travis [00:34:33] But the reason for that is I want to open up opportunities to promote some of our really amazing consultants. Rob — Jillian mentioned in that question — and then also Lauren and Justin, who are just absolutely crushing it right now and are changing so many lives. And I want to make it so that we can scale this thing better, which means that I need time for content creation, like doing this podcast. And if I’m going to do that, then I need to hire more consultants and people that are going to be able to help you.
Travis [00:34:55] And we’re going to always tend to pair the most experienced consultants with the highest debt burdens, too, because these things are really complicated. People with smaller debts — that’s a little bit easier, so there’s not as much that you can mess up. But man, oh man, $600,000 of student loan debt — there’s like six ways from Sunday that you can screw that up. And believe me, we’ve seen a lot of them.
Why you should apply for the Student Loan Planner scholarship
Travis [00:35:13] So, the last thing that I’ve got to say is the scholarship. So, the scholarship for Student Loan Planner closes September the 30th. We’re giving away over $7,000, I think, this year — like, 15 scholarships. We only have, like, six or seven applications right now, which is, like, crazy. But I guess I’m recording this near the end of August, so people procrastinate until the last second. So, it makes sense.
Travis [00:35:35] So, if you are literally any profession, we probably have a category for you to apply. So to apply, just to go to StudentLoanPlanner.com forward slash scholarship. [There are] all kinds of giveaways, like the investment course and a consult with me and then cash money, which never hurts.
Travis [00:35:50] And we’re also giving all that money out of our own pocket instead of taking on advertisers, just so we can — I kind of like the idea of feeling the pain a little bit with you on the student loan thing. It’s a really freaking big struggle. I just want to help every way that we can.
Travis [00:36:03] And so, thank you so much for what you’ve done for us, in growing our business and trusting us with your financial future and refinancing through our links and telling your friends about the show and leaving reviews on iTunes. That’s kind of our way of giving back to our community, is to give, you know, a percentage of our revenues back to the community.
Travis [00:36:19] Go visit that StudentLoanPlanner.com slash scholarship link. And thanks so much for the show, and I hope you had a wonderful Labor Day weekend.