On this Ask Tim & Tim episode of the Your Financial Pharmacist Podcast, we take two YFP community member questions about student loans. We discuss strategies for managing student loans during residency and how soon to refinance or consolidate student loans after graduation.
If you have a question you would like to have featured on the show, shoot us an e-mail at [email protected]
Mentioned on the Show
- YFP Episode 014: Turning Student Debt Frustration Into Action (Debt Free Theme Hour w/ Derek Schwartz, PharmD)
- Interested in learning more about becoming a beta tester for the YFP Student Loan Online Course? Sign up at https://yourfinancialpharmacist.com/studentloans
- YFP Episode 018 – Maximizing the Benefits of the Public Service Loan Forgiveness (PSFL)
- YFP Episode 026 – Baby Stepping Your Financial Plan – The 2 Things to Focus On First
- YFP Episode 029 – Refinancing Student Loans – Part 1
- YFP Episode 030 – Refinancing Student Loans – Part 2
Episode Transcript
Tim Ulbrich: Hey, what’s up everybody? Welcome to Episode 042 of Your Financial Pharmacist podcast. We’re excited to be doing two back-to-back “Ask Tim & Tim” episodes. And between this week and next week’s episode, we’re going to be featuring four listener questions: two this week about student loans and two next week about investing. As a reminder, if you have a question that you want to have featured on the show, shoot us an email at [email protected] and as a small thank you, we’re going to give you a super comfy YFP T-shirt. So Tim Baker, before we jump in to talk about student loans and get to these two questions, which are two really good questions, we need to share some awesome news with the YFP community. Last night, Derek Schwartz, if you remember our guest from Episode 014, 2014 graduate from ONU, Ohio Northern University, currently works with the Kroger Company in Cincinnati — last week, he made his final student loan payment. Three years, four months, paid off $192,000. So just an incredible story.
Tim Baker: Incredible.
Tim Ulbrich: And I still remember that episode and how fun that was.
Tim Baker: Yeah, it’s incredible. It’s amazing what you can do in a short amount of time. You know, I think for a lot of our listeners and a lot of clients I work with, they look at that six figures worth of debt, and they think it’s unsurmountable. And you know, this is another great example of someone that’s putting in the work and elbow grease to get through it. So kudos to Derek. Yeah, I’m just interested to see where he goes from here.
Tim Ulbrich: Yeah, Derek, congratulations. We’re obviously pumped for you, we appreciate you coming on the show and what you did in Episode 014, and we’re excited to see what you do with this lifestyle post-student loan debt. And I’m sure the YFP community’s going to be following that journey as well, so thanks for sharing that good news with us. So Tim Baker, we are here again obviously talking student loans. We’ve talked about this many times on the podcast. But I think it highlights we know how how important this topic is for our listeners that are struggling, obviously, with unprecedented amounts of student loans that they’re coming out with upon graduation. And I think this is a good chance — we’ve highlighted, mentioned, a couple times that, hey, we have a student loan course that’s going to be coming early this summer. And we’re actually getting ready to launch that course with a small group of about 50 beta testers. And for those of you that are interested in learning more about that course, potentially becoming a beta tester, you can head on over to yourfinancialpharmacist.com/studentloans. And Tim, do you just want to give them kind of a quick sneak peek preview into exactly what they’re going to get from that course?
Tim Baker: Yeah, I think the idea behind the course is to really answer a lot of these questions that we get about student loans, so I think there’s a lot of just such haziness about how to even take the first bit of the apple. So really what we’re going to talk about in this course is how do you inventory and just get a proper picture of what you owe and then really how do you assess all the strategies, whether it’s a forgiveness strategy and the PSLF program or maybe a non-PSLF forgiveness strategy, and then really how to optimize that. So when you walk away from the course, the idea is for you to know very precisely ‘This is my student loan strategy. I can walk confidently with it.’ And you know, kind of go down the road of a Derek Schwartz or not. You know, if your move is forgiveness and just be confident in that approach.
Tim Ulbrich: Yeah, we’re super excited about this. It’s been a labor of love with me, you and Tim Church has really taken a lead on a lot of this. And he’s just crushed it. And what I love about the course is I think what we’re hearing from the community members is that there’s so much uncertainty, there’s so much confusion, there’s so much stress around these student loans; ‘I don’t know what to do, I feel like I’m somewhat paralyzed.’ And I think what we’re going to be able to provide in this course is walking away with clarity of, ‘This is the repayment plan, strategy, the best option for your personal situation.’ So again, if you want to learn more what it means to become a beta tester, head on over to yourfinancialpharmacist.com/studentloans, and we’ll get some more information into your hands. Alright, let’s jump into our first listener question that comes from Bethany in Greenville, North Carolina.
Bethany: Hey, Tim and Tim. This is Bethany from Greenville, North Carolina. I had a question about consolidating and refinancing my student loans. How soon after graduation can I do this? And is there a limit to how many times I can refinance? Thanks.
Tim Ulbrich: Alright, thank you, Bethany, for taking the time to submit your question. We appreciate it. It’s a good one. Lots of people wondering about refinancing and consolidation. And obviously, I think your question’s specifically when to do it and is there a time limit to do it is certainly a good one that many others are probably wondering as well. Before we jump into answering, let me just reference listeners back to Episodes 029 and 030, where we talk about refinancing student loans in a lot of detail. And we’re going to hit some of the key points here in addition to answering Bethany’s question directly. So Tim Baker, I guess probably first since she mentioned both refinancing and consolidation, give us the quick breakdown of the difference between those two.
Tim Baker: Yeah, it’s a great question. And sometimes these are used synonymously, and that’s a misconception. I think the difference, you know, so define consolidation. Basically, when you consolidate your loans, you are taking two or more of your federal loans, and you’re making them one. And what happens is is that the loan that is consolidated takes the weighted average of your interest rate. So the example that I give is if you have $100,000 at 5% and then you have another $100,000 at 7%, when you consolidate those two loans into one, you’ll have $200,000 at 6%. So it just takes the weight. So it doesn’t really help you in terms of like you know, getting a better term or better interest rate. Most people do this for convenience sake, or even more importantly than that, they’ll consolidate their loans, so say like a Stafford loan to open up some of these income-driven plans. The income-driven plans would be things like pay-as-you-earn, revised pay-as-you-earn, ICR and IBR. Refinance, on the other side of this, is really when you go out into the marketplace, and you work with companies like SoFi or Earnest or CommonBond or LendKey, so these are some of the private student loan companies that we like. And you go out, and you submit your income and your credit, and they basically come back and say, ‘OK, right now, you’re paying 6%. If you refinance down to a five-year plan or a ten-year plan, we can get you down to 5% or whatever.’ So you’re basically going out into the marketplace to get a better rate. Now, the big thing with this to be aware of is that you are moving from the federal, the rec loans, to the private sector, which is important to know. But those are really the big difference. Consolidation is more of a convenience play/opening up more of the federal repayment plans, the income-driven ones. Refinance is where you’re throwing up the deuces to the federal system and saying, ‘Hey, I’m going to take a look at the private side and see what I can get there.’
Tim Ulbrich: Yeah, and I know Bethany’s question directly being how soon after graduation can I refinance is a good one because I know it seems like students, residents, new practitioners are more aware of refinance options, I think because of the higher interest rates that are out there on some of the federal loans right now, but also probably these companies doing a little bit better job on the marketing side of things as well. So what exactly are the requirements? I mean, how soon can somebody refinance after graduation? And I’m guessing there’s a technical answer to that question, but then maybe there’s also the reality of them being able to qualify for a loan.
Tim Baker: Yeah, so dependent on what strategy you choose — and again, we talked about the two overarching strategies that are out there are forgiveness and the basically nonforgiveness — dependent upon what you choose, is going to really define your timeline. So as an example, if you are looking at the PSLF, and you have a variety of loans, which most borrowers, most clients that I work will have a plethora of loans out there, you’re going to want to consolidate and get your loans into a loan that can get into one of the income-driven repayment plans and start paying or go into repayment as quickly as possible because the idea is to pay, you know, your 120 payments over those 10 years as quickly as possible. So once you graduate and you’re in the grace period, you want to look to get into the active repayment as quickly as possible. Refinance, on the other side, so this is typically where you’re not looking at the public student loan forgiveness program or any forgiveness program. Refinance is probably going to happen a little bit after that because what these private loan companies are going to want to see is income — so obviously, if you are — they want to see a history of income and maybe a history of repayment, so they want to see maybe a couple months of you actively repaying your loan in the federal system for you to get the best rate. Some of these refi companies will honor things like grace periods and that type of thing. But typically in the private refinance, you’re going to have a little bit more of a runway than you would if you’re going through consolidation and public student loan forgiveness.
Tim Ulbrich: Yeah, so I think technically the answer is yes, you can apply as soon as you want after graduation or if somebody’s in residency, but the caveat being it may be difficult to qualify because ultimately, they’re going to want to see probably a track record of payments being made. And also as you think about getting a competitive interest rate, obviously that’s in part determined based on a debt-to-income ratio. So unless there’s a situation where maybe somebody’s coming out as a student, and they have a spouse who aren’t working or a higher income-earning spouse and they can qualify, yes, you can apply, but ultimately, it may be difficult to get those loans over time. What about the limit? Is there any limit to how many times somebody can refinance?
Tim Baker: There isn’t. And, you know, there are some clients that I’ve worked with that have kind of hacked this a little bit. So they will either go out to each of the refi companies that we like and do a deal that way, or you can refi again and then refi again and then refi again all of your loans. So there’s really no limit to that. It will affect your credit score, you know, if you continuously refi because you’re basically doing a hard check on your credit when you go through the refinance program, but there really is no limit. And it’s kind of the same thing if you think about people that are homeowners out there. You can refi your home as many times as you want. Now, you’re going to be paying closing costs and things that aren’t necessarily present in the student loan refi arena, but the idea here is there are companies out there that understand that we have I think $1.3 trillion in student loan debt out there, and there’s interest payments to be had, so they’re going to compete, even actually offer those cash bonuses, so it’s nice for the consumer to be able to look at the landscape and say, ‘OK. Let me choose the best rate available and maybe get a bonus as I’m doing it.’
Tim Ulbrich: So you can hack the system Tim Church-style, right? And do a multiple refinance?
Tim Baker: Exactly.
Tim Ulbrich: I think he probably knows the rates to a T, the most competitive rate that’s out there, he’s got it nailed.
Tim Baker: He’s a machine.
Tim Ulbrich: He is a machine. And I think that’s the play is like, obviously, you want to consider the impact on credit. Just getting rate quotes will not impact your credit, but obviously, going through the process and ultimately refinancing with a company will impact your credit, so I think that’s a good point to be made. But ultimately, you can do it multiple times. Obviously, these companies do offer cash bonuses, so you want to weigh the benefits of that. And obviously, for some people, depending on maybe you were in residency and you decided to refi or shortly after school and your debt-to-income ratio didn’t look great — fast forward two years, rates may have changed, debt-to-income ratio looks difference, obviously, you’re a more competitive applicant in that process. I think it’s also worth here maybe for a minute just talking about what some of our community members may see in a refi is ultimately, these companies will typically throw in front of you a fixed interest rate, which doesn’t change for the life of the loan. So let’s say that’s 3%, 3.5%, 4%, whatever. That’s 4% for the time period that you’ve agreed upon: five years, seven years, 10 years. Or you’ll see a variable rate and actually even some hybrid rates that are out there now. And a variable rate meaning that can change during the life of the loan. So what advice do you have for people in terms of thinking about is a fixed rate the better play? Is a variable rate? What are some of those factors that should be considered?
Tim Baker: I think the big thing is basically the time horizon of the loan. So obviously, the longer that goes out — seven, 10, 15, 20 years — the more risk that you have, you know, interest rate risk. We are in a rising interest rate environment, meaning interest rates are probably going to go up since I guess the Great Recession, we’ve been stuck in lower interest rates, and they’re now finally starting to climb, which is good for savers, but not necessarily great for borrowers. So I think when you’re weighing the variable versus the fixed interest rate, obviously fixed, the information that you have there is known, so you know exactly what you’re going to pay over the course of the term. The variable interest rate, it might be tied to some type of index that will be adjusted annually to some type of index. If it is, it’s a three- or five-year or whatever, if you know that you can pay them off confidently, you might go for the variable just to kind of as that short-term play because you know you’re going to pay them off, so someone like a Derek Schwartz out there. If it’s going to be longer term, to me, if I was counseling a client, I would meet that with a little bit of pause, knowing that probably the rates are going to go through the roof. So it’s one of those things where you take a risk of getting a better interest rate in the near term, but you know, those particular rates could be jacked up, especially if the time horizon of the loan goes out further. So, you know, it’s not necessarily a bad thing to do, but you mentioned the hybrid loan. So the hybrid rates are kind of where you — if people understand what an adjustable rate mortgage is and arm, you basically, it’ll be fixed, the rate will be fixed for a set period of time and then it will adjust annually after that. So that’s another little bit of a hybrid model that will give you some fixed interest and then variable. So you could look at that particular solution to get a lower rate as well.
Tim Ulbrich: Yeah, absolutely. I agree on your input on the variable rate and evaluating that against the fixed. Other things I would throw out there would be looking at what’s your emergency fund situation? Know you have some extra cash if needed. What’s your appetite for that payment potentially changing? Do you have wiggle room or not in your budget? So if you look at your budget right now, and you’re looking at a fixed rate and that payment and say, ‘I’ve really got no room to squeeze out an additional,’ then obviously, that variable rate could be tricky. The other thing I would say is do the math. And we’ve got a great calculator if you go to yourfinancialpharmacist.com/refinance, that’s our page where we have all of our resources associate with refinance on there. You can run the math. So do the math and see, OK, best case scenario, the low end of the variable rate, if this were to stay as is — which to your point, in a short repayment period may be a good play — how much would I be saving against a fixed rate? And is that potential savings worth some of the unknown in the variables that you mentioned?
Tim Baker: Yeah, and I think looking at that dollar sign, you’re basically saying is $10,000 or x amount, is that worth the risk of, you know — and I think to quantify that in some regard can be very powerful.
Tim Ulbrich: So one of the things I want to end on here is if you go to our page, again yourfinancialpharmacist.com/refinance, we’ve got lots of educational resources that will help you out. But there’s some things that we fundamentally believe you should look for in a refinance company. And the good news is as these have become more popular, I think we’re seeing a lot more consistency in the market amongst some of these big players — SoFi, Earnest, CommonBond, LendKey, etc. The things that were looking at are, there should be no origination fee. So in fact, many companies are actually going to give you a cash bonus. But at minimum, you shouldn’t be paying anything to get this loan started. No. 2 is there should be no prepayment penalty. So if you take on a 10-year refi, and you want to get this done in five or seven because you got some extra cash or some additional money, you want to get it done faster, you should have the ability to do that without any penalties for making extra payments. Many of these companies are also going to offer you a lower interest rate with autopay. So if you can do that, of course take advantage of it. And one of the ones we’re always trying to hit home and we think is really important that you evaluate is ensuring that it has protection and a forgiveness clause in the event of a death or long-term disability. So if you only have federal loans, that protection is there for you. If you refinance with a private company, that can be dependent upon the company. And so you want to make sure 1, does the company offer that protection that those loans would be forgiven in the event of a death or permanent disability. And if not, do you have the insurance protection in place, whether that be from a life insurance policy, a disability insurance policy, to cover that in the event that it would occur? And then obviously, you’re going to see some nuances and differences between these companies about types of repayment options that they’ll give you. But ultimately, again, on that page yourfinancialpharmacist.com/refinance, you’ll see all of that information, you’ll see a guide that we have available, and we have links there where you can also click out and get some quotes with companies in a very short period of time. And we’ve got some really competitive cash bonus offers if refinance is the right play for you.
Tim Ulbrich: Alright, let’s take a quick break and hear a minute from our sponsor, and then we’re going to jump into the second listener question focused on student loans.
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Tim Ulbrich: OK, let’s jump into our second listener question, which comes from Nate in Ohio.
Nate: Hey, Tim and Tim, this is Nate from Akron, Ohio. My question is, what is the best way for me to start managing my student loan debt during residency? And early in the career, what is the most appropriate balance as far as investing and managing student loan? I appreciate any input you have. Thank you.
Tim Ulbrich: Nate, thank you so much for taking the time to submit your question. We appreciate you’ve got a good one, actually two questions here around the best way to start managing student loan debt during residency, a question we get a lot, and the second question, which might be the most common question we get: What’s the most appropriate balance as far as investing and managing student loan debt? So your first one, what’s the best way to start managing student loan debt during residency. I think it’s a great question. You look at the average resident salary out there, obviously dependent upon geographic location, somewhere between $40,000 and $50,000. But we have an average indebtedness now of graduates of about $160,000. So that’s a common thought, and a question that comes out is can I afford residency training? Obviously, what are the financial implications of that? And if I’m in residency training, what do I do about these student loans? So Tim Baker, as you hear that question, obviously you work with a lot of clients that are residents as well. What are you thinking in terms of strategies around paying off student loans during residency training?
Tim Baker: I mean, I think it follows — and I think Nate, this would be a good chance to maybe look at the beta group test for the student loan course — I think that the very first thing, whether you’re a resident or not, is really to look at the inventory. And I break this down in terms of an inventory of what you actually owe and who you owe it to and then also kind of an inventory of your feelings toward those loans. So a lot of people, you know, unless we ask ourselves the questions, how do you feel about these student loans? If it’s like, ‘I feel OK about them, I know they’re going to be around for awhile,’ versus ‘Tim, I can’t sleep at night. I get anxiety.’ And these are things clients tell me about their loans, that’s really going to dictate, I think, how you approach them. I think in residency, the beautiful thing about residency, especially dependent on the approach you take in terms of your strategy, whether that’s, again, the forgiveness play or the non-forgiveness play, is that you can do some damage in residency for both strategies. So to me, the best way to start is to do the inventory. And basically what dictates that is going to be really two things. It’s going to be your NSLDS, basically your report, which basically is an inventory of all your federal loans, and then also your credit report, which is going to basically outline all of your private loans. So I think once you kind of inventory your thoughts and feelings toward the loans and then actually the amount you owe and the interest rate you’re paying, I think that is going to be the first basically jumpoff point to kind of begin the process of saying, ‘OK, how do I begin to, you know, peel this thing back and figure out the best way forward?’
Tim Ulbrich: So once you do your inventory of your loans and you assess your feelings, to me, the question then becomes, are you pursuing Public Service Loan Forgiveness or not?
Tim Baker: Yes.
Tim Ulbrich: And I think that’s a critical question. Nate, your question around residency — what we know about residency training and pharmacy is that about 90 percent of all residencies are in a hospital, health system setting. And of the hospital health systems that are out there, about 80 percent are considered not for-profit institutions, which obviously would be qualifying organizations for residency. So Tim, why is that question of PSLF or no PSLF so important when you think about strategies of attacking student loans or not in residency?
Tim Baker: Yeah, and I think again, one of the things that is not necessarily, you know, completely laid out in front of you is the information about your forthcoming career. And what I mean by that is, you know, if you do a residency, and you work for a 501c3 nonprofit, which is basically what qualifies an institution to be part of the PSLF program, you’re not necessarily sure that you’re going to be, you know, if you’re a PGY1, if you’re going to be nine years in the public service or a PGY2, if you have another eight years in public service. But if you’re pretty confident that you are going to be in the public student loan forgiveness program, and you’re going to be in one of those 501c3, you should start basically your repayment as soon as possible because the way that your repayment is calculated is going to be based on the previous year’s income. So if you’re a PGY1, how much did you make in your P4 year? Probably not much. So that means your payment is going to be close to zero, but you still get qualified payments toward your 10 years. And the same thing when you are a PGY2, it’s going to look back at your PGY1 year and basically look at your income. And your payments are going to increase, but not in terms of what you would normally make as a pharmacist. So there are ways to really optimize your situation to get through really the first third of the PSLF program if you’re in a two-year residency program and you’re working for a nonprofit. So that’s super to note because I think the default in the federal system is if you have a grace period or a deferment period or whatever it is, most people take it because they think it’s in their best interest. Like, ‘Oh, the government is offering this.’ It’s the same thing with some of these repayment plans, which a lot of these federal repayment plans are actually garbage. And that’s one of the things that we talk about in the course is we give you a little bit of shortcut of the ones to look for. But just because the government says, ‘Hey, you know, take these grace periods or these deferment periods,’ doesn’t mean that you should. It’s not necessarily in your best interest. And on the flip side of this, if you look at it from a non-forgiveness play, you know, if you’re a resident, you’re probably not going to want to go into the private refinance sector because it’s going to look at basically your principal and your interest rate, and you might not be able to afford those payments, especially if you’re looking at an average indebtedness of $160,000. That payment’s going to be in the $1,800 range in a standard 10-year plan. So for residents making $40,000 or $50,000, it’s probably not going to be the best move. So, you know, this is kind of where you have a bridge strategy where you’re looking at the income-driven, you know, similar to what you would do in the forgiveness strategy where you would just do an income-driven plan and then when you have more information, you can either pivot and, you know, stay in the federal system or pivot out and refinance at that higher income level.
Tim Ulbrich: Yeah, just to reiterate what you said early on in that response is remember that just because you’re in deferment — or even if you’re making an income-driven plan, depending on that calculation — it’s likely that your loan balance is growing. And I cannot emphasize enough to not just react to the payment that’s put in front of you without thinking about what your overall strategy is. So what do I mean here is obviously, many if not all of your pharmacy student loans are unsubsidized, accruing interest while you’re in school, through any grace periods. But then even if you go into an income-driven repayment plan, because of what Tim mentioned and how they’re looking back into your P4 year to calculate that payment, that payment — depending on your total debt load — probably isn’t going to even cover the interest that’s accruing each month. So I think to the point that was made, if you’re not pursuing Public Service Loan Forgiveness, what can you do to try to at least keep that total balance at bay so when you get out of residency, you can then really start to attack those loans without that loan balance growing during residency training. So I’ve personally seen way too many situations — and obviously, some of them are not preventable because of whatever variables — but too many situations of somebody graduating at $180,000, $190,000, finishing two years of residency, and all of a sudden, that balance is $210,000 or $220,000 because it’s grown over that two-year period.
Tim Baker: And I, you know, have a story with a client I’m working with. She had about I think $75,000 in debt. And that’s what she thought she had. But over the course of all these deferments and periods that she’s taken advantage of, you know, air quotes “taken advantage of,” you know, when I actually did the inventory for her, it was upwards of like $90,000, $95,000. And she was shocked because she’s like, ‘Well I only thought I had $70,000.’ The problem is that the interest has grown, and then kind of a gut punch on top of that is when she basically goes into repayment, now that $95,000, that interest that was capitalized is now going to be interest on top of interest. And that’s kind of a difficult thing to swallow, especially for some people that they look back at their situation and they say, ‘Oh man, I probably could have paid down some of that interest. Or I could have been more mindful of my loans when I was in this period of flux.’ So yeah, super important to be aware of and not just to take kind of the programs or the different status of your loans as they go through, don’t take those just at face value.
Tim Ulbrich: So for those of you that are listening that are either current students or residents or those that may qualify or think you qualify potentially for PSLF, if you’re looking to learn more, Episode 018, we talk about maximizing the benefits of the Public Service Loan Forgiveness program, so we’ll link to that in the show notes. Tim, what are you hearing on the latest and greatest with PSLF? It seems like it’s actually been somewhat quiet for awhile and then there was news that came out last week about some action as people are actually starting to seek that forgiveness.
Tim Baker: Yeah, so the latest news is that was put out is that Congress has authorized or basically earmarked $350 million to borrowers out there that thought they were enrolled, properly enrolled in the PSLF program but then were probably, that were actually in the wrong repayment system. So it’s kind of a two-step process to get into the PSLF program. So this is encouraging, I think, to me because as much as the Department of Education has fumbled this whole program since it was initiated in the Bush administration back in 2007, this is one of the first I think steps where you actually see money set aside, and this sounds like it’s oops money for that, you know, subset of people that raised their hand and said, ‘Hey, I want to be in the PSLF program,’ and thought that they were in it but just didn’t do the, I guess the logistic step properly where they needed to move from a standard or an extended standard into an income-driven plan. So to me, it’s somewhat encouraging. And some of the chatter that I’ve seen is that the $350 million might not be enough, and I guess it depends on who actually that $350 is for, but we’re starting to hear more chatter about people that are actually being forgiven. So the stats that I heard was that 13,000 people applied for forgiveness since you could in October of 2017, only 1,000 was expected to actually be forgiven or be qualified because of some of these errors in the program. So that’s a 7.7% rate, which to me that means that we’re failing in terms of this program. But it sounds like this particular earmark spending will capture some of those people that thought they were in the proper repayment plan but weren’t. So that’s good news.
Tim Ulbrich: Yeah, and one of the things that gets me so fired up about the course that we’re working on is that we really spend a lot of time and detail helping those going through it decide is PSLF the right move or not. If so, what’s a strategy to maximize this? And then really getting into the nitty-gritty of what are the numbers? What do the numbers look like? And if I’m going to assume this risk, what’s the potential upside? So again, those that might be interested in learning more, helping us with beta testing, yourfinancialpharmacist.com/studentloans. So Tim, the million-dollar question, which is Nate’s second half of his question, what’s the most appropriate balance as far as investing and managing student loan debt? And here, obviously it’s also in the context of residency. So what are the factors that somebody needs to consider knowing this answer is highly dependent upon the individual in terms of how might I balance student loan debt versus investing for the future?
Tim Baker: It’s such a great question. I think it’s one of the questions that we get asked the most. And you know, the stock answer that I give is it depends, which is kind of the worst answer to a question ever. And I think one of the things that, you know, in Episode 026, we talk about baby stepping into your financial plan, the two things to focus on first. And really, the two things that I focus on when I look at a client’s financial picture is what does their consumer debt look like, so credit card debt, and what’s their emergency fund. So the student loan piece is a completely different animal, and I think dependent on the strategy that you take I think is going to dictate when you get into the investment world. And there’s lot of different opinions out there of when to invest and when not to invest and how do you do that with student loans. So some of the factors that I would look at in terms of should I be investing or not is what does your debt situation look like. So if you have credit card debt, which a lot of pharmacists will take on credit card debt as they go through school, I see that more and more, if you have credit card debt, go ahead and fold up your investment policy statement, your investment plan and stick that in your back pocket until that is completely paid off. I think the other thing that we have to be mindful of is just what is your attitude towards the student loan debt. So if your attitude is, ‘Man, I need to get out from underneath this as quickly as possible,’ or if you take kind of a Dave Ramsey approach to debt, and you think that most debt outside of the mortgage debt is bad, then you probably are not going to want to invest anytime soon. The other thing is just like interest rates. So if you’re fortunate enough to have loans that your interest rates are super, super, super low, and you’re kind of, ‘Eh, I can deal with the debt,’ then maybe wading into the waters of investing is more important. And I guess I say this all in the context of, you know, also your employer, what they offer in terms of retirement. You’re probably, nine times out of 10 — and this isn’t investment advice — but nine times out of 10, you’re going to want to probably at least put into your 401k or your 403b what your employer is matching because that’s basically a 100% return on your money. So if they match 4%, you probably want to put 4% of income in there. And that’s typically a general rule of thumb. Some other things to be aware of is — I’m trying to think. So one of the stories that I recently saw too is that — I don’t know if you saw this, Tim — is about 20% of students are using parts of their student loan money to buy bitcoin.
Tim Ulbrich: Yes, oh gosh.
Tim Baker: I would probably say that this is not a smart thing to do.
Tim Ulbrich: The crypto lovers are going to send us hate mail, by the way.
Tim Baker: Yeah, so. But yeah, if you were a client of mine, I would probably advise against that. Not because I don’t like cryptocurrency. I think that there is some longevity there, but I don’t think it’s necessarily looked at as a good investment in terms of using money that you’re 6 or 7% on to then put that there.
Tim Ulbrich: I think what all the things you’re saying is why the answer is depends. And to me, this is why it gets me fired up a little bit when a debate’s going on within a Facebook group or something about this topic because for everyone, the answer is different. I mean, there’s so many factors you just outlined: interest rates, philosophy or feelings toward debt, you know, in terms of what options, do I have a match, do I not have a match. Other ones I’m thinking about are what’s your horizon and timeline for saving? So if you’re a nontraditional student, and maybe you’re coming out, starting your career at 40, this answer might be different than somebody who’s graduating at 24. Are you pursuing loan forgiveness or not? If you’re going Tim Church-style, and you’re throwing massive student loan payments on a short period of say a five-year refi, and you can get your rate down to 3.5 or even less, that might differ than if you’re not doing that. So so many variables that come into play, and I think this also speaks to me the power of working with a really good planner that can help ask all these questions and help determine the answers to these. And we didn’t even talk about I guess your tolerance toward risk as being another one here.
Tim Baker: Yeah.
Tim Ulbrich: You know, and it can really help you wade through, you and/or a significant other to come up with a definitive answer to this question, to come up with a plan that can help you work through this and can feel confident in that plan going forward.
Tim Baker: And I think one thing that you kind of, that maybe we didn’t hit on completely is — and I think we’re seeing this now — is if I look at my student loans, and I’m paying 6%, but then I look at what the market has done over the last year, and I’m like, well, it’s up whatever, 15%. You know, isn’t it a no-brainer just to basically pay the least amount on my loans and then go into the market and get my 15%? And it’s not necessarily — I guess the rebuttal of that is it could easily be down 15%, the market could be down 15% next year. So it is a cyclical thing, and you know, right now, people are saying invest because it’s a no-brainer. But then, you know, if we go through kind of another dip in the market, that’s not necessarily a no-brainer. So the no-brainer in terms of what are the facts that I know is that if you pay off — your loans, they’re going to charge you like clockwork 6% every year. So that’s a given. But when you go into the investment market, you do take risks. So you’re not necessarily going to get that elevated return that you think you’re going to get. So although you can make a case that over the long-term, the market is going to take care of you, and it’s going to return 10%, that is true. If you’re looking at your student loans, that’s not necessarily a no-brainer that you’re going to get the return that you’re looking at in terms of the market.
Tim Ulbrich: And I think where this debate gets a little bit interesting is with some of the refi rates we’re seeing out there with people that are getting, that have top credit, that have a really good income-to-debt ratio and that are willing to pay it off in a really aggressive period, you’re getting rates down that low. Still, it depends, is the answer. But obviously, that becomes a little bit different discussion depending on their personal situation. ‘
Tim Baker: But usually if you get rates that low, it means that your $1,800 payment is now — what does Tim Church pay? $3,800 or $4,800? So there’s probably not a lot of money left over to actually go into the market and invest.
Tim Ulbrich: Great point.
Tim Baker: I think his thought, and I think we see this with a lot of millionaire pharmacists that we’ve interviewed is, you know, if you can train yourself to have the behavior to make massive payments towards your debt, you probably can do the same thing towards your investments. So any of that opportunity cost or any of that lost time that you invested, you can probably make up fairly quickly. And again, it just depends on your situation, your appetite for risk and all that. So it’s definitely a murky picture.
Tim Ulbrich: Yeah, don’t forget your timeline, right? So if you’re going to knock these out in three years, that’s a much different situation than if you’re waiting to invest because you’re going to pay them off over 10. So obviously that timeline and compound interest and time that could be lost is a critical factor as well. So Tim, great stuff as always. Thank you again to Nate and Bethany for submitting a question to be featured on this “Ask Tim & Tim” episode of the podcast. And as a small thank you, we’re going to be sending them a super comfy YFP T-shirt. And again, if you have a question you’d like to have featured on the show, make sure you shoot us an email at [email protected]. And we hope you’ll join us again next week as we feature two questions on investing.
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