Don't Sweat Your Debt
Six-figure student loans? With some smart planning, you can rest easy.
By Jerry Hayes, OD, and Kristin K. Anderson, OD
YOU'RE GETTING YOUR career started and contemplating how to repay a six-figure student loan. It feels great when the money begins to roll in, but you know it will take years to get out from under your debt. Does this mean you should keep living like a poor student, or dash off a quick check each month and put it out of your mind? The answer is somewhere in between.
Debt Isn't All Bad
A global recession kicked off by, among other things, myriad lending issues and high levels of debt, has gone a long way toward making “debt” an offensive four-letter word. People have always had an urge to “get out from under” their debt, and that's never been more true than it is today, when debt has come to represent irresponsibility.
In today's economic environment, this piece of advice may sound strange: Embrace your debt.
You didn't run up your credit cards in a 4-year spending spree. You borrowed money to invest in your career. There is a big difference between incurring debt to spend money on things that lose their value (clothes, cars, vacations) and incurring debt to pay for investments that will gain value (an education, a house, an optometric practice).
Your student loan allowed you to prepare for a high-paying career. It's the reason you can now practice optometry. Just think of it as part of doing business — an investment in your practice just like any other. And it's a good deal. In return for your large monetary investment, you're getting a lucrative career that will make that debt smaller and smaller every year.
Look at the Figures
You can probably cite the numbers for your student loans as easily as you can rattle off your Social Security number. To get an idea of the numbers that are out there, let's take a look at the typical student debt at Southern College of Optometry.
The average debt for members of the class of 2010 is $121,852 ($3,981 less than 2009). The typical interest rate for these loans is 6.8%, with a duration ranging from 10 to 25 years. Graduates at the low end of that duration, 10 years, at the average debt and interest rate have a monthly payment of $1,392.
So, let's say you're starting your first position with a loan bill of $1,392 per month, and you have to relocate from school to the new job locale and get a new apartment and probably some nice work clothes — at the very least. This will put a strain on the wallet, but you can do it.
Start by making your debt manageable. Talk to a counselor about loan consolidation and choosing the best loan duration to fit your practice goals. For example, if you want to purchase or open a practice, then you want to keep the payments low enough that they won't prevent you from doing so.
You need some flexibility for your career, as well as for your personal life. In a few years, your expenses for an apartment and work clothes could easily balloon into paying for a wedding, a house and a baby.
Create a Budget
Just as the economy has made “debt” sound bad, it has made “budget” sound good. We won't argue with that.
A budget isn't a financial cage keeping you from the movies and mall. It's a way to make sure you get the things you want. Perhaps you'd like to buy a practice or upgrade your practice with new equipment. Maybe you want to buy a house or send your kids to private school. You'll need money for that. A budget puts all of your major financial considerations onto a single radar screen, so you can enjoy life and know that everything is covered. You're taking care of business and you're ready for whatever comes along.
A financial advisor is a great option but if you prefer to work on your own, find some financial planning books or software to help you create a realistic budget. Here are some guidelines to help ensure that your transition from spending loans to repaying them is a smooth one:
■ A good budget is a reality check, not a wish list. Optimism is great in many areas of life — but not in budgeting. You want to budget for the worst-case scenario, not for what you hope will happen. That way, you won't get in a bind if something goes wrong, and you'll get a pleasant surprise if things go better than expected.
One key to keeping things realistic: After taxes and lifestyle costs, you may have less money than you think. When you're in school eating ramen noodles, $100,000 sounds like more money than anybody could ever need, and that may be true in a sense. However, after taxes, you have about $80,000. Once you plug that into a budget and subtract all of your expenses, including your student loan payments, you may find that the occasional bowl of ramen noodles isn't such a bad idea.
■ You'll sit more comfortably on a cushion. It's tempting to spend the money that's left over after bills, but that forces you to live paycheck to paycheck, killing your flexibility. Budget to save at least 10% of your take-home pay (20% is better) until you've amassed the equivalent of 6 months to 1 year's income. Keep this money where you can access it — not just for unexpected emergencies, but also for business and personal opportunities that may arise.
■ Debt repayment is only one of your objectives. Even with your bills covered and a cushion gradually growing, your budget isn't done. The best financial scenario is to work hard, secure a high income, save money and create long-term wealth. Use your budget to get in the habit of putting money away in retirement investment accounts, such as IRAs.
■ A budget is only as good as you are. Once you've made a budget, stick to it. It sounds simple, but everyone is fighting the temptation to spend money on everything from cars to restaurants, and the current economic situation tells us that they're not doing a very good job. No one wants to live like a student forever, and you don't have to — but live within your means, live like someone with a moderate income.
Also, resist the temptation to put less money toward your cushion or your investments to pay off your debt. At some point, you may have $100,000 in the bank and $75,000 in outstanding debt, and paying off your loans may seem like a good idea. Just keep in mind that you can afford your student loans — but you can't afford to put off saving and creating wealth.
|Typical Student Debt at SCO|
|■ Average debt: Class of 2010: $121,852 ($3,981 less than 2009)|
■ Typical interest rate: 6.8%
■ Length of loans: 10-25 years
■ Payment based on 10 years at the current average debt: $1,392
Join the Crowd
When it comes to the financial stresses of starting a career and repaying debt, new graduates have a distinct advantage over, say, the class of 2005. Why? Because you're not alone. The “return to financial responsibility” is here. The common attitude today is that living outside your means is foolish. Budgeting is smart. You'll find support and advice in every magazine, blog and TV show.
You're in good company, following a set of fiscal values that has become prized. Plus, you're in an admirable position, because you're part of a high-paying profession with an excellent future. Just follow your budget, and these years of debt will fly by faster than you think. nOD
||Dr. Hayes, owner of Red Tray Optical (http://community.redtraysaves.com), writes the Business Advisor column for Optometric Management.|
Dr. Anderson is Vice President for Institutional Advancement at Southern College of Optometry, Memphis, Tenn.
|Schools Are There to Help — Even Long After Graduation|
|When we were students, there was no financial aid counseling. We were on our own. Now schools are doing an excellent job of helping students plan, understand and repay their loans.|
Southern College of Optometry (SCO) sends students a consistent message about debt management starting before they attend and continuing post-graduation. Its methods are working. For 13 years straight, the school has had zero defaults on student loans, which means students are working and repaying loans as scheduled. Here's how SCO does it:
■ Plan ahead before school. Financial aid officers begin talking to prospective students about their budgets before they even enter the program. They also point students to an online debt calculator to help them compare the costs of various optometry schools. The calculator also lets them compare other costs, including their projected debt based on whether they have a roommate or not. (The difference over 4 years is about $30,000!)
■ Start students off smart. SCO gives all students entering school a projected debt analysis that shows how much debt they're likely to incur and how they will repay it. In addition, each September, a budgeting workshop for entering students helps them make a positive start with borrowing, budgeting and spending. The financial aid officers want to put all the facts in front of students to put them on the right track from the start. Students learn how to avoid the common mistakes that they can make with their money, as well as how to keep borrowing and spending low to reduce their payments later.
■ Follow through for 4 years. Each year, the financial aid office speaks with students concerning their loan needs and helps them file for appropriate loan assistance. Many times, the staff can show students how to reduce their loan debt through budgeting and other programs like work-study.
Students also receive a loan summary report of the loans they have borrowed so far in the program periodically throughout their schooling. No one gets a big surprise at the exit interview. A financial aid newsletter also reiterates the impact of budgeting, borrowing and spending, including everyday examples of how spending a little loan money today costs students a lot more in the future, once interest is factored.
■ Support graduates long after graduation. Before students graduate, the financial aid officers meet with them individually concerning their total debt, repayment options and monthly payments. Loan consolidation is a hot topic during these meetings, too. After graduation, the school encourages alumni to seek advice from the college when they need it until their loans are paid in full.