Are Insanely Large Student Loans Worth It?

large student loans

Are Insanely Large Student Loans Worth It?

Grant Sabatier

Founder of Millennial Money. Dubbed "The Millennial Millionaire" by CNBC, Grant went from $2.26 to over $1 million in 5 years, reaching financial independence at age 30. He's passionate about helping others build wealth and is addicted to Personal Capital.

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MM Note: This is a guest post from Travis, who is an expert at helping people refinance student loans. He’s the real deal. I asked him to share his experience working with clients who have insanely large student loans. I asked him a simple question – When are student loans worth it? Enjoy.

 

We have a crisis on our hands with the cost of grad school. I’m a student loan consultant, and I’ve personally consulted on over $44 million in student debt over the past four months since launching my business. I’ve worked with enough clients in different professions to see how the major professional occupations stack up relative to the cost of the education.

 

So the big question: Are student loans worth it?

 

The economics of professional grad school programs today come in three forms: the manageable, the burdensome, and the potentially future wrecking. My categorization is based on my own experience, and I hope it’s a wake-up call.

 

1.The first category puts you in a manageable amount of student debt that you have a hope to repay over a 10-year period.

 

2. The second category burdens you with so much debt that you probably would’ve been better off financially just getting an undergrad business degree and going to work.

 

3. The third category has the serious possibility of wrecking your financial future and probably should come with the equivalent of the ‘smoking kills’ warning label along with the admission letter.

 

I’m going to rank these popular jobs from the best to worst for ease of paying back student debt.

 

First: The Manageable

 

The Manageable category covers professions that graduate with debt to income ratios below 2 in most cases. While repaying the debt is still a little tough for this category, it’s imminently doable.

 

Pharmacists

 

In my view, there are few professions capable of such rapid debt repayment as pharmacists. My typical pharmacist client leaves school with about $150,000 of loans and has a solid $110,000 to $130,000 salary.

That means if they work at a private sector employer, pharmacists can easily refinance their debt to a lower interest rate with a private lender. If they work at a not for profit employer, pharmacists can track their progress toward the Public Service Loan Forgiveness (PSLF) program and pay a fraction of the cost of their education.

Unfortunately, pharmacists tend to make a lot of mistakes with their loan repayment strategy. Many either pay the loans back on the government’s artificially high-interest rates or they don’t use the PSLF program while working at a not for profit. Either way, pharmacists have attractive options for paying back debt if they manage their loans well.

 

Physician’s Assistants

 

This group benefits from a very short training period for a high-value skill in high demand. The PA’s I’ve worked with allowed the initial $125,000-$150,000 loans they borrowed as of graduation grow because of smaller income based payments. Since many PA’s start out making solid $70,000-$90,000 salaries, they can start repaying their debt while their friends from their undergrad cohort are still in school. Most Physician’s assistants would do well to refinance their debt and knock it out quick. In terms of ability to service their educational debt, Physician’s Assistants have it much better off than most.

 

MBA Grads

 

This ranking does not mean that all MBA’s are solid investments. I put the MBA degree in this spot because most of the debt is very manageable compared to other programs. The folks I’ve worked with tend to have $70,000 to $100,000 in debt and high middle manager level salaries of $80,000 to $90,000.

Could MBA grads have gotten to that level of the business world without an advanced degree? In many cases, the answer is yes. However, at least graduate business programs care about real world stats like starting salaries for students. People that go to business school in the first place want to make more money and are investing in their ability to earn more. Since most programs are two years, there is less time to build up a massive amount of debt. Hence, MBA’s have a reasonably easy time repaying their loans. They just refinance their debt to a lower interest rate with a private company and pay it back as fast as possible.

 

Second: The Burdensome

 

There is a lot of variability in this category, and the occupations here represent the former pinnacle of the economic ladder of the middle class. Some folks that get degrees to practice these professions do fine and earn a lot of money. Some have a terrible time and are saddled with more debt than they know what to do with. This group likely has a debt to income ratio between 2 to 4 once they are a couple years out of school making ‘real money.’

 

Physicians

 

Placing physicians in this spot is really challenging because there’s huge variability. I also help dozens of physicians get set up on the PSLF program, on which they’ll pay 20% to 40% of the true amount they borrowed. The ones who go into private practice frequently have high enough incomes as attending doctors to repay all their debt in under five years. So I imagine this would be the most controversial placement. I’ve seen many physicians far better off than the best off pharmacists and I’ve seen some in terrible shape.

The issue is that you have a 3-year to 10-year training period after med school where you’re earning $50,000 to $70,000 as a resident or fellow. During that time the loans accrue interest, and many of the doctors I work with start out with over $300,000 in debt once they start paying everything down. For a private practice dermatologist, this is no big deal. For a primary care physician in private practice who mismanaged their loans during residency, this is a crushing burden. Also in the absence of the PSLF program, many physicians would have a very difficult time paying back their loans. Since PSLF’s days are probably numbered with the new Republican government, I think this categorization is the right one.

 

Lawyers

 

As with physicians, you’ll find examples of top law school grads who leave school with $200,000 in loans but get a $170,000 associate job at a Big Law firm and power through the debt. However, that’s not the norm. The typical lawyer I see went to a top 100 program and has about $200,000 in law school debt, though I’ve seen debt loads far higher than this.

Most of my lawyer clients work at a small to mid-sized practice making $60,000 to $80,000 a year, although I do have several working in Big Law just looking for help with shopping for a refinancing deal. Sadly, I’ve also seen the reality of the job market in the legal field first hand, with many bright folks stuck in jobs they could’ve gotten with their undergrad degree because of job market saturation. So if you want a lifestyle without significant financial stress, don’t become a lawyer unless you go to a low-cost regional school or a top 20 school with the near certainty that you’ll have the grades to get a Big Law job.

 

Dentists

 

Dentistry used to be a path to financial stability. Now it’s a path to entrepreneurship or bust. What I mean by that is that the typical dentist client I work with has about $400,000 in dental school loans. Contrast that to their typical starting salary of $120,000, and it’s clear that the majority of new dentists literally depend on the government income driven repayment programs for their financial survival. It’s true some dentists I consult with have done very well for themselves, but it’s not the norm.

The ones who make the most of their dental education buy a practice for $300,000 to $750,000 and eventually earn $250,000 to $300,000 after they pay their business loan. Once that note is gone, that income can move up to $300,000 to $350,000. These folks repay their loans over time, but the solo practitioner dentist is getting rarer by the year.

Corporate dentistry has spread everywhere and new graduates are likely to start out as associates at a practice they have no ownership stake in. Many will remain employees instead of employers. These dentists start out at $120,000 but rarely earn more than $180,000. Dental school debt continues to grow. If running your own small business isn’t appealing to you, then the dental field is a poor educational investment. I expect 15% to 25% of graduating dentists would default in the absence of the REPAYE, PAYE, and IBR payment options.

 

Third: The Potential Future Wrecking

 

These are the graduate programs that place students in the most precarious financial situations. The clients I speak to coming out of these programs frequently have debt to income ratios above 4. In some cases, I’ve even seen folks owe more than 8 times their expected mid-career salary. These are real world clients I’ve helped. Occasionally someone will go to a more affordable program and come out with a manageable debt load or have parental financial support that limits the cost of their education, but that’s getting harder to do every year as these programs relentlessly increase tuition.

 

Veterinarians

 

Veterinary medicine is at risk of becoming a profession of the well to do. I’ve heard anecdotal stories that the average affluence of a vet student’s family continues to climb. From my client statistics, it’s easy to see why. I’ve worked with several dozen veterinarians with an average debt load of $300,000. Their typical starting salaries are around $70,000 and grow over time to $80,000-$90,000 if they’re employees.

With such a high debt to income ratio and limited not for profit jobs available in the field (meaning no PSLF), most veterinarians receive horrible treatment under student loan policy. Since the IRS considers private sector student loan forgiveness taxable income, veterinarians must save hundreds of dollars every month just to cover the future tax penalty on their loans. Additionally, they must contribute 10% to 15% of their discretionary income to loans for 20-25 years. If they’re married, they have to include their spouse’s income in the payment calculation. If they file taxes separately to get around that rule, they’ll increase their joint tax bill by a lot. I’ve literally had a veterinarian client ask me if it would help them to get a legal divorce but remain functionally married because of their student loans. If you want to be a veterinarian, either have rich parents or realize that your debt could burden you and your family for decades.

 

 

Chiropractors

 

My usual chiropractic client has over $275,000 of debt and a modest income of $60,000 to $70,000. One client just gave up and left the field. None of the chiropractors with student debt that I’ve spoken with have been in great economic shape thanks to their student loans. Not even one. That doesn’t mean that there are no chiropractors capable of repaying their loans out there, it just means that the chiropractic field is charging far more for the education than the economic value of the degree.

There’s no requirement to visit a chiropractor, whereas the other fields I mentioned have at least some floor on compensation. Chiropractors also have among the highest default rates of any professional program because of the financial strain the graduates face. Most chiropractors need to optimize their loans under the government repayment programs and pray for a federal bailout.

 

For Profit Graduate and Professional Schools

 

Here’s an easy rule of thumb for folks who don’t already have educational debt. If you want to be a veterinarian, dentist, lawyer, doctor, etc. and the only program you get into is a for-profit grad school, don’t go. Almost all of the consults I’ve done where the client has been on the verge of tears involved loans from for-profit grad schools. There has been a proliferation of these institutions in recent years because of the federal repayment programs like REPAYE, PAYE, and IBR. After all, if graduating students can pay 10% of their income no matter how high their debt, why not increase your tuition to sky high levels and accept everyone to maximize profits?

For all of the professions above, add 50% to the typical costs for the degree program if you go the for profit route. I’ve seen veterinarians with over $450,000 in debt, associate dentists with close to $600,000, and other really sad stories. Luckily under the current government programs, there are strategies to use that don’t involve bankruptcy, but it’s clear to me that for-profit grad schools tremendously overstate the value of their degree and in many cases flat out lie. If your dream job requires a professional degree and the only school that accepts you is a for-profit college in the Caribbean, my suggestion is work for another year, bolster your resume, and reapply to cheaper schools.

 

There Are Always Ways to Save on Student Debt, But the More You Owe the Fewer Your Choices

 

No matter what federal student loan policy looks like in 10 years, the one thing I know is that owing less is always better. You won’t have to worry about congressional policy or executive orders. You won’t need to stress about the future changes to an obscure government program that forgives student debt for employees of 501c3 organizations.

When I was a bond trader at one of the world’s largest active bond managers, outperforming the index by 0.1% was a massive accomplishment. When I’m helping clients make a strategy to repay their student debt, I can frequently “outperform” what they were doing previously by 1% to 2% per year. I love what I do helping smart people who in many cases were taken advantage of by graduate schools come up with a plan to pay back their loans and save money.

In my view, the best to worst occupations requiring student loans if you aren’t rich are pharmacists, physician’s assistants, MBA businesspeople, physicians, lawyers, dentists, veterinarians, chiropractors, and anything involving a 3 to 4-year degree from a for-profit grad school. What’s your own student loan story? Let us know in the comments below!

 

Travis Hornsby founded Student Loan Planner, LLC to give sophisticated, quantitative analysis for clients with five and six figures of student debt. He has applied his excel modeling skills from his days as a bond trader to save clients a projected $16 million on their student loans and counting. If you’re interested in his flat fee student loan consult service or just wanted to chat about the article, contact him at travis@studentloanplanner.com

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Grant Sabatier
grant@millennialmoney.com

Founder of Millennial Money. Dubbed "The Millennial Millionaire" by CNBC, Grant went from $2.26 to over $1 million in 5 years, reaching financial independence at age 30. He's passionate about helping others build wealth and is addicted to Personal Capital.

14 Comments
  • Erik @ The Mastermind Within
    Posted at 21:54h, 28 February Reply

    I was lucky enough to get out of grad school with only $8k in loans. I was able to pay them off within 6 months of graduating and I’m very happy that I’m student debt free.

    I don’t plan on going back to school because I believe in self teaching and self learning now. I have a goal to read 75 books in 2017, I’m through 14, and I’m learning way more than I ever did in school…

    I’m definitely grateful to be in the position I’m in – able to build wealth and live without many restrictions.

  • Travis @ Student Loan Planner
    Posted at 22:17h, 28 February Reply

    Dang only $8,000 in debt? What program did you go for Eric, if you don’t mind me asking? And what year did you graduate? One thing that I’ve found talking with folks is that the more recent your graduation date, the higher the debt all things equal

  • OthalaFehu
    Posted at 22:17h, 28 February Reply

    Law school here. wife too. I always say that post grad actually closes doors instead of opening them. Once you rack up 100k in loans you have to get a certain level of job just to get by, you loose the option to do something you want to do if it doesn’t pay enough.

  • Zed
    Posted at 22:49h, 28 February Reply

    What about STEM degrees? I graduated with over 100k in student loan debt, and a job in engineering. With dedication it is all paid off, and now the savings can soar! For me, absolutely worth it, despite the lean years. Might I add, those years could have been much leaner if I knew how to budget.

  • Cody @ Dollar Habits
    Posted at 02:03h, 01 March Reply

    MBA here. I graduated with $63k in student loans for both undergrad and graduate degrees. I minimized the opportunity cost of the MBA by completing an accelerated program and was still able to work full-time. After graduating with my bachelor’s and working at a law firm at the time, I strongly considered going to law school. Thankfully, I concluded the sacrifices required were far greater than my desire or commitment to becoming a lawyer. I decided to pursue the MBA instead. Now, I’m really thankful I did not end up going to law school. I’m pretty sure I would be miserable.

    Paying back student loans is a major bummer. They are currently the bane of my existence and the biggest monkey wrench in our financial plans.

  • Financial Panther
    Posted at 09:24h, 01 March Reply

    This is an awesome breakdown of the debt situation in all of these fields. Without a doubt, PA has to be one of the most underrated jobs out there. My fiance’s sister and husband are both PAs (I refer to them as the smart couple) and both have no student loan debt and easily make a combined $180k or more per year working reasonable hours. Considering the fact that they also live frugally, paying $800 a month in rent, I’d say they’re looking pretty darn good on the financial scale.

    Law is the trouble spot. If I could go back, I definitely wouldn’t have done it now that I’ve learned there are many more ways to make money other than lawyer or doctor. I ended up strategically going to a school on a half-scholarship, but still ended up with $87k in loans when it was all said and done. Luckily, I landed big law in the Midwest, with a starting salary of $110k, (midwest secondary city market rates are lower than in the coast) so just ended up powering through the loans in 2.5 years.. I can’t imagine taking out $200k in student loans for law school. Seems like a huge gamble because access to big law is basically decided in that first semester and the big law gig itself isn’t stable with the high attrition rates. In other words, even if you land big law, you might not last long enough to pay back your loans.

    Dentistry is tough to say. I have friends with $400k and $500k worth of loans, and to be honest, I have no idea how they’re paying them back other than burying their head in the sand. No access to PSLF since they’re private practice now. My fiance is sitting on $130k in dental school debt, which I think we can take out in a year or 2 depending on whether we’re able to follow my own advice of living like a student for as long as possible.

    .

  • Travis @ Student Loan Planner
    Posted at 09:26h, 01 March Reply

    Hey Cody, imagine if you added on another $200,000 on top of the $63,000. That’s what’s happening to a lot of folks out there and I try to help them minimize the cost of the decision best I can. Zed $100k in student debt for a STEM degree just depends on what it is. You mentioned budgeting mistakes, those are common. Luckily with most STEM folks they can make enough money to bail themselves out of bad decisions. That’s not true for a lot of the professions I profiled above

  • jaded1
    Posted at 09:49h, 01 March Reply

    Librarian here. Can’t technically be a librarian without the MLS/MLIS and academic ones require that plus additional advanced degrees. I’m a corporate one so I don’t qualify for public service forgiveness. Working public is so underpaid that it’s not worth it but working corporate is just barely enough to live comfortably but you have to repay all until 25 yrs forgiveness. The principle I got at this point is about 90k after paying it for the last 7 years. We’re also expected to continue to pick up more classes to keep updated. So who pays for that since I don’t have the money to front the tuition before reimbursement from employer?

  • earlyretirementnow
    Posted at 09:50h, 01 March Reply

    Econ Ph.D. at a highly ranked university. No loans and they even paid me a small salary for 4 years for doing teaching and research assistance.

  • Mrs. Picky Pincher
    Posted at 09:58h, 01 March Reply

    I’m on the “screw all student loans” train right now. Mr. Picky Pincher and I are paying off $65,000 of student loans, which will be paid off in the beginning of 2018. I majored in marketing and he majored in architecture–not traditionally “profitable” fields. We should have done basics at a community college and gone to an affordable state school. Sigh.

    The reality is that most employers don’t care where your degree is from (and some don’t even care what your degree is IN)–it’s just proof that you aren’t a complete idiot.

  • Travis @ Student Loan Planner
    Posted at 11:45h, 01 March Reply

    Woa Jaded1, I’ve actually worked with librarians before, I didn’t include them because of small sample size but that definitely sounds tough. I’ll say that the average balances are much lower typically that with chiropractors and veterinarians though I imagine the income prospects are limited. Have you checked PAYE vs REPAYE? Worth doing if you’re eligible.

    @EarlyRetirementNow did you get a tenure track job though after graduation? I read in the Economist that only 10% of folks graduating from PhD programs could get tenure track jobs in Economics, that dissuaded me from doing an Econ PhD that was my original plan before I decided I didn’t want to do real analysis.

    @Mrs. Picky Pincher totally agree. The primary value of a college degree is signaling in terms of one school over another. I’ve met plenty of slackers from top schools and lots of brilliant folks from unselective ones

  • Travis @ Student Loan Planner
    Posted at 11:48h, 01 March Reply

    @FinancialPanther what’s up! $130,000 is close to what my fiancee had when we met as well. Yeah law school really isn’t worth it in my view unless you’re going top 5 or you’re going to your regional school and have a specific business plan in mind. Once you’ve got the degree though, the only choice is to optimize payback for the best return on investment possible.

  • Liz@ChiefMomOfficer
    Posted at 03:46h, 02 March Reply

    MBA here – I relied on employer reimbursement to get through school, and I stayed employed full time, allowing me to pas as I went. I did need to take out a few loans for cash flow reasons, but wiped it all out as soon as I graduated and got that final reimbursement from my employer. It helped that my salary is/was above the average you have listed, making it so I could pay for life and still cash flow school. My oldest son is now starting to think about college, as he’s going to high school next year, so I’m trying to learn all about the current student loan market to teach him to make smart decisions. Thanks for the great article!

  • BabyLawyer303
    Posted at 12:59h, 12 April Reply

    I graduated from law school in May 2016 with $177,000 in student loans. Thankfully, and luckily, I was able to get a big-law job with a starting salary of $125,000. I am in the beginning of trying to pay that back now, and it is intimidating to say the least, but it seems relatively manageable (knock on wood). I would not have changed anything, expect maybe work a few more years before going back to school. While I enjoyed your article, you seem to completely dismiss the actual fields themselves and look solely at the numbers. I am surrounded every day by the brightest and most driven people I have ever met, many of whom wouldn’t be that way without law school. Yes, it’s a gamble. But if you love the law and legal work like I do, what other choice do we have?

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