28 Feb Are Insanely Large Student Loans Worth It?
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.
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.
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.
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.’
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.
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.
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.
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.
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 email@example.com
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