Are you working with a financial planner or financial advisor to address challenges created by your student loans? What I am about to tell you might cause you to question your plan. Many people think that student loans are like any debt, and that’s just not true.
The Exceptions Everyone Knows
Everyone knows that student loans usually cannot be discharged from bankruptcy. We all know that some don’t go away even after you die (the estate or co-signer often has to pay). The laws for garnishment of wages, tax returns, and social security are also quite harsh. Depending on the state where you live, these can all make your life a nightmare.
We also know that student loans are flexible. They allow deferment and forbearance. Some even allow income based repayment (which I hate). Of course the interest accumulates if you pay less than the minimum payment. It is capitalized, and later on you will pay interest on interest. We also know that the tax deduction for student loan interest is phased out well below the six-figure income range, so it is worth little to the average person.
There are other strategic differences that many people don’t think about – these are the ones you cannot afford to ignore.
The Unique Differences That Matter
The most important characteristics of student loans lie within the people who have them.
Most people with student loans are at or near the beginning of their careers. In other words, they have the highest opportunity for strategic, long-term, increases in income if they make the right decisions now. They must be reminded that the only way to pay off debt is to earn money. A “financial” plan that doesn’t at least discuss strategies for increasing income is useless for these people. Even worse is asking a broke young graduate to cut back, because savings is severely limited at that age and just won’t get the job done.
When you look at the entire financial picture of a student loan debtor, you’ll notice that student loans are the largest store of risk. When you have zero assets and tens of thousands in liabilities, your financial plan must specifically address the area of largest quantifiable risk. Within that area (debts), you should have tailored strategies for the specific types depending on how large they are. Your plan for paying off your student loans should not be the same one for your credit cards or car loan. As I mentioned earlier, student loans are different, so you should expect different strategies.
For example, student loans beg the question of whether interest rates should be ignored when paying off debts. Perhaps collateral (or lack thereof) is more important? Maybe the presence of a co-signer is the most important priority? The answers to these questions will depend on your own unique circumstances, and must be addressed.
You should also consider not saving for retirement or buying a house until your loans are paid off. Financial advisers that earn commissions from IRAs might not consider this option but it is as valid as any other. Of course you forgo employer matches and things like that in the short-term, but so did Billionaires like Warren Buffet. You don’t become rich without passing up something so the question then becomes WHAT to pass up. You as the individual will decide which direction to go and that will determine what you will pass up. Remember: It is not difficult at all to save enough for retirement if you start at age 30 or even 35. You will have to save more dollars, but you’ll also have much more earnings then. Also, inflation will have eaten up your loans. Your advisor should work the necessary “magic” with numbers to show you how YOUR ambitions are possible – if you find yourself bending and twisting to his/her beliefs, it could mean trouble.
The Bottom Line
If the largest financial instrument in your portfolio is a student loan, please be very careful where you get advice. I wouldn’t trust a television show, radio show, or magazine – especially if the person giving advice is over fifty.
Student loans are new, and very few finance professionals have been “trained” on them. What I know is the result of hundreds of hours of self-study and life experience.
People are likely to recommend you the same strategies and tactics they use on all other types of debt and this will most likely hurt you in the long run. Always ask your advisor how many of her clients are like you, to get a sense what she actually knows. Ask why she recommends specific actions for you as an individual, and expect her to mention alternatives. If she cannot tie her recommendations to your unique debts as well as your situation or it sounds too much like what you’ve heard on television, you might have a problem.
Of course, whatever recommendations you get from someone you are paying should be written and signed, with letterheads if possible.