The Situation: Husband and Wife both have great jobs. Unfortunately for the couple, both spouses also have massive student debt. Many doctors, lawyers, optometrists, dentists, and veterinarians, had to borrow a great deal of money for the required education. In some marriages, this debt is doubled. These high earning couples may have a bright financial future, but it is becoming increasingly common for them to have $500,000 or even a million dollars in combined student debt.
What is the best way to handle these student loans?
The Marriage with Massive Combined Student Debt
Two six figure incomes may be enough to live comfortably, but it isn’t enough to immediately tackle some mountains of debt.
The most common student loan repayment strategies are usually to either aggressively pay off the debt as fast as possible or to make minimum payments on the debt in order to get the remaining balance forgiven. For many borrowers, the ideal approach is apparent very early on in their student loan repayment journey. For the high income huge debt couple, the answer may not be as obvious.
Rather than going all in on either of the traditional repayment routes, a wait and see approach is preferable. Borrowers on the wait and see approach treat their federal loans as if they are working towards forgiveness. They get enrolled in an income-driven repayment plan, pay only the minimum payment, and take the appropriate first steps toward Public Service Loan Forgiveness if they are eligible. Meanwhile, they treat their personal finances as though they are in aggressive repayment mode. The budget and allocate as much as they can spare towards their student loans. However, rather than putting that money towards their student debt, it gets stashed away in a high yield savings account.
At some point in the distant future, maybe next year, or maybe many years from now, the appropriate strategy will become apparent. This normally occurs when borrowers have been working long enough to reliably project future income and are able to make more definitive calculations to weigh the cost of interest chasing forgiveness against the potential savings of aggressive repayment. Couples who decide to pursue forgiveness will have money set aside for retirement or a student loan tax bill. Those that opt for aggressive repayment will have a pile of cash ready to put a huge debt in their student debt.
The cost of the wait and see approach is the money lost on interest. If a borrower has $10,000 in the bank earning 2% while they have student debt generating 6% interest, they are losing out on 4%, or $400 per year.
The Big Assumption
The assumption we make with this plan is that the couple’s debt is in federal student loans. This is probably a fair assumption for most couples who fit this description because graduate students are able to borrow federal loans up to the full cost of attendance.
Borrowers with private loans should focus on limiting the damage inflicted by student loan interest. Pay off the high interest loans first and most aggressively. If possible, refinance the private debt at a lower interest rate.
Other Strategies and Items to Consider
The student loan issues cannot be viewed in a vacuum. They should be considered as part of a wealth generation strategy. During this time couples should also be thinking about other goals, such as retirement. One of our favorite tax tips is to maximize contributions towards 401(k)s, IRAs, and other tax-advantaged accounts. By doing this borrowers can lower their monthly payments on income driven repayment plans and build for the future.
Couples usually will benefit from pursuing the same strategy. If one spouse opts for aggressive repayment while the other chooses to chase forgiveness, it can cause complications when filing taxes and trying to minimize spending.
We have grouped all of these higher paying professions together, but key differences could affect long-term planning.
For example, lawyers who find a job out of law school with a large firm may have an excellent salary and the potential to earn even more. Unfortunately, for many of these lawyers, the early high salary may be harder to replicate in later years for a variety of reasons. As such, student loan strategy for young lawyers probably requires a bit more conservative planning.
On the other hand, doctors, optometrists, and dentists have a more reliable stream of income upon entering their field. More stability allows for more aggressive repayment strategies.
The Strategy for Couples with Huge Loans
Sadly, there isn’t a spreadsheet or calculation that can be made to determine the optimal student loan strategy for most high debt-high income couples.
The reality is that it could take years before there is sufficient information to make a definitive decision on repayment tactics.
Couples facing this situation should make sure they understand the nuances of aggressive repayment as well as the many rules of student loan forgiveness. Armed with the appropriate knowledge, these couples can plan carefully and then act accordingly once the ideal strategy becomes apparent.