Regardless of Income Level, It Takes a Plan to Effectively Manage Student Debt

Even with a six-figure income, some American workers still find it difficult to adequately save for retirement because they are saddled with large amounts of student-loan debt. Consider the average student-loan balances for recent graduates in these traditionally high-wage professions^[1]:

• Average dental school debt: $285,184
• Average medical school debt: $196,520
• Average veterinary school debt: $183,014
• Average pharmacy school debt: $166,528

While the debt balance alone is daunting to address—with a typical pay-off period of 10 to 15 years—the most pressing issue for many of these professionals is how the debt payments impact their monthly cash flow. Even after their careers have taken off, it’s common for professionals in the dental, medical, veterinary and pharmacy fields to spend nearly 10% to 15% of their monthly pay on student-loan repayments.

And when your monthly cash flow is constrained to this extent, it is hard to save as much as you might like for retirement. In fact, according to PricewaterhouseCoopers’ “2019 Employee Financial Wellness Survey,” 68% of employees who are stressed about their finances have less than $50,000 set aside for retirement.

“Monthly cash flow is really the core issue at hand here,” said Lee Busby, a colleague in my firm with expertise in helping public service employees, like physicians and university employees, manage their student-loan debt. “Once professionals find some margin in their monthly cash flow, they are able to address their other financial priorities, like saving for retirement, with a bit more confidence.”

So, what are some ways professionals can manage their cash flow more efficiently, pay off student-loan debts more effectively—and, yes, even save more for retirement? Here are five strategies to consider:

• Assess your cash flow. Take inventory of the money that flows in—and out of—your bank account each month. If you have more money going out than you have coming in each month, identify at least three discretionary expenses that you can cut back on or eliminate.
• Amend your loan repayment plan this year. If your income was impacted by the COVID-19 pandemic, the recently passed CARES (Coronavirus Aid, Relief, and Economic Security) Act will allow you to suspend your federal student-loan payments until September 30, 2020. The CARES Act also allows for these loans to accrue at zero percent interest until September 30. If you pause the payments on your federal student loan, this action will not count against any federal student-loan forgiveness plan you are enrolled in now. That’s right: With this relief option, the federal government will essentially give you credit for payments to its forgiveness program—even if you do not make any payments on your federal student loan.
• Apply for loan forgiveness. If you are employed by a nonprofit entity or a U.S. federal, state, local or tribal government organization, and you have a federal student loan, then you may qualify for the Public Service Loan Forgiveness Program.
• Ask your employer for help. The CARES Act allows for employers to contribute up to $5,250 toward an employee’s student debt (federal and private) until the end of this year on a tax-exempt basis. Sixty-three percent of U.S. employers currently provide tax-exempt tuition assistance to employees.
• Adapt your financial plan. If the CARES Act provides some relief to your monthly cash flow, to what extent could you increase current contributions to your workplace retirement account over the next year? How would this decision help you retire on time?

To discuss how these strategies—and others—can help enhance your own plans for retirement, reach out to a local CFP^® professional in your area today.

[1] Sources: Association of American Medical Colleges, American Association of Colleges of Pharmacy, American Veterinary Medical Association, The Institute for College Access and Success and NerdWallet