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Got dental student loan debt? Some tricks to help you tackle it

Oct. 5, 2016
Mountains of dental student loan debt can inhibit dentists' ability to save money, plan for retirement, buy a house, or even get married. There's a way to move forward and alleviate the debt.
As young people continue to amass piles of educational debt, which have the potential to haunt them for decades, student loans have emerged as a big issue during the campaign season. While there is currently no clear answer to student debt reform, it’s safe to say that making higher education more affordable is something that many voters support.

According to a report by the Federal Reserve of New York, the numbers are staggering. Americans are currently saddled with nearly $1.3 trillion in student loan debt, with the average borrower owing around $26,000. In essence, if you went to college and are under 40 years old, you almost certainly have unpaid student loans. (Even if you’re older than that, there’s still a pretty good chance you owe.)

This predicament is particularly acute for dental professionals, who take longer to matriculate through school, which results in a larger burden. As most dentists know, it’s not at all uncommon for someone to leave dental school with as much as $400,000 in student loan debt.

RELATED ARTICLE: How dentists can crush their expensive student loan debt

Even for professionals with high earning potential, debts like this can be crippling, acting as a financial albatross that can impede someone's ability to save money, plan for retirement, buy a house, or even get married. Here are some helpful steps to help you rein in your debts:

Determine cash flow—To further illustrate how much of a burden student loan debt can be, consider the story of a couple who visited our office recently. Both were dentists, and each earned a healthy, six-figure income. But since their combined student loan debt was nearly $980,000, more than one third of their monthly budget was tied up in servicing those loans. The couple was just trying to make ends meet, even as they earned relatively lofty incomes. Dilemmas like this are hardly exceptional within the dental community.

One solution is to do a full analysis of your finances to evaluate monthly cash flow. Most people would be surprised at how few Americans have a full appreciation of how their debts and other obligations stack up against their earnings. From there, it’s easier to figure out what you can afford to pay each month and come up with a long-term strategy that will allow you to pursue your other financial goals more quickly.

Pursue refinance options—The key is to address your high-interest rate loans first. An economical way to pay off student loan debt with very high interest rates is to pare down large balances by using savings or other cash assets. But not everyone has that luxury. The next logical step is to pursue refinancing options. Given that the average borrower has anywhere from five to 10 separate loans, with each having a different interest rate, this can be somewhat tricky. Those loans that carry an interest rate at or above 5% are frequently good refinancing opportunities. While the difference between 4.5% and 7.5% may sound trivial, that spread has the potential to not only improve your monthly cash flow picture, but to produce long-term interest savings of over $100,000.

RELATED ARTICLE:New dentists: How much debt is too much?

Income-based option—Federal student loans have an income-based repayment option, which is precisely what the terminology suggests: the amount of your payment is determined annually based on what you earned the previous year. Calculations vary, but typically that works out to be about 10% of that figure spread out over 12 monthly payments. This approach makes the most sense for people fresh out of school, when incomes are lower. This helps to keep payments manageable, build liquidity, and put the people in a better position to refinance. The problem, though, is that this is hardly a long-term solution. Indeed, because the payments can be small in proportion to the overall balance of the loans, the borrower is doing very little to address overall debt burden. In some cases, all they're doing is paying off some of the accrued interest. Using the income-based option for too long can be the equivalent of kicking the can down the road.

There are a few other options worth addressing. One is loan forgiveness. Though it’s true that some loans can be forgiven—for those with government jobs, it’s after 10 years, and for those in private practice, which is the vast majority of dentists, it’s after 25 years—borrowers need to keep in mind that the balance owed is treated as ordinary income on their tax return. This isn’t the best path for most people.

The other is consolidating all your loans into one. This approach sounds good in theory, but in practice it doesn’t usually accomplish much, other than perhaps making your debt look simpler on paper. The reason is that the interest rate normally reflects a weighted average, which typically results in a wash.

Ultimately, tackling outsized student loan debt comes down to this: the sooner you come up with a plan to confront this problem, the easier it will be to approach the next big decision in your life. And the next one. And the next one after that. This includes buying a house, getting married, having kids, and retiring. There’s no way to do any of these things with heaps of debt weighing you down.

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Michael A. Rousseau is a financial planner with CCR Wealth Management LLC. His prior experience includes comprehensive financial planning focusing on retirement, and income planning for individuals and families at a financial planning firm in the Greater Boston area. Joining CCR Wealth Management LLC in 2013, Michael is responsible for gathering and analyzing information to develop and monitor financial plans for clients. He is an active member on both the CCR Financial Planning and the CCR Corporate Services Committees. Michael is a member of the Financial Planning Associatio and the Massachusetts Chapter of the FPA.