Sometimes, life comes at us fast. It’s easy to become overwhelmed as our lives get more complex. In this article, I’ll explain how a professor’s family flipped the script. They went from overwhelmed to crushing their debt and positioned for success.
Here’s how they did it…
Mr. Professor was just starting his 2nd year as a professor at a private university. He’s married and the family’s gross income is six-figures. Both spouses are in their early 40’s. They have 3 children. I met this professor through a mutual friend and we decided to meet over coffee one morning before work. We discussed his family and his current financial situation. I shared with him that I understand the challenges of higher ed professionals and that I have a passion for serving them. I do this through comprehensive financial planning. He had never had a financial planning relationship before. He agreed to take the next step of gathering a few documents and to take my services for a “test drive”.
$265,000 of Debt
As I sifted through the documents to do a thorough analysis for this family, it was clear there was a debt issue. We discussed it when we first met but we didn’t get down to the exact dollar amount. They had done a great job of building a nest egg, well into six-figures. Problem is, they had also accumulated considerable debt. Here is the debt breakdown:
- $70,000 in credit card debt
- $35,000 from a HELOC (What is a Heloc?)
- $160,000 in student loans (from undergrad and doctoral studies)
- A mortgage balance of $75,000.
Before you gasp over these numbers, you should realize that this is not uncommon. Many families struggle with juggling different accounts and end up accumulating debt. To note, the credit card debt wasn’t because of years of overspending. It was due to some home improvements that went awry. Getting rid of this debt became priority numero uno.
The Initial Plan of Attack – Or Lack Of
Mr. and Mrs. Professor had preconceived notions on how they would attack their debt. His student loans were about to come out of deferment and he wished to pay them down as quickly as possible. Utilizing a “standard repayment” of 10 years, he was staring down the barrel of a $1,500 monthly payment. He planned to pay off the HELOC little by little and pay slightly above the monthly minimum on his credit card payments every month. This would take 10 years or more to make meaningful progress. I told him that I would study his finances and come back to him with recommendations. Upon doing so, he was blown away and agreed to hire us. Over the next 18 months, together, we made tremendous progress.
Here is how comprehensive financial planning can change lives...
Mr. and Mrs. Professor had a $50,000 brokerage account from investing over the years. After reviewing the account statement, we found that they had less than $1,500 worth of capital gains. This meant that they could immediately use these funds to pay down debt and would owe less than $400 in capital gains taxes. This was great news! Could we get them investment returns greater than the double digit interest rates charged by the card companies? Absolutely not. They cashed out the account and paid down the credit cards. This wasn’t an easy decision. It took hard work and discipline to save up the $50,000. While saving the $50,000 is commendable, the best long-term decision for them was to use the funds to take one step closer to being debt-free.
So Mr. and Mrs. Professor now have $20,000 in credit card debt and $35,000 in a HELOC. We knew from their mortgage statement that they had quite a bit of equity built up in their home. We referred them to a trusted mortgage specialist. They worked out a cash-out refi of their home. In short, they refinanced to a new mortgage (while leaving 20% equity to avoid PMI) and pocketed the remaining equity as cash. The result was $50,000 that was used to pay off the HELOC in full, leaving only $5,000 in credit card debt. It also lowered their mortgage payment, freeing up additional cash flow. Sure, they extracted equity from their home and started a new 30 year mortgage term, but they also paid off $50,000 (!) in debt. They can use the additional cash flow freed up to start paying ahead and building up equity quickly.
What’s left? $160,000 in student loan debt. This amount of student debt is not uncommon. To earn a professor position, you normally need to have a Ph.D. Earning a Ph.D ain’t cheap! Mr. Professor was concerned about how they’d pay off his loans and meet all of the other family goals, such as educating their children and retiring comfortably. His plan was to funnel all available discretionary cash flow toward these loans until they were eliminated. This would mean delaying saving for retirement and contributing to his college savings for his children. He planned on using the standard repayment option of 10 years. With interest, this would mean shelling out over $200,000. Having met other professors that have had the same concern, I asked him if he had considered Public Service Loan Forgiveness, or PSLF. He was unaware of this program. PSLF is available to those working full time at tax-exempt organizations, like universities. After making 10 years of qualifying payments with PSLF, your remaining student loan balance is FORGIVEN.
Mr. Professor had no doubt that he would work as a professor for over ten years, so PSLF made a ton of sense. Unlike other forgiveness programs, the forgiven amount under PSLF is not taxable at all. It is wiped out free and clear. (Click here for more on PSLF) We found that all Mr. Professor’s loans were eligible for PSLF. We recommended that he enter into an income-based repayment plan with the longest repayment period. The idea is to keep monthly payments as low as possible, thus the forgiven amount is greater. Think their six-figure gross income makes them ineligible? Think again! Income-based repayment plans cap at 10-15% of your discretionary income. This means that his family size (5) helps him qualify for a lower monthly payment. Federal Student Aid’s Repayment Estimator showed that Mr. and Mrs. Professor may pay about $75,000 toward the loans over ten years. Their estimated forgiven amount? $165,000! This was a HUGE relief.
(for more on Income Based Repayment check out Student Loan Hero)
None of this would have been possible by making decisions in a vacuum. Through comprehensive financial planning, we helped Mr. and Mrs. Professor make informed decisions that aligned with their goals. The new reality for these clients:
- They paid off their entire HELOC.
- They have NO MORE CREDIT CARD DEBT. The remaining $5,000 was paid off within 6 months. This was due to their increased cash flow from the mortgage refinance and using cash that was previously allocated for much higher credit card payments and HELOC payments.
- The cash flow that was allocated to pay student loans is now being used to save for retirement, fund his children’s college savings, and pay ahead on their mortgage. PSLF and income-based repayment on the student loans was a life saver!
- They are making wise investment decisions. We help them manage their household portfolio by utilizing an investment policy and investing efficiently through asset allocation and asset location.
- They have a game plan in place when it comes to planning for retirement. We helped them to establish a lifestyle goal and we track progress.
- They have confidence that they have adequate life insurance. By doing a “needs analysis”, we were able to make sure they had the right amount of life insurance. It it also cost-effective.
This is an example of the life-changing impact of comprehensive financial planning. Mr. and Mrs. Professor are now well on their way to their best financial life. They are relieved from their debt burden and feel confident in their financial future. No matter what your situation looks like, comprehensive planning can help prepare you for every life transition. More importantly, you can feel at peace knowing that you are prepared for anything that life throws your way.
You can do it, I believe in you!