Student Loan Repayment, Debt Cancelation and Justin Sloan, CFA, CFP, on How to Save for Retirement (Episode 106)

Many of our clients are dental specialists, and I’m going to dive into specific concerns about which repayment plan might be best and whether you should pay accrued interest on your loans.

Even if you’re not a dentist, you’ll want to keep reading because I’ll cover what a Biden administration might do with student debt cancelation. It could mean tax implications if it goes through, so I’ll cover what that might mean for you.

You’ll also hear from Justin Sloan, CFA, CFP, from Buckingham Strategic Wealth about the best way to save for retirement.

Student loan repayment for dental specialists

Many dental graduates aspire to go for a four-year dental training and residency program to become dental specialists such as periodontists, prosthodontists or even dental surgeons.

Dental specialty residencies are expensive. In most cases, dental residents have to pay for the training instead of getting paid like other medical residents. That means they have to take on additional debt while they don’t have an income for the period of the residency.

It’s one of the reasons dental specialists tend to have high student loan debts because the current loan continues to grow during the residency period.

If you are a dental graduate and you already have undergrad student loan debt, deciding to go for the specialty residency can be a difficult financial decision to make.

What do you do about your student loan payment as you go for the residency?

My advice, if you have no income, is to file a nil tax return. That will prove that you have an Adjusted Gross Income (AGI) of zero, which will allow you to make a $0 payment on your monthly student loan payment.

Revised Pay As You Earn vs. Pay As You Earn

Depending on what the cost of the residency program will be, you will likely have a very high student loan at the end of the residency. In that situation, doing Pay As You Earn (PAYE) instead of Revised Pay As You Earn (REPAYE) might be the best option.

The reason is that your income might not be high enough to pay the debt back, especially if you plan to live in an area where there's lots of competition, and your income is going to be capped.

With PAYE, you will set yourself up to go for forgiveness, which means giving yourself the shortest period for forgiveness possible and not worrying about the interest.

Should you pay accrued interest pending student debt forgiveness?

As a student, you will most likely not be able to make any payments on your student loan during the period of your studies. By the time you graduate, interest will have accrued to a substantial amount by the time you graduate.

Does it make sense to pay the accrued interest to keep it from capitalizing if you’re going for forgiveness? The simple answer is no.

It doesn’t make sense to make a payment towards something that's going to be forgiven. If your student debt is going to be forgiven, any extra dollars you pay is like pouring money down the drain.

When you're going for forgiveness, you shouldn’t worry about the interest accruing.

Interest on student loans accrues; it does not compound. So it grows a lot slower than a compounding rate of interest does.

Also, PSLF is tax-free so you don’t have to worry about tax liability. But even if you were to get taxable forgiveness, the tax amount you would owe is a fraction of what you would have to pay to account for it. In other words, paying $1 now might save you $0.15 off your tax bill in the future. It doesn’t make sense to trade $1 for $0.15 – and that’s if you’re pursuing taxable forgiveness.

If you’re pursuing PSLF, if you pay $1 now, you’re literally getting back $0. So, avoid paying anything when you really shouldn't. And don't be afraid of interest capitalizing. It's really not as bad as it seems.

Will President Biden effect student debt cancelation?

Now that Biden has been declared the president-elect following the elections, there has been significant talk about student cancelation. And that’s because one of his campaign promises was to do a $10,000 cancelation of student debt for every American.

Student debt cancelation with legislation

The question is, can student debt cancelation be done via legislation? Of course it can. Initially, the expectation was that Democrats would have control over the House, the Senate and the White House.

But the Democrats in the House lost seats, and their majority narrowed. It also looks like the Republicans will have control of the Senate, or it might end up being 50-50 with Kamala Harris, the Vice President, being the tiebreaker.

With such a narrow margin, getting student debt cancelation legislatively is going to be a lot more difficult unless there is a major compromise between the two parties.

My analysis is that, legislatively, student debt cancelation is extremely unlikely because you'd have to have a supermajority of progressive Democrats to do that. The only way that that would happen is if you had a great depression where you had significant deflation.

The reality, too, is that a majority of Americans don’t go to college. It makes student debt cancelation fairly easy to attack politically because it's unfair to cancel student debt while people without degrees are paying for it.

You’d also have people saying that Biden canceling student debt would take away from other programs like paid family leave, expanding healthcare access, maintaining and expanding the safety net, etc.

So, I don't think that there's any chance that happens legislatively.

What about through an executive order?

Opinions vary among student loan experts on whether the President has the power to cancel student debt via executive order. Progressives and the interest groups that lobby on behalf of student loan borrowers seem to say that the President definitely has that power.

On the other hand, the more moderate wing tends not to be sure he has the power. They often think that even if he has the power, should he use it? So, it’s unlikely to happen because there's a lot of disagreement on this.

The other big question is would student loan debt cancelation be taxable? It seems like this is something that everybody agrees on; that, yes, canceled student debt would be taxable.

If you had $10,000 of student debt forgiven, that would be considered taxable income.

What if your debts are larger than your assets? Then you'd be considered insolvent, and you could file an insolvency declaration with your tax return that would show that your assets are lower than what your debt is, and then the debt would be forgiven tax-free.

But if you’re pursuing PSLF, it could cost you a lot of money. Student debt canceled via PSLF is tax-free. But if it was canceled by executive order, it would become a taxable event.

In that case, student debt cancelation would make you pay more than you would have if your loan was forgiven through the PSLF.

Justin Sloan, CFA, CFP, on how to save for retirement

Justin Sloan, CFA, CFP, is a financial planner at Buckingham Strategic Wealth. I sat down with him to discuss the importance of not focusing solely on tax-deferred plans to grow wealth, asset location and trends in the medical world.

The clients Sloan tends to partner with are a bit younger, earning at least $250,000 to $300,000 and are often physicians.

After finishing school, clients often need help organizing what to do with their income. Sloan helps them figure out “what to do with it, help prioritize debt versus saving for retirement versus maybe saving for kids’ college and so on.”

The big question is: how are you saving for retirement? How can you achieve more tax efficiency while saving for your retirement?

“Every year is an opportunity to start designing your financial future,” said Sloan. “[It’s] an opportunity to fund those different types of accounts and start accumulating assets in different types of accounts.”

One mistake that people make is focusing on their 401k as the only vehicle for saving for retirement. If you do that, you only have one tax-deferred account that you can draw from in retirement.

A better option is to diversify your retirement savings. You could have a set of accounts that you could draw from, or take different types of income or recognize different types of taxes as you draw from those accounts.

Having the flexibility to reach into different types of accounts that are taxed differently puts you in a better position to plan for retirement.

The concept of asset location

Once you decide to have several different types of accounts that are taxed in different ways, it is very important to come up with an investment plan that puts the right types of assets in those different types of accounts. And that's the concept of asset location.

“Asset location is incredibly important as you start to assemble a portfolio,” said Sloan. “Otherwise, you're going to find yourself sharing more of your investment portfolio growth with the government at the end of the day.”

Diversified savings gives you more financial flexibility to be able to draw from your accounts in the future instead of throwing dollars into a tax-deferred account and hoping for the best. For more information, visit our financial planning resource page.

And for custom student loan help, one of our Student Loan Planner® consultants would love to talk through all the student loan repayment strategies that may be available to you. Book a student loan consultation today.

Get a Student Loan Plan