How to Solve Your Student Debt Dilemma – Episode 181

Everything you wanted to know about student loan debt … and a whole lot more!

Reese’s guest on the Dentist Money™ Show is Travis Hornsby, founder of StudentLoanPlanner.com. On this episode, you’ll find out why your attitude towards debt may need some adjusting.

From federal loans vs private loans to why interest rates alone shouldn’t dictate your choices, Travis and Reese discuss numerous reasons why you need to think about student loans differently. It’s a podcast for the dentist struggling to figure out how to best handle debt … and for the student currently piling up debt.

To find out the best way to manage your student loan debt.

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Podcast Transcript:

Reese Harper: Hey, Dentist Money Show listeners. Thanks again for tuning into another episode. Today I interview Travis Hornsby. I’ve been wanting to get Travis on the show for a while because he has really deep experience interacting with hundreds of different dentists around debt consolidation, refinancing, and various student loan repayment strategies.

Reese Harper: We dive into when you should consolidate, versus when you should consider income-based repayment, how different student loan options are going to effect your future career expansion possibilities, and also the insight that Travis has interacting with different dentists at different stages. Both during dental school and post graduation.

Reese Harper: So, I hope you really enjoy this interview, I sure did. And I think we really arrived at some concrete advice that will help a lot of you make decisions about your student loans.

Announcer: Consult an advisor or conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentists Advisors, a registered investment advisor. This is Dentist Money. Now, here is your host, Reese Harper.

Reese Harper: Welcome to the Dentist Money Show, where we help dentists make smart financial decisions. I’m your host Reese Harper and I’m super excited about my interview today with a industry legend. He’s known around as the student loan – I want to say student loan planner, student loan advisor. I got several emails in the last couple of days actually of people asking me, “Hey, what do you think about this Travis guy?” And I was like, “Actually, I’m about to interview him tomorrow.”

Reese Harper: So, anyway, Travis Hornsby. Welcome to the show, Travis.

Travis Hornsby: Thanks. Yeah, I guess you’re about to find out if I’m a scumbag or not.

Reese Harper: He’s a legend. He is. He’s a mystical legend. You wouldn’t know that there’s a CFA out there; for those of you who don’t know, Chartered Financial Analyst is a pretty difficult, technical, credential to get and he’s over utilizing it and bringing it to you in the student loan industry.

Reese Harper: Travis is probably capable of solving any financial problem and he’s put all his brain into student loans. Or some of it, at least. I’m sure you got a lot of other stuff you’re working on there.

Travis Hornsby: Yeah, I mean, it’s a 1.5 trillion dollar problem, right? So, I hope [crosstalk]

Reese Harper: It’s a big one!

Travis Hornsby: I’m kind of surprised there’s not more people working on it, but I’ll take it.

Reese Harper: Yeah, dude. I love that you’ve kind of seen how obvious that, I guess that challenge is. It’s definitely one of the top three or four concerns that I think a lot of medical professionals would have right out of school, is just like what do I do with this? And they don’t feel like there’s a lot of great resources.

Travis Hornsby: Yeah. Like, I used to be a Municipal Bond Trader, you know? And who invests in municipal bonds, right? People who have already kind of won the game.

Reese Harper: Yeah.

Travis Hornsby: Like, if you’re investing in municipal bonds, it’s because you have so much extra money, you’re in such a high income tax bracket, that you’re like, “Oh, shoot. I don’t want to pay 40% in income taxes. So, I’m gonna put my money in the California Municipal Bond Fund so I can avoid my 50% marginal tax rate.”

Reese Harper: Uh huh.

Travis Hornsby: It’s like, yeah. When I was doing that it was really exciting to analyze these states, and the new issues, and we did all these project fundings, and toll roads we built. We built the One World Trade Center and all these things. But then you get down to it, like the people using it are the people who’ve already won the game.

Reese Harper: Totally.

Travis Hornsby: It’s a lot more fun to help people who are trying to win the game.

Reese Harper: Yeah. Now, if I know your background a little bit, didn’t your wife go through med school? I mean, was that part of the impedance that helped you kind of start solving this problem, or not?

Travis Hornsby: It was, yeah. She went to medical school. Came out with a modest amount of debt compared to most people; $124,000. So, the complexity around this is we had the money talk, which all couples have at some point; whether they know it or not. So, we had the money talk and she’s like, “Okay, I’ve got this debt.” I’m like, “Okay, well just pay it back, right? You’re gonna make a lot of money as a surgeon, it’s gonna be easy.” But then I found out about the Public Service Loan Forgiveness Program and I found out about income driven repayment options, generally.

Travis Hornsby: So, she was in her seventh year of training when we met, so she was about to become an attending. I said, “Wait a second. We could pay $1,200 a month for three years and the remaining balance of like $80-90K should be forgiven tax free.” So, suddenly it becomes pretty dumb to refinance a loan like that, right?

Reese Harper: Yeah.

Travis Hornsby: So, we started looking into that and then our loan servicer came back and said, “Oh, instead of seven years of credit, we actually have you down for three years of credit on half of it and one month of credit on the other half.” And we’re like, “What?” So, I had to do all this analysis to try to figure out what the heck is going on with this big giant mess?

Reese Harper: Totally.

Travis Hornsby: And then found out that, you know, we had some friends who are veterinarians and dentists. And the difference between medicine and those two fields, is that the vast majority of physicians have the opportunity to be employed at a qualifying non-profit. Whereas veterinarians and dentists are almost all like small, Mom and Pop or corporate private practice kind of places. So, you don’t have that loan forgiveness option over ten years. So now you’re doing 20 to 25 that you got a tax bond to prepare for.

Reese Harper: Yeah.

Travis Hornsby: So, some of our articles that went viral in the very beginning of our business where primarily in the veterinarian and dentist space, because it’s like there was no light at the end of the tunnel like there was for physicians.

Reese Harper: Totally.

Travis Hornsby: That’s kind of interesting how we’re [inaudible 00:05:27][crosstalk 00:05:26]

Reese Harper: Let’s back up to the fundamentals for people that may not be aware of this problem. And let’s say you’re graduating from dental school, and you just login now and you see 13 loans or you see seven loans; you don’t really know where they’re from exactly. You kind of do, you see a name. But you’re not really exactly sure what your options are.

Reese Harper: So, just give us a broad overview of the choices that dentists have to make after graduation and lets kind of start breaking that down.

Travis Hornsby: Yeah, like you want specifically after graduation or in school?

Reese Harper: Let’s go in school first, before we get to after graduation. Let’s start in school.

Travis Hornsby: Yeah. So, in school, so a lot of people think that the only thing that matters is the interest rate, and that couldn’t be further from the truth. Like, that’s the old school way of thinking about debt, where you actually have to pay it back. Oh my gosh.

Travis Hornsby: And just to give you an example of this, you can take out loans that are health profession student loans. Like, you can take those out while you’re in dental school, and a lot of times the financial aid offices will recommend that. But the problem is, is those loans, which are serviced by ECSI, Heartland ECSI usually; they’re offered at a 5%. And so a lot of times they’ll say, “Hey, why don’t you take out $50K out of this health professions loan?” So, the problem is, is that’s not eligible for loan forgiveness unless you structure it the right way after graduating.

Travis Hornsby: So, while you’re in school, if you’re gonna graduate with a debt to income ratio over 2:1, you’re gonna want to have federal direct loans for the most part. Like, that’s gonna be the easiest, surest, fire, thing to do.

Reese Harper: So, just to back up on that. What did you say, two to one? What was the ratio you were just using there?

Travis Hornsby: The two to one is for sure if you’re gonna have a debt to income ratio over 2:1. So for example, you’re gonna graduate with let’s say, your mid-career salary you’re expecting you’re gonna be at $180K. Because you’re gonna be the average dental owner in America.

Travis Hornsby: So if you’re gonna have debt over 360 at graduating, then you could really project that kind of going into school. At least for the debt amount, pretty well. Just take the cost of attendance that the school gives you and multiply it by 1.25, that’s the debt you’re gonna leave with.

Reese Harper: Yeah.

Travis Hornsby: If you don’t have any help. So you know what your debt’s gonna be, you don’t know what you’re income’s gonna be probably. Like, you can guess. But that’s gives you at least a starting point.

Travis Hornsby: Of knowing like, do I need to focus on the interest rate? If you’re gonna have less than $300K, I might focus mostly on the interest rate of what kind of debt you get.

Travis Hornsby: So let me back way up. You can have loans that you can pay based on your income, right?

Reese Harper: Yeah.

Travis Hornsby: You’re in school, if you take out federal loans, you have the option to pay based on your income. That’s the best option that dentists can possibly have. Because no matter what happens, if you have a loan like that you’re not in trouble.

Travis Hornsby: That’s what I love about that kind of loan. If you have federal loans, then that’s it. Then worst case scenario you’re paying a percent of your income. You’ll still be able to buy a house. Still be able to do practice.

Reese Harper: Yup.

Travis Hornsby: Still be able to do all these things you wanted to do.

Reese Harper: The types of options that are available to us, we have federally subsidized loans that we can elect to pay on normal schedule, or we can elect to pay them on a subsidized schedule, or a percentage of our income. That’s one type of loan.

Reese Harper: We also have private loans, right?

Travis Hornsby: Right, exactly, yeah. So private loans, yeah.

Reese Harper: Go ahead.

Travis Hornsby: Private loans you can take out instead of taking out federal loans. And the only scenario that I think makes sense to do this is, if you need more than $40,000 a year of funding for dental school. Then if you only need an extra $10-$20K, there’s some lenders out there that are coming out with no cosigner loans that are cheaper than Grad PLUS.

Travis Hornsby: So you can take out Stafford Loans, I always recommend people max out their Stafford Loans. And then over and above that $40K per year, you can take out another, you know, you can take out a different kind of loan. So you can take out the federal loan, Grad PLUS, over a seven percentage of straight, high origination fee – but has all those income protections, right?

Travis Hornsby: And if you are gonna owe a lot of debt, you need to do Grad PLUS. You need to do all federal loans because [crosstalk 00:09:33][inaudible 00:09:33]

Reese Harper: Because a lot of guys listening, they’re like going through USC right now. And they’re like, “I’m gonna be north of $500,000.” So they’re gonna max out, right? On their basic Stafford Loans at $40,000 a year, right?

Travis Hornsby: Yup. And then they’re gonna take on Grad PLUS above that. So yeah, so let me make it even simpler. If you’re listening and you’re at USC or NYU or Midwestern, or you know, in either campus, right? Or here. Even if you’re in, what are some other ones? Like, the one in Nova Southeastern. Like these private, high cost places – then all federal. No question. Only federal, don’t take out any private loans. If somebody says, “Well hey I got this one that has a lower interest rate.” Ignore them. Take out Stafford and Grad PLUS Loans in max.

Reese Harper: And you’re saying you might do a private loan if it’s just a little bit above the Stafford minimum. Because you know, it might not hurt to have that kind of risk and get the lower interest rate.

Travis Hornsby: Yeah like, so shut me up if I’m getting too technical.

Reese Harper: No.

Travis Hornsby: But over $40K, the Grad PLUS rate right now is 7.6%. So everything you borrow above that is 7.6%. On top of that, there’s about a 4% fee upfront too that you have to pay. It’s the origination fee.

Travis Hornsby: So that’s really expensive. So if you’re only needing an additional $10K above that $40K, then it might make sense to think about, “Hey, maybe I use one of these common bond”, for example. It has a no cosigner loan for people who are in dental school.

Travis Hornsby: So you might use something like that for that marginal $10K of borrowing. Basically you’re getting a 6% of straight in maybe instead of a 7.6%, and you’re having a lower origination fee as well. So that’s just an example. So those kind of people might be like, University of Florida Dental School, especially the Texas Dental Schools that are really low cost.

Reese Harper: So I’m gonna say public schools, like the University of Utah public school is actually pretty reasonably priced. It’s just hard to get in to some of these public schools.

Travis Hornsby: Right. Yeah, exactly. I would say most people definitly need to take out all federal.

Reese Harper: Okay.

Travis Hornsby: If you have all federal, we’ll be able to do anything.

Reese Harper: Is there any other loan to consider besides the Stafford, the Grad PLUS, and the private?

Travis Hornsby: Yeah, there’s the Mom and Dad loan.

Reese Harper: Yes.

Travis Hornsby: The bank of Mom and Dad. And that’s an absolute freaking disaster. I mean, absolutely disaster. So, do not borrow from your parents. Terrible idea, always ends badly. And it might not end badly because of something bad happening in your relationship, but you’re either gonna go for loan forgiveness or you’re gonna pay the debt off, one of the two. And the reality is, is most people that think they’re not gonna go for loan forgiveness actually could benefit from going for it, in my experience.

Reese Harper: Uh huh.

Travis Hornsby: Like, it’s getting harder and harder to justify a refinancing and paying off your dental school loans every year. Because the price of school keeps going up faster than the cost of inflation. But dental incomes, in aggregate, are actually falling.

Reese Harper: Yeah.

Travis Hornsby: Or at least they’ve fallen over the past 10 years.

Travis Hornsby: So you’re getting the situation where, I’ll give you an example. Like a first generation immigrant family comes over, let’s say from India. They think that they want to make sure that their child has the absolute best experience. So the second generation kid was born here in America, American citizen, English is their native language too. But there’s still that cultural aspect; so the parents are like, “Well I’m gonna pay $2,000 of your $600,000 USC borrowing. And then you’re gonna take care of our mortgage and help us.”

Travis Hornsby: And what that did, is that just created an extra payment for no reason. So that created an extra $2,000 a month payment that you have to make to your parents. For just no reason. Because you’re paying the same percentage of your income whether you have $400K or $600K.

Reese Harper: Totally.

Travis Hornsby: So that’s that last option. So I would just say, in terms of ways you fund yourself while you’re in school, if you have only federal loans, you’re in great shape. If you use private loans or bank of Mom and Dad, exercise extreme caution.

Reese Harper: That’s great advice, man. What about the, let’s go into how do we know if we should be the person that defers and just does loan forgiveness, versus pays this thing off?

Travis Hornsby: Yeah, so there are some different scenarios there that I could go really deep, but I’ll try to keep a high level.

Reese Harper: Yeah.

Travis Hornsby: Stop me if I’m going down rabbit holes.

Reese Harper: No, you’re fine.

Travis Hornsby: Because you’re right, I do this a lot, so.

Reese Harper: It’s all good! No, this is great. We like the rabbit holes. Sometimes slowing down to go down through each one of them is helpful, so.

Travis Hornsby: Yeah, listen on .8 speed, right? On podcast player.

Reese Harper: Yes. Uh huh.

Travis Hornsby: So, okay. If you have a debt to income ratio, it’s really 1.5, that we see the real “mark” being between refinancing and pay off. And there’s a couple exceptions to that; but 1.5 is a good general rule. So if you’re a practice owner, your debt to income ratio is below 1.5:1, refinance. Especially if there’s no other debt in the picture, with your spouse or anything like that.

Travis Hornsby: So that’s a great, kind of general recommendation. So you’re making $200,000 as a practice owner, you’ve got your practice loan, and you have less than $300,000 in student loan debt, you feel pretty stable and your finances are in good shape – then go ahead and refinance.

Travis Hornsby: The exception would be if you – so let’s talk about that 1.5:1 debt to income ratio. What if I’m an associate right now and I’m going to be a practice owner and I know I want to refinance? Should I refinance now, before my practice? That’s one thing that comes up a lot. And the answer to that is no. Because you can do the repay plan if your goal is to eventually refinance and you can get an effective interest rate after the subsidies are applied. It’s similar to a refinancing deal, if not better. And that’s temporary.

Reese Harper: And you’re saying there’s a difference between, for those who don’t know, there’s a difference between a repay plan than an income based subsidy. Talk about that.

Travis Hornsby: Well, yeah like see… [crosstalk]

Reese Harper: Well there’s a difference between a repay plan and a refinance.

Travis Hornsby: Refinance, okay. Yeah, refinance. Okay so refinancing is giving you a permanent rate at a certain level. So I’m gonna refinance, that means I’m gonna get a permanent 4.5% interest rate. The repay plan basically, the interest charge depends on what your income is, relative to your debt.

Travis Hornsby: So what the repay plan does, is they take your payments, apply it to the interest that you have, and then the remaining interest they cover 50% of it. So naturally, if your required payments are more than the interest that’s accruing, you’re gonna get a subsidy of nothing. And your interest rate’s just gonna be the stated interest rate on the page you’re looking at.

Reese Harper: Yeah.

Travis Hornsby: But if you earn a low income, like you’re a dental resident or you’re a first year associate or something like that, then you probably have some subsidy going on there with the repay plan that’s gonna cut your effective interest rate to a lot better level. So it might be a 4-5% interest rate, and you should hold on to that low payment so you can buy a dental practice and have a lot less stress while you’re going through that process.

Reese Harper: So to summarize this, there’s a good guideline on debt to income ratios. Again, a debt to income ratio is just taking what your debt is and dividing by what your annual gross income is, right?

Travis Hornsby: And I mean student debt. Because I know dentists, you all have a lot of debt, right?

Reese Harper: Yeah. Very different debt. And so you take your student loans, you divide that by your income, and you get this ratio. Sometimes that might be you know, a one, it could be a two, it could be a two and a half – if you’re that USC grad we just talked about. And kind of those scenarios, we have to be really careful refinancing in that kind of circumstance. Because it’s starting to get to the point where it might make sense to never pay this thing off completely. Just let the loan run its cycle and you’ll pay some taxes at some point down the road.

Reese Harper: But it makes sense to look at it that way. For people who have a high, let’s say anything above one and a half is what you’re using as your barometer, right?

Travis Hornsby: Yeah.

Reese Harper: Okay. And then the exception to that is people whose income might be rising fairly quickly, or people that are going from being an associate to an owner. Or people that are going from a basic owner that’s making in the low two’s to mid two’s, to where they can see a path from their peer group and based on what they feel like is reasonable for their personality and ambition; they might be making four or five hundred within a reasonable period of time.

Reese Harper: Now the debt to income ratios changed; you’re saying the whole time though, you’d rather see people stay on income based repayment until they’ve proven that their income’s gonna get to a point where that ratio comes down. But don’t preemptively refinance assuming that you’re gonna get to that point of income.

Travis Hornsby: Yeah, like there’s this story about Lake Wobegon, where everybody thinks that they’re the best looking person and the smartest person that has the house on the lake, kinda thing. It’s like, the joke is not everybody can be above average.

Reese Harper: Yeah.

Travis Hornsby: And everybody thinks that they’re gonna be a top 1% dentist.

Reese Harper: Yeah.

Travis Hornsby: Like, when I talk to people, it’s kind of almost funny. I ask them like, consult form, what’s your expected income in five years? I can tell you, I’ve had so many people be like, “$400K”.

Travis Hornsby: And the reality is, is yeah like, that’s possible. But most people are $150-$250,000.

Reese Harper: Yeah.

Travis Hornsby: That’s the typical range, right?

Reese Harper: Yup. And that’s the average. The average data, I mean when you look at average income statistics, where are you pulling your average income statistics from? Like if I go to the ADA’s website and I look at average dental incomes, I’m gonna find a different number than I’m gonna find on US News and World Report. I might see the average dental income’s $160,000 somewhere, but then at the ADA I might see $210,000.

Reese Harper: But when I’m finding is, the dentists pay themselves a salary that’s sort of fixed and never really changes. Because they’re trying to minimize their payroll taxes.

Travis Hornsby: Of course, yeah.

Reese Harper: So then they never really increase that salary, even as their collections grow and as their profits go up. And then that’s the data that keeps getting reported. And it might be the same data reported for 10 years, on the same salary. But their income was actually going up by quite a bit.

Reese Harper: I know that dental incomes are going down. I feel like on aggregate on average, that’s got to be the case. It’d be interesting for me to – I think it’s just good that you’re offering kind of that cautionary advice on, let income drive this decision, as opposed to letting emotion drive it. You’re like, saying, “Look, gotta use a ratio. We’ve got to determine some objective criteria here.”

Reese Harper: And I think for a lot of people, they don’t really know what their income’s going to be. So they could preemptively, my worry is, refinance preemptively. And then put themselves in an even harder position to grow their income. Because now they have a mandatory commitment they’ve got to make, and they don’t get to continue to try to grow and take advantage of the entrepreneurial opportunity that dentistry uniquely still has.

Reese Harper: I mean, that’s why student loans are so expensive in dentistry, partially. Is because there’s still a lot of upside. There’s not a lot of seven figure occupations left in the professional world. And I still see that happening a fair amount in dentistry, just because you still have control over that entrepreneurial opportunity.

Reese Harper: But man, people refinance their loans so quickly sometimes. At such an early age I feel like they choke out that opportunity a bit. Can you talk about that a little bit?

Travis Hornsby: Well like one thing I wanted to say is, I used to say debit to income ratio of 2, that was by break even point.

Reese Harper: Okay.

Travis Hornsby: But then I started doing 1.5. So in other words, I made it harder to tell people to refinance. Like, why did I do that? It’s because a lot of times when people are in that ratio, like above 1.5, they might be able to enhance their strategy. Obviously you guys are really working with strategies like, helping people set up solo 401K’s, or SEP IRA’s or you know, 401K’s for their businesses if they’re just practice owners, and helping people optimize their pre-tax accounts.

Travis Hornsby: So one example is, a California dentist making $200,000 a year is probably gonna be, I think in a 32% federal bracket if they’re single. And maybe 9% California, right? So you’re at 41%. And now let’s tack on 10% for the student loan payment; because if you’re putting money into pre-tax accounts, you’re getting lower student loan payments. Because it’s based on AGI. So your marginal tax rate now is 51%. So you can put money into retirement and max that out and get 51% tex savings, or you can refinance and ut that extra $1,000 into loans. Like that’s kind of an intense scenario, right?

Reese Harper: Yeah.

Travis Hornsby: So what I’ve found is that 1.5:1 ratio takes that into account. Because a lot of times what people will do is if they’re at that point where they’re making some good income, they might actually be able to reduce, like make the debt to income ratio even higher artificially. By putting money into pre-tax accounts and working with a planner, and trying to put the maximum money away and also into their practice by using depreciation and those kind of things.

Reese Harper: Yeah.

Travis Hornsby: So like I said, it’s about [crosstalk]

Reese Harper: So you went more conservative, because you’re like, I want to allow – I mean you’re echoing what I’m saying in a different way. Which is, dentistry is a uniquely entrepreneurial opportunity still. Meaning, you have some discretionary money that you can – you know how an office manager can add a new location, you could hire an associate, you could put money into marketing, you could build a new piece of dental technology. I mean, there’s a lot you can do with that free cash flow. And it’s coming from your business ownership, in a lot of cases.

Travis Hornsby: To just give you another example, it’s about your AGI. So we found this trick recently, probably in the past year. Where if you live in a community property state and you file separately for your taxes, you’re supposed to equally distribute community income across both spouses.

Travis Hornsby: So for example if you’re making $250K a year in California and you’re married and you have a stay at home spouse, if you file taxes separately, you can distribute that $250K income across two people. And so what does that do for your student loans? Say I have $300K of student loans. And now instead of having a debit to income ratio that’s telling me to refinance, if I file taxes separately my monthly payment now could go down to maybe $700 a month. On my $300K student loan debt. And I could become a forgiveness candidate within almost zero tex penalty from filing separately, because of that equalized income.

Travis Hornsby: So that is mind boggling that you can do loopholes like this. And find all these loopholes that you know, you have to really have done hundreds of these to really be super familiar with it.

Reese Harper: It’s probably changing fairly often too, you know? So it’s kind of a little bit of a moving target. So it sounds like the general advice that you give at this point is, be conservative with deciding when to refinance. And really make sure your income is high enough to justify that.

Reese Harper: Because talk about the, if I stay on IBR – income based repayment indefinitely, talk to me about the consequences that that has on me.

Travis Hornsby: So we did, I made a calculator to play around with how big of a deal is the right loan strategy. I wanted to figure that out, because having the wrong strategy can cost you several hundred thousand dollars. But all of the different ways that I ran the numbers, basically having the wrong strategy can cost you about one to three years longer work life. So in other words, one to three years off of your retirement date.

Reese Harper: Yeah.

Travis Hornsby: So that’s the consequence if you screw it up.

Travis Hornsby: With what we found is, I look at the percentage of your income going to loan payments, investing, in brokerage accounts, and retirement. So I look at that percentage in terms of how soon are you gonna be able to be financially free? And what we found is, if you do about 15% of your income going to those three things, then you’re gonna not be able to retire until you’re in your mid 60’s to mid 70’s.

Travis Hornsby: So 15%. So that means you’ve got probably like, a portion going to your income base repayments, you’ve got maybe 4-5%, 10% something like that going to retirement, if you include an employer match. So that’s a lot of dentists out there. Is you’re an associate, you’re getting a 4% match; so that’s like 8% going to retirement. And then you got like, the 10% going to your loans. So that’s not enough. And what I found is, going from a 15% settings rate to a 30% rate going to loans, and retirement and investments, that actually can save you like, a decade off of your retirement date.

Reese Harper: When you say 30% savings rate, you’re including student loan payments in that?

Travis Hornsby: Yeah I’m including loan payments. I’m also including retirement savings.

Reese Harper: Yeah.

Travis Hornsby: So retirement savings are done with pre-tax dollars. So if you’re throwing in the maximum to retirement savings, you could easily be doing 15-20% of our income going into retirement savings.

Reese Harper: Yeah.

Travis Hornsby: But it’s only actually filling like, less.

Reese Harper: Less. So what was your broader, over arching point in that example there? Was it that, look by going into an income based repayment, or deferral, or loan forgiveness essentially strategy, you’re gonna be able to go a lot faster than the alternative?

Travis Hornsby: Yeah, I’m trying to do away my business and show people how important yours is, basically.

Reese Harper: Yeah. I love it, I appreciate that.

Travis Hornsby: No I mean, what I’m basically saying is, is somebody with that amount of debt, they’re worried about the size of their debt. They’re worried about the wrong thing.

Reese Harper: Yeah.

Travis Hornsby: So the idea of getting on the income driven strategy for the long term, is absolutely fine. I’m not worried about that at all. Lie, you’re gonna make the payments, the one balance is gonna grow. Hey guess what? Like some progressive president will eventually win in the next 30 years, probably, right? And they’re probably gonna wanna do a bail out.

Reese Harper: Yeah.

Travis Hornsby: Because they’re not gonna come after people for one time, lump sum tax penalties where people are having to sell their practice to sell their house and empty their brokerage accounts.

Travis Hornsby: I don’t personally believe they’re actually gonna do that. That’s what the rule is, but that’s because the rule’s never been tested yet and people haven’t cried bloody murder over it. When people start crying bloody murder over it, they might have that happen.

Travis Hornsby: So in other words like, focusing on the debt as the reason why you can’t be successful, is kind of like blaming something that’s not the problem. People that are not achieving financial success, they have a lot of debt; they’re actually the problem. It’s with them that the solution can be done. Basically if you increase your savings rate, you start investing a ton, if you get the right loan strategy and the right financial plan in place – I don’t care if you have $600K and you’re a general dentist in Beverly Hills making $120K, you can still be super financially successful. Like 30% going to loans, retirement and investments, is not an unbelievable amount. You could do that.

Reese Harper: So when you’re saying that 30%, you’re talking about the minimum income based repayment amount plus the retirement savings?

Travis Hornsby: Right. So like you get a deduction for the income based repayment. Like, it’s 10%; it’s actually an effective rate of like 7%.

Reese Harper: Okay.

Travis Hornsby: Because you get a deduction, so you know, it’s really like 7%. So 7% of your effective income is going to loans. And then say another 5% of going to your tax bomb. Because you’re gonna have to pay the income tax bomb at the end of the 25 years, right?

Reese Harper: Yeah.

Travis Hornsby: So 12% is going to combination of loans, plus brokerage account. So now let’s say I maxed out my 401K, and that’s $19,000 a year; like I showed you, the $200K dentist might actually only be paying half of that in take home pay because of that 51% tax rate.

Reese Harper: Okay, so if you’re going through your program with somebody and you, I know you don’t always advise income based repayment, but you’re trying to get them on a plan to where they’re also saving up for that income tax – we’ll call it the tax bomb that you’re mentioning, that they’re gonna have to owe at some point down the road potentially.

Reese Harper: And you’re saying that there’s a possibility you get to keep that money anyway because we’ll have to see how the government decides to deal with that. But when do you owe the tax on that income, on that student loan? When am I gonna owe the tax? A lot of people don’t know the answer to that.

Travis Hornsby: Yeah you get a 1099C in 20 years if you’re on the pay as you earn plan, 25 years if you’re on the IPR or revised pay as you earn plans. From the date that you started payments, assuming you didn’t use any forbearance between that 25 years or 20 years. So that’s the answer to that.

Reese Harper: And what’s the difference between the 20 and the 25 year again?

Travis Hornsby: Yeah so pay as you earn is a 20 year program, revised pay as you earn and income based repayment are 25 year programs. Now the way the regulations are currently written, the different plans all account for one another. So I’ve had some dentists, the extreme forum and blog reader types that have been like, “Hey, why can’t I do repay for 19 years, and at the very end after getting all those subsidies, I’m gonna switch to pay and I’m gonna get it all forgiven in 20 years.” Instead of pay for that period. And to that I just say like, “Don’t try to optimize everything so hard that you forget that there’s bureaucracy and nightmarish loan servicers that you have to deal with.”

Reese Harper: Yeah.

Travis Hornsby: So there’s a proposal that would lock everybody into the payment plan they’re already on, it’s in congress right now; if it gets passed, people that should of been on a pay 20 year plan that would of really benefited from that, they’ll be stuck in a 25 year plan. And hey, guess what? Dentists make a ton of money late in their career.

Travis Hornsby: So you’d have to be paying a lot extra on your loans that ended up working out the wrong way.

Reese Harper: You’d say, gut feel is go income based repayment, save up for the tax bomb and just live your life and maximize your savings. Use the power of compound interest, lower your effective tax rate, and grow your net worth that way. As opposed to kind of, I don’t want to say “obsessively”, but people fixate on that student loan elimination.

Travis Hornsby: Yeah, they do.

Reese Harper: I mean, man. Seven or eight years in, you’re barely – I mean even if you went all in. I mean let’s say you took you entire 40% of your $180,000 income, which gives you, maybe you’ve got $60,000 a year or $65,000 a year you can throw at your loans. I mean, you’re still looking at like, a solid – assuming no emergencies, no vacations, no life, you’re gonna go six to seven years hacking at this thing before, you know?

Travis Hornsby: I like to say jokingly like, NYU now, for people going there, they’re gonna come out with $600K in debt. I predict it’s about $600K is gonna be the average debt for this class that entering. So that’s a $6,000 a month payment, that’s if you want to pay it off in 10 years. That’s $72,000 a year. New dentists from NYU is probably gonna make $120,000 as an associate and coincidentally, they’ll probably take home about like $80,000 after all the different taxes and deductions. So you’re getting to a point where like, if you wanted to pay off your debt, literally 100% of your take home pay at some schools would have to go towards paying it back.

Reese Harper: Yup. Yeah man, it’s just not, and this is where it kind of, the message that – it’s difficult to give this message, but I just think right now the dental student loan cost is really driven by the fact that the industry still has a ton of entrepreneurial opportunity. I mean that’s why USC can get away with charging what they’re charging. There’s a lot of reasons why, but some of them are this one. There are many reasons why they can do this.

Reese Harper: One of them is you’ve got some states in some areas, you got one school and that’s all you got. So, it’s a monopoly in some cases. But it’s also supply and demand, and I think the demand is there only because you don’t know what your income is. It’s gonna be variable. And it might be four times what the next persons is, and as long as that opportunity’s there, it’s gonna cost a lot more.

Reese Harper: I mean, what do you think the average dental school cost is compared to medical school cost right now?

Travis Hornsby: Probably 20% more, maybe.

Reese Harper: Yeah I mean it’s definitly more, I don’t know exactly how much more. At the high side, on average I think you’re 20-30% more for sure.

Travis Hornsby: Yeah. But here’s our system though, really what we have is a system that takes 10-ish% of your income in exchange for being a dentist. Is that a good trade compared to being a bachelors degree holder making $60K a year, with undergrad level debt, like $30K? Like abso-freaking-lutely.

Reese Harper: Yeah.

Travis Hornsby: Would you like to make $120K starting salary and lose 10% of it to loans? And then also have the potential for all these entrepreneurial activities? And you can potentially make way more than that? Like, is that a good trade?

Reese Harper: Yeah.

Travis Hornsby: It’s a great trade. And then it doesn’t matter what the cost is, because it’s the same payment if you have $300K or $600K. And so from a perspective of a dentist like, yeah it doesn’t matter what the cost is. Just go get your dental degree; as stupid as that sounds.

Reese Harper: No counselor at the dental school is really getting down into this granular level of analysis or advice. Saying, “You know what, you should probably contemplate an income based repayment strategy and just save up a little money for that tax hit that you’re probably gonna take.” I’m confident that, in my experience at least, that’s a very, I don’t know if it’s two to three dentists out of ten would even be aware of that as an option that they had. I think they just feel like, “There’s a point when I’m gonna refinance and lower my interest rate.”

Reese Harper: And that makes sense to me, because that’s how even 40 and 50 year olds think about their investment accounts all the time. Is like, “What return did I get? What return did I get? What return did I get?” And it’s less about some more important factors that are driving returns, or more important factors that are driving your student loan repayment. It’s not the interest rate that we should make the decision around, right?

Travis Hornsby: Right, exactly. And I will say that, places like the most expensive schools are doing a better job of this as a survival strategy. Because when you have a bill that’s gonna be $500K, like… [crosstalk]

Reese Harper: Yeah! They’re like, “It’s okay, you don’t have to pay this back.”

Travis Hornsby: Well yeah, it’s like I look at admissions committees and counseling is like sales and marketing departments of universities. That’s what they are. And so your sales agents, like when people start getting tons of questions about things, like when people are starting to freak out, like that’s why you suddenly have to at least know a little bit about it.

Reese Harper: Yeah.

Travis Hornsby: And so I’m seeing that the schools are having to answer a lot of these questions from prospective students. Like, “Wait, like $400K? How am I gonna pay that back?” They’re starting to get more push back from students, for sure.

Reese Harper: Let’s talk about this just real quick, a lot of people don’t know how the percentage of their income, what percentage of their income is required in an income based repayment strategy? And if that varies at all, person to person?

Travis Hornsby: So it’s 10% of your discretionary income, which is your AGI minus 150% of the poverty line. So I mean, you can file taxes jointly and include our spouses income in that. Or you can file separately and exclude your spouses income with certain repayment plans.

Travis Hornsby: So one person, the deduction is like $18,000. So if you’re making $120K, subtract off $18,000, so almost you know, it’s about $100K. 10% of that’s $10,000, divide by 12. You know, you’re at like, $750-800 a month for a typical new associate.

Reese Harper: Yeah. 10% of your discretionary, which is your gross minus 150% of the poverty line?

Travis Hornsby: Yes.

Reese Harper: Yeah. And the next questions is about the guy or gal that is now out of school and they’re contemplating refinancing; because their income is, let’s say their income that it will be – they’ve been on income based repayment for a while. And they’re confident that their debt to income ratio is at a one or less, or it’s a one and a half or less, or it’s maybe even 80 base points or .8 or .9. What’s some advice you’d have for people on refinancing at that stage?

Travis Hornsby: I like this thing called the refinancing ladder. And this is a strategy where you start off with a 15 tear, or maybe even a 20 year, depending on what stage you’re at in your practice. And that’s all about cash flow, right? Because you talked earlier in the episode about the importance of cash flow, and that $1,000 or $2,000 a month, what you could do with it.

Travis Hornsby: So I’m not necessarily a fan of going from like, a 5% to a 4.5% with this huge extra contribution that you’re required to do.

Reese Harper: Yeah, you’re doubling your payment or something? Tripling it?

Travis Hornsby: Yeah so what I tell people to do instead is, you know a lot of people they get kind of like, “lumpy” income. You have an amazing month and you crush it, but you kind of think maybe next month won’t be as great. So there might be some seasonality into your income.

Travis Hornsby: So if you do want to pay back your debt, like don’t get me wrong, get rid of it. I think there’s a big psychological toll of having student loan debt compared to other kinds of debt, you know they’re asset backed. So I think that it’s great to get rid of your debt fast, I’m just saying people could start off with a 15 year and make a lot of extra payments over and above what they have to make when they have extra money, and then they could refinance again to like a five or seven year. And because you’re doing that refinancing a second time, that five or seven year payments gonna be way lower than what it would of been if you started out with five to seven year.

Reese Harper: Yeah.

Travis Hornsby: So you’re just gonna get a lot of extra flexibility for a very small, extra cost in interest.

Reese Harper: What’s the maximum amortization schedule that I can get on a refinance?

Travis Hornsby: 20.

Reese Harper: And who do you, like do you have a list of lenders that you kind of shop through? How often does the market recycle and how active is it? It seems like it’s growing quite a bit.

Travis Hornsby: It’s super competitive. For dentists, you’re gonna get a great rate as soon as you have a debt to income ratio below 2:1. And I would say a lot of the top lenders are gonna have very similar rates. So Laurel Road, CommonBond, SoFi, Earnest, ELFI – like there’s a lot of different lenders. And whoever’s offering the top rate, it always changes. [inaudible]

Reese Harper: Do they all offer 20 year AM schedules?

Travis Hornsby: Not all of them. Most of them do though.

Reese Harper: Okay. And can you pick a custom AM schedule with each lender, or do I have to kind of pick on 5 year increments or 2 year increments? Or what’s common?

Travis Hornsby: Yeah like Earnest will let you pick your own.

Reese Harper: Okay.

Travis Hornsby: So that’s the most customizable and the other ones are all five year increments. And I would say that the 10 and the 15 year are the most common refinancing terms. I would say the 10 is the most popular.

Reese Harper: So what you’d advise is, try to I mean, if you’re aggressive, entrepreneurial, if your expansion minded – which tends to be our core audience, then use the debt. I mean, you got through school, you paid what it cost, you do income based repayment to get your practice stable and get your income to that point where you’re DTI’s a lot lower, right? That’s kind of the primary first objective; liquidity and bringing that DTI down. And then you’re saying, go for a repayment ladder strategy or refi ladder strategy where you’re instead of just like, throwing this all in a 10 year, maybe start with a 20 and go to a 15. And a 10, and a 5. Continue to accelerate or refinance multiple times throughout your career as opposed to thinking about it under a one time kind of option, right?

Travis Hornsby: Exactly. And you know, for a fee only/fee based planners like you guys, yeah there’s not a lot of commission revenue. We do earn commissions on refinancing on our site, but our approach is to give the vast majority of that back to the reader.

Reese Harper: Yeah.

Travis Hornsby: So when you do all those refinancing, because it’s not a lot, it’s like $500 on average each time you refi. But you know you do that two or three times, it’s $1,000-$1,500, something like that. Most important thing is obviously, the interest rate. But if you apply directly at these places, you won’t get any cash back bonuses. So it’s just kind of a “nice to have” if you go on our site.

Reese Harper: Yeah, it’s great man. So how do you guys work with customers that are in school, versus out of school, versus refi – what’s the consulting process like? How have you built your product to meet the needs of your customers? How do you charge and what’s it like?

Travis Hornsby: Yeah, our goal is to turn them into profitable customers for you.

Reese Harper: That’s good for us.

Travis Hornsby: I’m just joking. But in all seriousness, if somebody comes out of school and they may not be ready to spend a four figure amount for a financial advisor. Their still trying to get a lot of things in place. So it’s $300-$600, depending on how much debt they have. So it’s a flat fee, one time. That gets you a CFP or CFA consultant.

Travis Hornsby: I tend to work with the people that have over $400K, so that’s the $600 fee. And then if you have less than $400K, it’s that $300 or $450. So it’s a flat fee and we charge that. We make the plan for people, do the [inaudible] call and they have follow up. Six months of a follow up that we could do. You know, a year really, of email follow up for the podcast listeners.

Reese Harper: Yeah.

Travis Hornsby: Yeah, so that’s the consulting process. The refinancing process, we don’t have to be involved in that from “you are paying us” stand point. Like, people will reach out to us. They’ll be like, “Hey, I’ve got $200K of debt, I’m making $200K. I’m feeling pretty good. You mind if I just give you some screen shots of different refinancing offers, and you can tell me via email if it’s good?” And I’m happy to do that for free. If somebody just wants a second opinion on their refi deal, like that’s not something I have to get on the phone with. And I’m assuming a certain percentage of people use our refinancing links, because I think they’re the best out there in terms of the cash back bonuses.

Reese Harper: Yeah.

Travis Hornsby: So the consulting thing is really designed for people who are like, “I don’t know what I should be doing. Like I’m not sure if I should refinance, I’m not sure if I should go for forgiveness. I know my loans cause me a lot of anxiety and I know that it’s a big barrier to my mindset, of increasing my net worth. So I want to figure out how these should be handled, whether it’s forgiveness or refinancing.”

Travis Hornsby: And sometimes people will come to us and they’ve already made that decision and those are the people that we can just like, I just respond like, “Hey, just let me know what kind of offers you’re getting. Screen shots are great.”

Reese Harper: That’s awesome.

Travis Hornsby: That’s the process of it. Most people probably do need to do the consulting. Even if they think they should refinance because again, a lot of the popular advice out there, the “debt rage”, like “Pay down your debt. Do you debt screen.”, right?

Reese Harper: Yeah, man it just doesn’t really, there’s a difference between maximizing your overall net worth throughout your life and getting rid of your loans as fast as you possibly can. They’re just not always aligned.

Travis Hornsby: Yeah, well it’s way easier to get you excited about paying down your debt and putting thousands and thousands on your debt, instead of putting thousands into like Vanguard index funds. Nobody’s like, “I have a $100K in Vanguard index funds! Wooo!”

Reese Harper: Yeah.

Travis Hornsby: You don’t get that guttural, visceral reaction. That’s the thing is like, I don’t know if that’s a, hey like maybe we could create the $100K net worth scream.

Reese Harper: I’m working on it right now with a new app we’re building that I think will help these younger people who are trying to get the same emotional upside out of growing their net worth. I mean, the wealthiest companies and people in the world have to use a combination of debt, and liquidity, and asset building to create real wealth. And it’s not just about eliminating a debt and then somehow you’re successful. I mean there’s, there’s so many things in dentistry around building this business that either you’re going to go work for a DSO and you’re going to be an associate, which is fine and admirable and it’s a great career. Or you’re going to go build a business. And if you’ve chosen to build a business then debt is your friend now. It’s an important friend; it’s really critical that you manage it properly.

Reese Harper: So I just love that you’re really taking an approach that I think is, you probably wouldn’t have this approach if you didn’t have your CFA and CFP. Because when you learn about actual financial math, you develop this opinion. Well you have. And I just feel like there’s so much bad advice out there right now. So that’s my rant. I’ll et you wrap up with any of your final thoughts before we let people go.

Travis Hornsby: No it’s just, increase your savings rate. Your number one screw ups are not related to the loan decisions that you made. It’s probably what’s in the driveway and what kind of house you’re living in is the two biggest risks, frankly. And also the other big one would be staying married.

Reese Harper: Yeah, absolutely.

Travis Hornsby: So if you can conquer driving paid off cars, living in a house less than two times your joint income, and staying married, and you max your retirement accounts and put $1,000 in a brokerage account – you’re gonna be in the top 10% of dentists financially, from a success standpoint. Just by virtue of you can accomplish those five things.

Reese Harper: Yeah.

Travis Hornsby: And then add on the student loan plan, and learning how to invest or getting a planner to manage it for you, and increasing it above $1,000 a month in that brokerage account and being a practice owner – now you’re talking about the next level wealth of making work optional.

Reese Harper: Yeah.

Travis Hornsby: So I would just encourage people to get a plan for what they’re doing with their lives, financially.

Reese Harper: Ah Travis, it’s been great man. I’m looking forward to having you back on to get an update periodically. It’s been great chatting with you, you’ve got such great insight for people and you approach it with a, I think just a real analytical, thoughtful approach and it means a lot. So thanks for all you’re doing out there for our clients and for dentists all over.

Travis Hornsby: Yeah, for sure. And folks can reach out and help@StudentLoanPlanner; I write all those emails.

Reese Harper: Yeah, we’ll put all of Travis’s information in the show notes, so that you’ll know how to reach him. Is that the best way to reach you? For people that are just listening and too lazy to get on the website?

Travis Hornsby: Yeah, help@StudentLoanPlanner.com is just the best email to send. I usually respond to all of those.

Reese Harper: Okay, thanks Travis. Man, we really appreciate it and look forward to catching up with you again soon.

Travis Hornsby: Thanks Reese.

Reese Harper: Thanks again for listening, guys. I really hope that you enjoyed the show.

Debt & Financing