If you're a therapist, chances are you have student loans and a lot of them. I know your debt can feel overwhelming, but there is no reason your student loans need to run (much less ruin) your life. There are many great repayment and even forgiveness plans available. However navigating the student loan system is sadly near impossible without specialized training. That's why this week I'm covering the ten things every therapist needs to know about student loan debt.
Watch the video 🎥 here 👆
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Read the post 📚 below 👇
This post is all about Federal Student loan debt. If you have private student loans, this information won't apply to you. I will cover handling private student loans another time.
And friendly reminder, nothing here is financial advice. This is general education to help you decide the right path for yourself. I can't cover all of the important details of student loans in a single post. If you suspect you need professional guidance, please seek that out.
Navigating the student loans systems is really, really complex. Despite having worked in finance for over twenty years, had I not completed extensive training about the student loan system I would be utterly lost. I was - and still am - shocked by how complex the system is and how terribly it consistently fails borrowers. That said, there are good options available for virtually every borrower. But it's insanely challenging to figure out what plan is best for you. But never fear, today we'll cover what you need to know. Let's make sure your student loans don't derail your life plans.
Here are the ten things I want every therapist to know about their student loan debt.
1. Make space for hard-to-hold emotions. 🧘
Money is almost always emotional. When we're dealing with something as big as six-figure student loan debt, it is natural to experience challenging emotions. The first thing I encourage everyone to do is to make time and hold space for these emotions to show up.
So before we go any further, let's pause for a moment and take a deep breath in, hold it for a moment and then slowly let it out. Whew. There, I'm feeling better. I hope you are too.
2. Make space for hope. 🥲
As as a therapist, $100,000 (or more) of student loan debt is far from rare - it's the norm. You are in good company and there is no student loan so large that it can't be effectively managed.
Whether you’re working in an agency or your own private-pay practice, you have good options available to you! You won’t be saddled with this debt for the rest of your life. It need not run (much less ruin) your life.
3. Know your Student Loan Debt-to-Income Ratio. 🧮
Figuring out how large your student loan balance is relative to your annual income is the critical first step. This number will determine which of two primary pathways you'll follow to become debt free.
Figure out how much money you make in a year.
- If you're single, look for your Adjusted Gross Income ("AGI") number on your most recent tax return.
- If you're married and live in a community property state find your Adjusted Gross Income ("AGI") number on your most recent tax return and divide it by two. Community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington & Wisconsin.
- If you're married and don't live in one of the community property states, don't use your tax return. Figure out how much you make excluding any income from your spouse. Look at the pre-tax earnings from your private practice or the the W-2 your employer sent you.
The next step is to find your total outstanding student loan balances.
You should be able to find that amount on a recent statement from your loan servicer or at StudentAid.gov.
Finally, divide the total outstanding balance by your annual income.
- If the number is over 1.2x, you are almost certainly an excellent candidate for an Income Driven Repayment plan.
- If the number is under 1.0x, you are unlikely to benefit from an Income Driven Repayment Plan. In this circumstance, you likely want to pay down your loans reasonably quickly. You might consider refinancing your loans through a private lender (see below for cautions) to reduce your interest rate.
- If the resulting number is between 1.0x and 1.2x, you may be a good candidate for an Income Driven Repayment plan. Think about what's likely to happen to your earnings over time. If your income is likely to stay pretty stable or even decline, an IDR plan could still offer you meaningful benefits. On the other hand, if your income is likely to increase, an IDR plan is less likely to offer much relief.
What is an Income Driven Repayment Plan?
Great question! There are several different Income Driven Repayment plans available. They are all complex but work in the same essential way: they only require you to pay a fixed percentage of annual income toward debt repayment regardless of your loan balances.
If your debt to income ratio we calculated above is over 1.0x, an income driven repayment plan will likely allow your monthly payment to drop - often by a significant amount. Watch for a future blog post where I'll explore the available plans in greater detail and help you calculate how low your monthly payment might be. Be sure and subscribe to my newsletter so you don't miss those!
4. Assume your Loan Servicer is wrong. 😑
Regardless of who your loan servicer is, chances are they've given you bad information. Be very skeptical of anything your loan servicer tells you.
Servicers often get simple questions of fact (like what repayment plan you're on) wrong. And I would never rely on the advice from a servicer regarding what repayment strategy to follow. More complex matters like qualifying for Public Service Loan Forgiveness - forget it, they simply have no idea what they're talking about.
The folks you interact with on the phone simply haven't been given the training, resources or time to be able to determine the best repayment plan or strategy for you to take. This is not the way it should be, but for now it is the way it is.
If you need help navigating your student loans, don't count on the servicer. Find a qualified fiduciary financial professional who has specialized expertise in student loans. The rules around student debt are far too complicated and unusual to put it in the hands of anyone else.
I recommend you work with someone who has gone through the advanced training the CSLP Board offers. I've completed this training, and the CSLP website offers a directory of other student loan professionals who have meet their educational requirements.
Looking for more great resources to help you navigate your financial life? Check out my free Guide to Financial Planning for Therapists. Click here to access!
5. Approach loan consolidation with caution ⚠️
If you're thinking of consolidating your student loans within the federal student loan system, be careful.
Often consolidating your federal student loans into a single federal student loan offers no real benefit - and it comes with some meaningful downsides:
- You won't reduce your interest rate. In fact, your interest rate will likely increase slightly.
- Any unpaid interest you've accumulated will also capitalize, which will increase your future monthly interest charges.
- Consolidation will also erase any (and all) progress you've made toward Public Service Loan Forgiveness.
- Some loans that offer special benefits, such as Perkins Loans, lose those benefits if they're consolidated.
- Finally, in consolidation you lose the ability to target your payments to your higher-interest-rate loans. In a consolidation all outstanding debt has the same interest rate, which is simply the weighted average of your existing loans.
Three Consolidation Benefits Worth Consideration
With those drawbacks in mind, there are three primary benefits of consolidation that might make consolidation worth it.
- The first big benefit of consolidation within the federal system is that it will 'cure' your loan status if you've fallen behind on payments. But you can only do this once! If you consolidate when you don't need this benefit, it's gone forever.
- The second big reason to consolidate is to access to a greater range Income Driven Repayment plans. But make very certain you actually must consolidate for the IDR plan you want. Seemingly innocuous changes, including consolidations, can forever disqualify you from certain beneficial provisions. Watch for my upcoming post which will detail the different IDR plans and their requirements.
- The third and final big reason to consolidation is to convert a Family Federal Education Loan (FFEL) loan to a direct loan. If you borrowed prior to 2010, you likely have a FFEL loan. Direct loans offer many benefits which FFEL loans don't receive. For example, the recent Administrative Forbearance freezing interest and payments during the pandemic does not apply to all FFEL loans. But you can always consolidate a FFEL loan to a Direct loan and receive enhanced benefits. This is true even if you only hold a single (perhaps already-consolidated) FFEL loan.
The TL;DR here is: If the only reason you're consolidating is the administrative ease of a single loan, I'd strongly encourage your to consider skipping consolidation for now.
6. Beware private loan consolidation companies ⛔️
Sadly (if predictably) there are many scams taking advantage of student loan borrowers. The most benign of these scams egregiously overcharge you for what you could easily do yourself. (Or with the help of a more ethical and moderately priced CSLP professional like me 🙂). The most malignant will steal your identity and cause long-term damage.
Be cautious of any advice or solicitation you get. If anyone pressures you or insists you must act now before a program changes or ends - they are lying and you should ignore them. Never, ever share your FSA login credentials. If anyone asks for them that is a HUGE red flag. 🚩
Trust your intuition and instincts here. If it sounds fishy or too good to be true, it definitely is. Only work with reputable financial institutions and advisors you can verify.
7. Approach private refinancing with caution ⚠️
If your student loan debt-to-income ratio we discussed above is below 1.0x, Income Drive Repayment plans are unlikely to offer you much relief. In that case, you'll want to pay off your debt reasonably quickly. This will minimize the interest charges you incur.
One way to reduce interest is to refinance your federal student loans with a private lender. Right now, interest rates are insanely low, so there can be very significant savings especially if you have a good credit score.
But be cautious. When you refinance with a private lender, you lose many of the generous benefits and protections the Federal system affords you. Public service loan forgiveness, long-term forgiveness, any special debt forgiveness Congress or Biden ultimately offers, repayment and interest holidays like we've seen during the pandemic, special discharge provisions including death and disability discharges. All these provisions are unique to Federal Student Loans.
The moment you refinance with a private lender these protections are gone forever. Be very certain of what you're giving up and understand the provisions of your new loan documents before signing on the dotted line!
8. If you're pursuing PSLF, triple check everything!!! ✅ ✅ ✅
Public Service Loan Forgiveness (PSLF) is like the holy grail of student loans. Everyone talks about it, everyone seeks it and yet no one seems able to find it. Perhaps it doesn't even exist.
I can assure you that Public Service Loan Forgiveness is, in fact, a real thing and borrowers have had debt forgiven. But it is a very fussy program. There are a lot of rules and you have to follow them all carefully.
I'll do a more complete post on PSLF in coming weeks. For right now, here are the three essential elements requires for PSLF to work.
- You must have Federal Direct Loans. If you hold FFEL loans (generally issued before 2010) these are NOT eligible for PSLF. You will need to consolidate your FFEL loans to a Direct Federal Loan. You can "consolidate" even a single (perhaps already-consolidated) FFEL loan.
- You must be in the right type of repayment plan. Double check this by looking at your actual student loan documentation. Do NOT trust what the loan servicer tells you over the phone. You should be in an income driven repayment plan for maximum forgiveness. If you are in an EXTENDED or GRADUATED repayment plan, your payments do not count toward the 120 required payments. You'll want to fix this as soon as possible. Sadly there is no way to retroactively fix an ineligible payment, so you want to be very careful.
- You must hold the right kind of job. And you need to be working in that job at three separate points of time: when each of the 120 monthly payments are made; when you apply for PSLF forgiveness; AND when you ultimately receive the forgiveness. You must be working full-time for pay (volunteering doesn't count) for a qualifying employer. Qualifying employers include any government entity (but not contractors) and 501(c)(3) non-profits. Political organizations and labor unions are not eligible employers.
9. Prepare for the tax bomb of longer-term forgiveness 💣
All of the Income Driven Repayment plans have either 20 or 25 year forgiveness provisions. I know that seems like an impossibly long time, but if you suspect you will eventually reach that forgiveness, you'll need to prepare for the tax bomb.
In general, if any debt you owe is forgiven, the amount of the forgiven debt is taxable income to you. That means the year you receive forgiveness on your student loans - or any other debt for that matter - you might get a very nasty tax bill. Only Public Service Loan Forgiveness escapes this tax. Be sure to be setting aside savings to prepare for this.
This tax treatment is in flux. I think there is a reasonable chance legislation will pass that eliminates the tax bomb. But legislation is a chaotic and unpredictable process, so I wouldn't yet count on anything. For the moment, the only future tax change we know is coming is an unfavorable one: the discharges for death or disability will become taxable in 2026 and beyond. Through 2025 these death and disability discharges avoid the tax bomb (just as the Public Service Loan Forgiveness does).
10. Use deferral and forbearance with care 🤨
Deferral and forbearance can be valuable tools to bring loans current if you've fallen behind on payment. They can also be decent tools if you can't afford to make payments for a limited period of time. But be sure and run the numbers. Often entering into an Income Driven Repayment Plan will yield a better overall outcome. Your required payment under these Income Driven Repayment plans can be as low as zero! And using the Income Driven Repayment Plan approach will likely help you reduce the amount of unpaid interest that capitalizes (and increases future interest charges).
That's a Wrap 🎬
We covered a lot today and yet it is just the beginning of what you need to know to effectively manage your student loans. Watch for future posts where I'll give you a better overview of the different Income Driven Repayment plans available and what your monthly payment might be under those plans. I’ll also cover Public Service Loan Forgiveness in greater detail. And those Byzantine PSLF rules are critically important ones to get right.
And if this all feels a bit much, give me a shout. I work one-on-one with therapists from all over the country helping them address issues just like the ones we talked about today! There are a bunch of different ways to work with me which I describe on my services page.
Turning Point is a registered investment advisor in the state of California. Please visit turningpointhq.com for important information and additional disclosures. This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes financial, legal or tax advice; a recommendation for purchase or sale of any security; or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Read the full Disclaimer here.