Today's blog contributor is Kurt Whitesell, CFP®, Senior Advisor out of Summit's Rapid City, SD branch office.
A few weeks ago, while playing some golf, I was visiting with a young couple. They were well-paid professionals who are strapped with student debt. In our conversation, they told me they make a good living, although they had made some poor decisions about financing their educational costs. When they heard I was a financial advisor, they were very forthcoming about the challenges they faced. It caught me off guard, but I could see it was weighing on them.
When they explained they were paying nearly 13% interest on almost $80,000 in private student loans, it almost took my breath away. What a travesty! I would like to think that this was a “one-off situation” where this young couple had been an anomaly, although, in another recent visit with some prospective clients, I realize they are not alone. What in the world is going on? These are bright, hardworking people who have been taken advantage of by an industry that preys on the young, less money-savvy who are trying to get ahead and land a high-paying job and now are buried in student debt. What should they do now?
After gathering more information, I found they had bought a home at a low-interest rate, and they are considering selling it to pay off their debts (even though they love it); my advice to them:
- Be patient, it takes time to work through the process of retiring debt; it has taken you years to get here and will take years to get out
- Consider consolidating the debt in an attempt to lower the interest rate
- Borrow what they need to pay off the high-interest debt against their home, where they had accumulated equity. In doing so, it would be more manageable and less expensive than before. Their current interest rate on their home is 3.5%, and they had considered selling the home and using the equity gain they had made to pay off their student loan debt. Although that would only pay off the debt and then would create another problem of needing a place to live, so I thought that would not be the best option.
They wondered if they should stop putting into their retirement accounts to reduce the debt quicker.
- I suggested that was a bad idea. My experience has taught me that the best way to get out of debt is by paying yourself first while you’re simultaneously working on paying off the debt. The problem with trying to pay off your debt before saving is that it creates a bad habit of taking care of others before you take care of yourself. This reminds me of when oxygen masks drop from an airplane during an emergency, they suggest you put your own on before helping others. You probably don’t want to mess this one up!
- We discussed the importance of paying yourself first and making sure that the money you’re putting away is invested into a managed portfolio of equities for the long term as opposed to being deposited into a savings account where it is easier to withdraw and historically doesn’t grow as well over time.
Lastly, who should they talk with about their finances?
- I congratulated them on being able to discuss this issue with me. Even though we had just met, I could tell it had been a major issue for them, and if left for them to decide on their own, it could be a disastrous outcome.
- Seek the help of a CFP® professional. Someone who can provide caring guidance. As a fiduciary, I have a responsibility to provide honest advice that is in the best interest of the client.
In consulting literally thousands of individuals over three and a half decades, I know the best time to ask for help is when you are thinking about it!! Don’t be shy; your future is determined by the decisions you make today and how you navigate the path to a better, more secure future.
(Please note that this is not to be considered a recommendation for your personal situation. Every person has unique strengths and challenges and should be discussed with your financial professional)
- Kurt