When I wrote this post, the federal student loan forbearance ended on December 31, 2022. Now it’s extended. So this piece is now how I will change my financial plan when it ends! But basically, since the beginning of the pandemic until that date, interest rates on all federal student loans have been at 0%. This was obviously a huge advantage for those of us with huge student loan debt.
But now that
is will eventually be over, so how will my financial plan changing as a result?
The impact of the federal student loan forbearance
Before discussing how my plan changes, let’s briefly discuss the impact of the 2+ years that the federal student loan forbearance had.
And I am writing this from the perspective of a physician i.e. a high income earner. For many, this forbearance was a reprieve from the economic hardships of the COVID pandemic and the result was ability to cover everyday needs with a reduced income. However, for high income earners, we were much more fortunate and privileged. I recognize this.
In the case of physicians, all of us should have been able to cover our student loan payments without the forbearance. However, the 2+ years of 0% interest rates on federal student loans permitted us a lot of flexibility.
Instead of paying these loans off, we could use the payment amount to:
- Invest or
The problem is that many of us did not invest wisely or spend intentionally
Many speculated rather than invested on things like cryptocurrency and NFTs, leading to the bubbles and demises that we have not seen.
Other spent unintentionally. At best, this hindered their future wealth building ability and chances to reach financial freedom. At worst, it contributed to the rampant inflation we now all experience. Both are unfortunate.
But I digress…let’s look at how my financial plan is changing as a result of the end of the federal student loan forbearance.
How my financial plan is changing due to end of federal student loan forbearance
As a reminder, you can review my entire written financial plan here.
However, as a quick refresher, here are Selenid and my top financial priorities (with completed items crossed out):
Pay down high interest loans/debt (>8%)Done! (as of 10/2020) Establish emergency fund (3-6 month’s expenses)Done! (as of 12/2020)
- Maximize Voluntary Defined Contribution (VDC) retirement account
- Pay down medium interest loans (6-8%)
- Invest in vetted real estate (cash flowing rentals w/ cash-on-cash ratio >10%)
- Contribute to 529 college savings account
- Maximize 457(b) retirement account
- Pay extra to mortgage
- Pay down low interest loans (<3%)
- Contribute to back door/spousal Roth IRA (every January if contributing – 2 steps)
- Contribute to retirement taxable account
- Donate to charity with equity dividends
Looking at this, there are really 3 main ways that our financial actions will change based on the lifting of the student loan payment pause.
Notice that I now am saying that our financial actions are changing rather than our financial plan. Because, as you will see, our plan really didn’t change at all. Just our actions based on that plan…
1. Paying more money to debt
This is the most immediate and obvious change based on the lifting of the forbearance. I am now required to pay monthly installments to my ~$250,000 federal student loans. So I’m going to make those payments.
But, I plan to make much more aggressive payments than just the minimum amount.
Remember, I made a HUGE mistake (one of many) by deferring my loans all through my 7 years of training. Had I not done that, I would be ready for PSLF forgiveness this year! But alas, I did. And not even the new PSLF rules helped me – and that’s fine.
Given this reality, my student debt pay off plan has always been to aggressively pay off my loans in 5 years. And I have aggressively paid down over $100,000 of my private loans during the forbearance. I will now do that same with federal loans.
Revealing My Secret Strategy to Pay My Student Debt
So, a greater portion of my “margin” between what I make and what I spend (AKA my savings rate) will be going towards loan payments.
Remember, paying off loans offers a guaranteed return and immediately increases your net worth. No other investment does that.
Watch Jordan’s Masterclass Webinar on The 12 Steps to Financial Freedom for Physicians here!
2. Real estate investing will slow
This is something I anticipate for a few reasons.
First, more of our savings rate will be going toward debt pay down. This leaves less available to buy new cash flowing properties.
A Real Estate Investing Guide for Physicians
Now, we have always used all profits from our now 7 rental properties solely to re-invest in more properties. And we will continue to do this. However, it will take a bit longer to accrue since we won’t use as much of our “day job” income to supplement.
We now make about $10k+ in cash flow monthly from our properties. So we will still be buying. But I imagine the rate dips a bit.
Secondly, mortgage interest rates are quite high now. We still actively are always looking for good properties, but fewer meet our criteria so that also results in a bit of a slow down. (Even though there are still good deals out there! It just takes a bit longer to find them…here’s a guide…)
3. Advancing further down on our financial priority list
Currently, Selenid and I make it down to the #6 on our financial priority list – contributing to our kids’ 529 accounts.
This priority list is like a waterfall – we take our savings rate, apply it to these priorities, fill the buckets until they overflow to the next, and keep doing so until we run out of money.
Now, everyone’s priorities will be different and that’s ok, as long as they lead you to reach your financial goals. More on that can be found here…
And for us, #6 is where we currently run dry.
However, with the federal student loan forbearance ending, I believe that we will begin to advance further down the list.
Well…mainly because of the top 2 changes that I listed above.
By paying off loans more quickly and likely contributing a bit less to real estate investing (with deals also a bit fewer and further between due to rising mortgage rates), our savings rate will extend further down the list.
I imagine we will start contributing to my governmental 457 and potentially start doing some backdoor Roth IRAs.
The importance of acknowledging these changes
In my mind, it’s important to recognize that while our written financial plan is a relative constant (remember, by rule, it takes 3 months for us to make any changes to the plan), it is not a static document.
Our financial actions based on our written plan can and will change based on certain circumstances. I hope I have demonstrated this.
Some principles of personal finance do benefit from rigidity:
- I will only invest in index funds for the long term, I will not attempt to pick stocks or time the market
But our financial behavior does need to be somewhat fluid. We can’t just stubbornly pronounce:
- I will keep investing in alternative investments rather than pay off debt because that is what I have been doing for the past 2 years
The way I look at it, the really important thing is to review your written financial plan every once in a while and make sure that you are actually following the spirit of the plan.
That’s exactly what I will do as the end of the forbearance approaches and I find it very helpful!
And here are some helpful first steps in developing and refining your financial plan and resultant actions!
- The Simple Path to Wealth for Doctors: Back to Basics
- The Simple Habits That Will Make You Financially Successful
- Why I Care About Physician Financial Well-Being
What do you think? Will you alter your financial actions based on your financial plan? Will the end of the federal student loan forbearance have any impact? Let me know in the comments above!