Budget Friday Submission 2

Budget Friday Submission 2

budget

Budget Friday (Photo credit: 401(K) 2012)

WOOHOO! I’m back with another Budget Friday submission! Today we will be going over a very unique budget. Here are the deets:

Today’s budget is another anonymous submission (I have a feeling most of them will be). They have a very unique situation which was a fun challenge when coming up with the modified budget. Here’s the background:

They are a couple who moved out of country while the husband is pursuing a medical degree. They have no kids, no car, no cable and live a very simple lifestyle while he is finishing up medical school. She does teaching and freelance work and he brings in the (borrowed) cash money with a student loan disbursement. They plan on moving back to the states to start residency around the summer of 2014.

 

Credit Card Debt (Balances):

  1. CC 1 – $2400.00 at 10%

Student Loan Debt (Balances)

  1. Her Loans- $38,000.00
  2. His Loans – $173,000.00 and counting

They will likely end up at $400,000.00 combined by April, 2014.

Goals:

  1. Build $5,000.00 Emergency Fund in 12 months
  2. Save for backpacking trip to Europe in 20 months ($5,000.00)
  3. Pay off credit cards in 6 months ($2,400.00)
    1. Note: They stated they wanted to pay off the credit card, but didn’t give me a set date. I find that goals are achieved when they have a timeline. So I said within 6 months.

Notice anything unusual about the above numbers? Yea, me neither. Oh well, moving on.

Here’s their budget submission:

Budget Friday Submission 2

So, where to start…

The Big, White Elephant

So, this couple is going to have $400,000 of student loans to pay off once he is done with medical school. Wow…. It’s hard to even fathom paying off the mountain of debt…ever. BUT, luckily they have some serious  earning power in the future. After residency, they can easily pull in $150,000 – $200,000 a year. Doctors get paid well, and the medical field always seems to be growing, so I’m not too worried about them making enough money. They can live off $50k-$70k a year and pay these loans back within 5 years, easily.

The issue is that they want to pay off the loans during residency, which at this amount, will most likely crush them. I worked it into the budget, but my suggestion is that they elect for “forbearance of medical student loans” until after residency. This will allow them to reduce their payment to a more manageable number, or postpone it completely. The downside to this is that they are still paying interest on the entire student loan, which is a massive amount because of the size of their loan.

Goals Achievement

For the short term, they are able to accomplish their goals with ease. They can pay off their credit card within 2 months, and then put the extra money toward the Emergency Fund, then towards their backpacking trip. Here’s the payoff schedule:

  1. Credit Card – $2,400.00 (gone by month 2)
  2. Emergency Fund – $5,000.00 (saved by month 4)
  3. Backpacking Trip – $5,000.00 (saved by month 6)

Snowball Effect

By the time they pay off the credit card, they’re rockin’ $2,140 a month extra that they can throw at the emergency fund. They’ll have it saved by month 4, easliy! After that, they’ll have a snowball of $2,390 a month to toss at the backpacking trip. Two months later…BOOM! Saved $5,000 towards their trip. This puts them in February, 2013. That gives them 14 more months until they are out of medical school, moving back to the states and ready for residency.

At this point, their extra every month is $2,390. So the questions is, what to do with it? Well, if they’re serious about killing this student loan ASAP, then I suggest chucking it at that loan. I would start with the 38,000 loan and killing that first. At $2,390 a month, that loan could be PAID FOR by summer 2014. That would put their total around 360,000 in medical student loan debt. I would then say then find a comfortable payment to stick with during residency, and once he’s a doctor, kill the loan in 4 – 5 years. It’s totally doable, it will just take a little perseverance!  Sound like a plan? GOOD!

Comments: So…what would YOU do with $400,000 in student loans? Do you think this is a good plan for them? What are some alternative ways to attack this Mt. Everest of student loans debt? And why, when I think of doctors, do I think of that line in the movie “Catch Me If You Can” where’s he’s like “do you concur?” And then the one resident who didn’t later says “I should have concurred!” I think I’m on my own with this one, it sounds really funny in my head though.

 

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Comments

  1. Wow! I am overwhelmed hearing the total sum of student loan debt!

    The good news-like you said- is that they will have very high earning potential in the future. However, I think they run the risk of being perpetually in debt if they don’t tackle those credit cards sooner and are planning a European vacation while still in such a huge amount of debt. I personally would put all dispsable income towards their debts ASAP!
    Holly@ClubThrifty recently posted..I Need to Lose WeightMy Profile

    • The European vacation might be a bit much, but if they want to tackle this debt quickly, they will probably go insane. I think after 7+ years of school, a vacation in the middle isn’t too bad, especially being follow by another 3+ years of residency, then 5 years of debt payoff. It’ll be a tough road.

  2. Very interesting case. I don’t know this because I’ve never take out grad student loans – is it possible to not take on as much money? In your plan, they have so much extra money each month after funding the EF! Can’t they just reduce what’s coming in? Essentially your suggestion is to pay debt with debt, which sounds very strange, but if they want to consider it they should ask what the relative interest rate is of her debt vs. his. If hers is lower, shouldn’t they try to reduce his ultimate loan burden before paying hers off?
    Emily @ evolvingPF recently posted..Our Hang-Dry Laundry StrategyMy Profile

    • You know, I actually am not sure. I agree, paying back debt with debt is redundant, so it would be better to take out less for sure. I’ll have to defer to another reader or someone else for the answer to that.

      Also, interest rates are 6.8% on federal loans for both. I think getting rid of one loan would do wonders for their motivation to tackle the rest.

  3. I see a couple of holes:

    1. Internet for $15 a month? Where do I sign up for that?
    2. Phone for $50? Is this a landline? Because it is fairly hard to get a cell phone for two people for that cost.
    3. I know vacations are important, but with 400k in loans you might want to consider something less expensive.

    I’m also curious what medical school he is attending. Most people who leave the country to do this are doing so because it is less expensive. Since the majority (I know there are some GREAT schools outside the US) of the top medical schools are in the US, I don’t know why you would go somewhere else if you we planning on practicing here, unless you goal was to save money.

    Overall I think they plan you have in place is very solid, there just needs to be a few questions answered to really iron this budget out.

    PS. I love taking a voyeuristic look at other people’s financiers and I love this feature!

    • They live on an island, and have VERY low expenses. I’m assuming it’s “not-so-high-speed” internet. Not sure about the phone, but there are some great pre-paid options out there.

      The vacation is for sanity, and I think after over a decade of school and residency they would lose their minds without one.

      Glad you liked the Budget Friday feature! 🙂

  4. I’m with Brian on this one…I’d probably avoid the backpacking trip and wait until you actually accomplish a few financial goals prior to rewarding yourself with an expensive trip. Maybe take a small $1-2k vacation and use the $3k you’ve saved and pad that emergency fund a little more.

    That amount of student loan debt is extremely scary, and there is no doubt these guys will be in debt for the rest of their lives unless they’re serious about paying down the loans as soon as he gets a job. I’ve coached quite a few doctors and it’s really tough for them NOT to fall into the inflation lifestyle seen in those higher income-earning jobs. The nice vacations, cars, houses, and dining really add up. I’d just encourage them not to fall into the trap that so many other doctors do. Wait until your loans are paid off, then enjoy the rest of your lives and the great things you can do with that potential income.
    Jason @ WorkSaveLive recently posted..High Cholesterol – The China Study Diet & Fitness ChallengeMy Profile

    • ^ agreed. Lifestyle creep definitely needs to be addressed very carefully so as to not get stuck with this debt forever. I think seeing a debt payoff date can be VERY motivating, and am hoping this budget can help show that they can have freedom very soon and a very high potential for creating massive wealth.

  5. I agree with Brian and Jason-maybe hold of on the big vacation and take a smaller one? Not saying not to go, but with that student loan amount, that’s just scary. The phone and internet I actually have for about that much. Mostly because I got a deal with AT&T and we only have one phone to split. The second phone is paid for via work. And where are they living in the states? That’s a big amount of rent to me but I also know that I live in the midwest.

    I agree completely with cutting down the misc and dates. Dates are important but we do a lot of free or nearly free dates. We have 2 a month that are out (every pay period basically) generally.

    Also, have you heard back from the first couple? I’m interested to see how they are doing…
    bogofdebt recently posted..Friday’s Link Lovin’My Profile

    • I believe they are moving to New York, so I just assumed that number. And the vacation I left in there for their sanity. Personally, I might take a smaller vacation, but I’m also not the one going to medical school, so I don’t know the mental/physical burden of it all.

      I have not followed up with the first couple, but plan on that after about 3 months.

  6. Wow, those student loans are scary. I hope he really does well in school and on his exams. I assume he’s attending a medical school in the Caribbean so there is no guarantee he’ll match with a residency. Fingers crossed for this couple. If he doesn’t get the income of a doctor, then I don’t know what they’re going to do.
    Felicity @ Waist & Wallet recently posted..Dollars & SpendsMy Profile

    • Yes, medical school is offshore, so I really hope as well that things work out well as far as residency and jobs go.

      • I could be totally wrong, but I believe that Caribbean medical schools are the last resort of those that can’t cut it in the states,and the cache` isn’t the same. Hopefully,he can pull a job state-side. They should definitely be trying to kill her loan!

        • I hope they can kill her loan before he’s even done with residency, and then get a job in the states. Carribean medical schools might have a stigma attached, but once licensed, that should help him secure residency here, and eventually a job.

  7. In reality the perfect time for a backpacking vacation is when you’re still young. So I’m sure they will do that regardless of any implications on their debt. I think because they are trying to budget and are concerned about their debt they will get serious about paying it off asap. They do have to be wary of getting hanging out with other doctors who are urging them to go out to expensive restaurants, getting a nice car, nice home, etc. With that much debt, they have to try to pay it off asap to prevent paying a huge amount of interest on it.
    Modest Money recently posted..August 10th 2012 Blog UpdateMy Profile

    • Yes, I think the real temptation will be the lifestyle increase. If they can hold off for 4-5 years, they’ll be in a VERY good position!

      And I left the vacation their as a choice for them, because medical school and residency will definitely take a toll!

  8. Yeah that trip threw me. When I had around $100K in student loans, I didn’t take a proper vacation for about 6 years. Instead I took small road trips which had the effect of getting away and being able to relax while seeing parts of this country for cheap.

    The student loan debt while large isn’t unusual for doctors. I have friends with larger loans. The payments are doable with a doctor’s salary. If he works in a depressed region or one in need of doctors, he can have much of that loan forgiven too.

    • Sandy, this is what I would do, but I also don’t have the pressures of medical school. I left it in the budget because it was one of their stated goals.

      And good to know about working in a depressed region, didn’t know that. We do have friends who are doing something similar, so I know the loan amount can be paid off. It just looks scary to us lay-folk who aren’t making over $100k a year.

  9. Also, she might want to rank up her earnings just a bit to hit those numbers faster.
    Sandy recently posted..August 1 Check InMy Profile

    • I just got word that she was promoted, but she requested to leave the pay where it was and she’ll update it herself. I think the promotion and pursuing more freelance work will help them as well.

  10. Medical school is expensive. You live off the student loans, similarly with lawyers.

    Well, I think the backpacking trip is a nice idea. You definitely want to do something like this while you have little to no dependents. I say go for it. However, there has to be a solid plan to having the debt paid off. Trips that costs at least $5,000 may not be something they want to indulge in every year. But I think it’s safe if they could find a less expensive trip for now.
    The debt doesn’t scare me. With the extra $2390 I would definitely throw more at the emergency fund. I think they should allocate the $2390 between their emergency fund, paying off debt, and other expenses. Without really meeting the clients, these are just my thoughts.
    Ornella @ Moneylicious recently posted..Apple, Coke, Holocaust, and Shopping: Unconsciously Prime Our MindsMy Profile

  11. Go for the backpacking trip. $5,000 is a drop in the bucket comparing to the $400k. It will be tough to pay off that huge amount of debt. Even if they make $200k per year, the tax will take a big bite out of it. 400k just sounds overwhelming. They will just have to keep on living like students and try to put extra toward that debt. Don’t get lure into lifestyle inflation once they start making $200k.
    Joe @ Retire By 40 recently posted..Do credit scores matter after retirement?My Profile

    • At least they’ll have a huge write-off for student loan interest 😉

      Assuming Obama doesn’t penalize these “RICH PEOPLE!”

      • Student loan interest deduction phases out (max is only $2500 anyways) when you make to much. If their MAGI is over $150K they won’t be able to deduct any of it…

        As an added bonus, in some states *cough* Indiana *cough* you actually have to add back in some of your student loan interest deduction if you make above a certain amount. Not so fun fact I learned this year.

        • I hate phaseouts, I really do. I didn’t even think about state taxes (I live in a state without state income tax, WOOHOO!) They can take advantage of the $2,500 write-off during residency, but you’re totally right, if they can’t get their MAGI below $150k, even that small deduction is gone as well.
          iheartbudgets recently posted..Budget Friday Submission 2My Profile

  12. That is so much school debt. I can’t even begin to know how that would feel. I don’t have much advice but it looks like you had some good recommendations for them. I wouldn’t put off beginning to pay them down. The sooner they get started the better!
    Chase
    Debt Free Teen recently posted..Week 8 | Summer SchoolMy Profile

    • I agree, but I don’t think they would be able to handle that big of a minimum payment. In forbearance, you can lower your payment to allow a little breathing room, but still be paying them down. I bet they can lower the balance by $50k or $60k during residency if they pick a healthy sized payment!

      • I completely disagree with the recommendation to pursue forbearance. I graduated from medical school in May with about $110,000 of student loan debt. My spouse graduated with me with another $125,000 of med school debt. Instead of forbearance he should apply for income based repayment in which the minimum payment is based on income. With IBR our payments combined will be around $1000 (remember this is on two residents’ salaries). The payments are affordable, and they get you in the practice of paying SOMETHING each month. Some people on forbearance put their heads in the sand, don’t pay anything, and ignore the accruing interest. IBR won’t even cover our interest, but it does make us look at our loans on a monthly basis. I’m hoping that will inspire me to pay back as aggressively as possible.

        I definitely support the backpacking trip though. When he starts residency he’ll be working 80 hours a week. He’s not likely to have the flexibility and free time that he has now again until retirement. I don’t regret one cent that I spent on travel during medical school.

        I also suggest that he does his residency in a low cost-of-living area. It makes such a difference. Residents get paid similarly everywhere in the US. That $3000/mo paycheck goes a lot further in the Southeast or the Midwest than it does in NYC or SF.

        My last piece of advice is that he should do whatever field of medicine he loves the most. Don’t worry about the paycheck of the specialty. For one, medicine is going to take up many, many hours of your life. You should enjoy what you do. Second, who knows what payment is going to look like in 10 years, especially with all of the changes in health care. Third, there are great loan repayment options for the primary care fields that traditionally don’t pay as well as the specialty fields. Don’t let your student loan debt determine your specialty.

        Good luck!

        • You are correct! The reading I did on forebearance made it seem like what you described above as IBR. Sorry for any confusion on that, but I agree, paying a manageable amount each month while in residency is the way to go. And after talking with this person over email, that is their plan. Thank you for the clarification on this.

          It’s great to hear from someone who is already there, and I like the positive attitude you have about it. Thanks for dropping by!

  13. Holy shit medical school in the Caribbean is a bad choice.

    He WON’T have the earning potential of $150,000-$200,000 per year. He’ll be trapped in family medicine, with little room for grown and huge liability insurance. That’s IF he even finds a position. There’s no guarantee with a degree from one of those schools. I know of someone who got a medical school at one of those schools and no one will hire her here (Canada).

    There is no education on earth worth $400,000 of debt. I’m sorry, but this is stupid. Sorry to burst everyone’s bubble but there is no way they’ll pay these off in 5 years, they’ll be lucky if they ever pay it off.
    Bridget recently posted..August 2012 GoalsMy Profile

    • They plan on gaining residency in the states. And getting “trapped in family practice” is not so bad.

      From the Beureau of labor Statistics:

      Family and General Practitioners Average Annual Salary: $170,330

      http://www.bls.gov/oes/current/oes_ny.htm#29-0000

      Based on some general research on the carribean schools, I don’t think it’s as doom and gloom as you state. He plans on passing the USMLE (Medical License Exam) just out of school, and the stigma of attending a school offshore is usually erased by having this license. I am working under the assumption that they have done their research and have forseen these disadvantages.

      • I googled after this post and saw that it’s much different from US to Canada so maybe my friend is just getting screwed whereas in the US getting an education at a Caribbean med school is more acceptable.

        I’m just surprised you’re ok with the $400,000 student loan debt. I don’t think anyone she take out that much, not even for medical school. That’s more than most homes in the USA! If someone was like, “oh hey I make $40,000 can I buy a $400,000 home?” everyone would be like, “wtf? No you stupid! you can’t afford it!” but no we have this, “oh hey I make $0 per year but I’m going to take out $400,000 for med school” and the response is, “no problem! you can pay that off in 5 years! Don’t worry about it!”

        This is so, so bad.
        Bridget recently posted..August 2012 GoalsMy Profile

        • It i a bit excessive, that’s for sure. But telling them “hey, you shouldn’t have done that” does not help the situation at all right now. Already being over $200k in debt, finishing off medical school, going through residency and getting a good job as a doctor is the best option, so I am encouraging them in that direction. I do think if they stick to this budget, plan well and work VERY hard, they do have the ability to pay this down.

          Had I gotten this budget before they took out any loans, my outlook would be different, but as is, this is the best case scenario, and I think they’re motivated enough to make it happen.

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