The Student Loan Roller Coaster

INTRODUCTION

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
Hello WCI listeners, I'm still taking some time off to rest and recover from my accident. But don't worry, I'll be back in a few weeks. Until then, enjoy this episode from one of our friends of WCI.

Tyler Scott:
All right, friends, Happy Halloween. My name is Tyler Scott. I am excited to be hosting again today while Jim continues to recover. Great news. This is your last episode without Jim. He's going to be back next time. Thanks for being patient with us while we've tried to keep the content going. Thanks for being patient with me. I'll ask for that again today.

But we're excited to be here with Andrew Paulson, the head of Student Loan Advice, to talk about the current state of the federal student loan program, especially as it relates to this judicial quagmire that the income driven repayment plans are in and how that can affect all of us that are pursuing public service loan forgiveness and other income driven forgiveness options.

Andrew is a personal friend and one of my bosses here in the WCI complex. We just got back from a week together at Lake Powell as part of the WCI retreat in southern Utah. We had a lot of fun wake surfing and rappelling and cliff jumping and relaxing as a team together. It was fun to be there. Andrew also came through in the clutch as our DJ on top of the houseboat dance party.

Andrew Paulson:
Yeah. That was a good time. Yeah.

Tyler Scott:
Megan kind of bullied us into doing that. She is our podcast producer, my wife, and rave master at the retreats. That was fun. It was fun to hang out together. What was fun for you? What's a quick little highlight for you from Lake Powell?

Andrew Paulson:
Yeah, I don't think a White Coat Investor retreat would be fitting without some type of adrenaline junkie type stuff. As you're well aware, we know a lot of people on our team like to rock climb, mountain bike, skydiving, all that sort of stuff. It was fitting that my favorite part was rappelling a 50 foot cliff. Yeah, that was a blast. And we just were right up at the top and we were able to kind of look down under. And I know you did it. And I think about half of our group did it. I'm thinking Megan did it, as well. Megan was giving me a thumbs up. But that was our favorite part. But you wouldn't just rappel down into the water. They had the rope about 10 feet off the water so that you would get down and then you had a free fall. That was probably my favorite part of Powell.

Tyler Scott:
I felt like Tom Cruise, like letting go of the rope and falling into the water. Jim played a different song for each of us as we came down on the boat. That was really fun. Wonderful.

Well, let's get our sponsorship taken care of here. Today's episode is brought to you by SoFi, helping medical professionals like us bank, borrow and invest to achieve financial wellness. SoFi offers up to 4.6% APY on their savings accounts, as well as an investment platform, financial planning and student loan refinancing, featuring an exclusive rate discount for med professionals and $100 a month payments for residents. Check out everything that SoFi offers at whitecoatinvestor.com/sofi.

Loans are originated by SoFi Bank, N.A. NMLS 696891. Advisory services by SoFi Wealth LLC. This brokerage product is offered by SoFi Securities LLC, member FINRA/SIPC. Investing comes with risk, including risk of loss. Additional terms and conditions may apply.

All right, everyone. Andrew and I are here gathered in Jim's office. This is one of the experiments we're trying is in-person, in-studio interviews. We're both certified student loan professionals, and I've worked with Andrew over this past year at Student Loan Advice, where they provide customized, personalized student loan consultations to help navigate the ever maddening labyrinth of student loan decision making and optimization facing millions of Americans today.

Andrew and I talked before, and we've got a couple goals for today. The first one is to articulate the current reality of the student loan situation as of today, October 9th. The second goal is to identify what is at risk for borrowers right now who are pursuing different loan forgiveness options and what is not at risk. So what should you be stressed about? What should you not be stressed about?

Our third goal is we're trying to keep the discussion as high level as possible without wading into the weeds too far. There's a lot of weeds that are necessary. So please forgive the inevitable technical talk. And we'll do our best to identify the jargon before we get started.

QUOTE OF THE DAY

We're going to try to follow Einstein's advice to “Keep everything as simple as possible, but no simpler.” And we're going to use that as today's quote of the day, to keep everything as simple as possible, but no simpler. We want to reduce it down to a way that's digestible. And when things are complex, we have to honor and name that complexity.

And our last goal is just to provide some hypothetical case studies that we think are representative of various circumstances listeners might be in right now, with the hope of providing some guidance for which of those considerations might most be applicable to you.

STUDENT LOAN VOCABULARY LESSON

Andrew, before we get into all of this, would you mind giving us a little vocab lesson and a little acronym guide? You and I are going to start throwing around sentences like, “For those on IBR plans going for PSLF, they may need to consider SAVE, REPAYE, or IBR and make sure they avoid that old IBR plan now that ICR is gone.” And that is a nonsensical statement. Sounds a little like a really weird episode of Sesame Street with all that letter madness. So can you give the listeners a little understanding what do these acronyms mean? Help us set the stage here.

Andrew Paulson:
Yeah. And I'll say another thing too, is that much of this conversation, this is all federal student loans. We're not going to be delving into private student loans and refinancing today. Know that this is for those of you out there that have federal student loans and in specific to federal student loans, we're going to be talking about a specific type of repayment program that is income-driven repayment plans.

These terms get thrown all around a lot, IBR and ICR and IDR, but let's start from scratch here. The first thing you need to know is there are income-driven repayment programs where payments are based on your income. They're usually somewhere between 10 to 15 percent of take-home pay. And there's four different IDR plans. Income-based repayment, IBR. Pay-as-you-earn pay. Saving on a valuable education, SAVE, and the last is called income contingent repayment, ICR.

We're going to be spending most of the time today on the SAVE program and on the income-based repayment program because the ICR plan and the PAYE program are currently no longer allowing any new applicants. As of July 1st this year, they have phased out those payment programs to any new entrants. And we'll talk a little bit about those of you that are already in a payment program like PAYE, what you should be thinking about.

But just so you know, there's four different income-driven repayment programs and these income-driven repayment programs are a great vehicle for you to help pay down your loans, particularly if you're interested in a loan forgiveness trap.

Tyler Scott:
Wonderful, thank you. That's really helpful. So listen closely out there to our D's and our B's. Our IDR is fundamentally different than IBR. IBR, income-based repayment, is one of the IDR options. So, it can get a little complicated. We'll try our best to talk slow and highlight those differences.

Also, Andrew, can you speak about the difference between public service loan forgiveness, which we will be saying PSLF, and other income-driven or IDR forgiveness options? I don't want people to get lost in those two tracks.

Andrew Paulson:
Yeah, these are the two most common federal forgiveness tracks out there. Public service loan forgiveness is the holy grail of loan forgiveness. There's been almost a million borrowers that have received public service loan forgiveness. We've successfully helped a lot of doctors get PSLF and navigate that.

And that program has four rules. Number one, you need to be on an income-driven repayment program. IDR plan, IBR, PAYE, SAVE one of those that we're going to talk about today. You need to make 120 payments. That means about a decade of payments are required. They don't have to be consecutive. This is cumulative. If you take some time off after graduate residency for boards, or you take time off for kids, or whatever it may be, know that you can just pick up where you left off.

Third rule is you need to have qualifying student loans. That is direct federal student loans. And the last rule is that you need to be working at a qualifying institution. That's a non-for-profit or a 501(c)(3). A lot of academic centers, VA, community health-based centers, those sorts of things. Okay, that's the four rules for public service loan forgiveness. And I should also throw in there, you need to be working at least 30 hours per week at a qualifying institution. Okay, that's PSLF. And after you have made 10 years of payments, whatever the outstanding loan balance is, it is discharged tax-free.

Now talking about IDR forgiveness, it is similar in some ways to public service loan forgiveness, where you need to be on an income-driven repayment program, but it is much longer. It's 20 to 25 years, depending on which payment program you're on. In the PAYE program, it's 20 years, and most of the others, it is 25 years of payments. So not only is it two times as long, but after you've been paying for 20 to 25 years, whatever your outstanding loan balance is at the time, is not tax-free. And this is what we call the tax loan.

This is something, if you want to do that track, you got to prepare for that tax bill in 20 to 25 years, because suppose you have $400,000 of loans and you live in a high tax state where you have to pay 40% in taxes. You could have almost a $200,000 tax bill that year. So there's a lot of planning considerations that need to be made for that. And frankly, taking a step back on IDR forgiveness, we very, very rarely see this being the optimal option for doctors, unless your debt is 3x or 4X your income, and we're talking about attending income.

Tyler Scott:
Awesome. Thank you. That's really helpful. And for today's episode, we're not going to go down door number two. We're not going to be talking really about the IDR 20 or 25 year forgiveness. We're mostly going to be talking about the public service loan forgiveness. Though anyone pursuing forgiveness, some of these recent changes are applicable to them. So that's wonderful.

The other thing, Andrew, before we get started is we're going to be talking about the IBR repayment plan a lot. And in reality, there's two versions of income-based repayment and income-based repayment as a plan is not actually available to all borrowers, based on the ratio of their student loans to their income. Can you just give us a quick primer on the two different versions that you and I call new IBR and old IBR, and then which people qualify and which don't?

Andrew Paulson:
Yeah. Sorry, folks, we're muddying in the waters early on today for Halloween. But the way to think about income-based repayment is, did you borrow before July 1st, 2014, or did you borrow after that date? Because if you have a loan dispersed before July 2014, you would be eligible for old IBR, where payments are 15% of discretionary income or take-home pay. If you started borrowing after July 1st, 2014, then you would be in the camp for new IBR, which payments are 10% of income. That's a big difference.

The other thing we need to mention is it has an income phase-out that's called partial financial hardship. And that means if you have filed a tax return and your income is greater than your student loan balance, you may not be able to get into income-based repayment.

Tyler Scott:
Wonderful. Thank you. And we'll talk about some of those details when we do our case studies here in a little bit. Just know that there's two types. Old IBR is worse. We would rather have new IBR because that's a lower percent of your discretionary income for your payment.

This actually brings up an important disclaimer I want to mention before we keep going. As a financial planner, people ask me a lot of questions at dinner and at football games. And my answer usually starts with, “It depends.” And there is no area of personal finance right now that is more subject to the “It depends” clause than student loans.

There's just so many variables. Those variables include what state you live in, what state you're moving to, when your training ends or when it ended, what type of job you take, if you're married, if you're getting married, your income now, what your income will be in the future, your partner's income, how many kids you have, the types of loan you have, your student loan balance, the student loan balance of your partner, the date of your first loan, the date of your last loan. And then I stopped making my list because I thought that was long enough, but there's more variables than that. This stuff gets detailed and into the weeds really fast.

I think it always makes sense for clients with a lot of these variables, which is most people to get a specific consult on your specific situation. If you have questions, reach out to student loan advice, let Andrew and his team help navigate your unique situation. I work in finance all the time. This is all I do. And I still need Andrew's help all the time. So, it's just a really challenging area. With that disclaimer in mind, Andrew, can you give us a quick state of the union here on the student loan situation? What's going on? What's at risk? What's not at risk?

WHAT STUDENT LOAN REPAYMENT PROGRAMS ARE AT RISK OF GOING AWAY AND WHAT ONES ARE NOT?

Andrew Paulson:
Yeah. The first thing we want to talk about is the SAVE program. It is in legal peril right now. And it's our belief. It's a pretty good chance. If you're in the SAVE program right now, it's not going to be around next year. So what are the ramifications right now? If you're in SAVE, you are placed into a forbearance very similar to COVID where there is no interest and there are no payments currently.

But there is a huge difference that this type of forbearance has, that is dissimilar from the COVID time where you're not getting credit for PSLF or IDR forgiveness. Not great. And I know that there's a lot of frustration around that right now as we've been getting lots of emails about “This is changing my plan of when I'm done with everything. It's changing my plan at my employer.“

Okay. We hear you. And I also want to highlight too that if you're in residency right now, if you're in training, we would absolutely want to be looking at options to be able to be in repayment. Because remember, your payments are based on your income. And we would much rather that you're getting credit for all those months when your payments are $200, $300, $400 a month instead of when you're in attending, high-powered attending, and you can afford the $3,000, $4,000, $5,000 monthly payment. So just want to really be cognizant of this if you're in a situation right now where your income is lower.

Another thing that we've been getting a lot of questions about is “What else is at risk? What else is at risk if the SAVE program is?” The SAVE program came up about a year ago and it was previously called REPAYE and the Biden administration rebranded this as SAVE with a couple of new features that help out borrowers. And I should say that there is a lawsuit that was brought about by multiple Republican lawmakers that took place on July 18th. And it's been blocked ever since then.

Back to the risk that is at hand here. The issue is that the government will tend to make loan policy through two methods, one by way of Congress and second through administrative rulemaking.

Now Congress passed public service loan forgiveness and income-based repayment. Those are written into law. Payment programs such as PAYE, SAVE and ICR were made through administrative rulemaking. And I'm not going to get into all the legal nitty-gritty today. And I know that Jim did a lot of this about a month ago, or really I think one of his last podcasts that he recorded before his accident going into the legality of student loans and public service loan forgiveness and how to think about that. So you should definitely check out that episode.

But what we know is that things that are created through administrative rulemaking are much easier to tweak and to do away with, as we've seen the shelf life with SAVE, which is about a year's time before it is no longer eligible for enrollment and perhaps is gone.

But I want to make a key point here for those of you that are wondering about public service loan forgiveness, this is written into law by Congress. It is much, much safer to be in income-based repayment or the public service loan forgiveness program because they're piped by Congress. It would be much harder for them to get rid of that.

Tyler Scott:
Awesome. Thank you. That is so helpful. If I'm hearing you correctly, there is no need to panic about PSLF going away. That is not one of our stressors, which is nice. We also don't need to be worried about IBR going away because both PSLF and IBR have a more entrenched position due to their congressional statutory process they were created.

What is unclear is if the other IDR plans like SAVE and PAYE and ICR will survive this court battle and or what they could look like afterwards.
Andrew Paulson:
Correct.

We don't know. Okay. That is one of the deliverables we're trying to hit here today is what is at risk and what is not. I hope that was helpful. We've got some things coming up with the Eighth Circuit Court in October and probably a Supreme Court appeal to their spring docket. So, we may not have an answer until summer of 2025. Is that a fair supposition?

Andrew Paulson:
It's a good outline of how things are right now, Tyler. We're going to have a hearing right before this podcast airs on October 24. Then there's going to be a decision by this Eighth District Court. Whatever the result, it's probably going to go to the Supreme Court. Then they have to go through their legal proceeding. We went through this a couple of years ago with that big student loan forgiveness where we were waiting and we were thrown back and forth like we were on a roller coaster. Then there's probably going to be a decision in the summer, but we all think it's kind of a foregone conclusion right now with the 6-3 conservative majority that they're going to rule SAVE as unconstitutional.

Tyler Scott:
It’s not looking good for SAVE.

Andrew Paulson:
Yeah.

OPTIONS IF YOU ARE IN ADMINISTRATIVE FORBEARANCE

Tyler Scott:
Okay. If we don't have to worry about PSLF, what do we get to worry about? Let's worry. For those who are saying, “Yeah, I get the PSLF is safe, but I really need these months to count while I'm stuck in administrative forbearance limbo because maybe these payments, as you said, are going to be a lot lower than future payments.” What would you say to them? What other fallback options do they have for people who are stressed about this?

Andrew Paulson:
Yeah. Everybody's asking, “How can I get back into repayment? How can I get my clock resuming again? I don't want to kick the can further down the road.” Especially for those of you that are hitting your 10 years right now. You're like, “I don't want to wait for this next election that's coming up and further delay things.”

One option is you could apply to switch your payment program. We'll talk more about that and what's going on there. The other option is called PSLF buyback. This is a pretty new program. We have seen it work. We have seen this help borrowers onto their track to public service loan forgiveness.

Here's how it works. Whatever forbearance months there are for this legal forbearance, maybe it's six months, maybe it's nine months, maybe it's 12 months. At a later date, you could apply to get retroactive credit for these forbearance months and have those months converted from forbearance to credit or qualified toward your 120 for public service loan forgiveness.

Now, in order for you to get credit for those months, you fill out an application through the PSLF reconsideration application, and there's specific verbiage that we put this all together in a previous article on the White Coat Investor blog. If you search PSLF buyback, you're going to find this and we walk you through from A to Z how to do it.

Another key point is that you're going to need to make a lump sum payment based on however many months you were in forbearance. They're going to calculate your payment on whatever your income was at the time. If you're in residency right now, that's going to be a piece of cake for you. If you're already making attending money, that's something you may need to save up for when you've got a $20,000 or a $24,000, $30,000 lump sum payment.

Let me talk a little bit more about the downside of buyback. You can't use PSLF buyback until you are at your 10 years. That means realistically, if you're not getting credit for six months or a year of all this legal forbearance, you've probably got 10.5 to 11 years of employment, and you're beyond your 10 years. Well, the trouble is that you can't get PSLF buyback credit right now. We couldn't apply for it right after this legal forbearance unless you're already at your 10 years. You have to wait until it's going to get you to your 10 years.

The other thing, it was also made through this administrative rulemaking process. We are going to have a change in the White House next year. There's a chance that whoever is elected could just do away with this because you may be several years out before you would be eligible to apply for it.

Tyler Scott:
Awesome. Wonderful. One potential option for those people who want these months of administrative forbearance to count could be PSLF buyback. But if I'm hearing you right, there are three caveats to keep in mind. First, you cannot apply for buyback until you reach your 120 payment threshold, not counting the months you're hoping to buy back.

Andrew Paulson:
Correct.

Tyler Scott:
If the pause lasts six months, the soonest you can apply for buyback is after 10.5 years. Am I hearing you right?

Andrew Paulson:
That's right.

Tyler Scott:
Great. That's caveat one. Number two, the payments you are buying back are based on whatever your payment would have been during this paused period. If your payment is $500 right now and pauses six months, then you have to come up with $3,000 as a lump sum to buy back your months. That payment is due, I think, within 90 days of applying for buyback. Does that sound right?

Andrew Paulson:
Yes.

Tyler Scott:
Okay. That's not that big a deal. If your payments are $3,000 a month right now and the payment pause lasts 12 months, now we're talking about a $36,000 lump sum payment to buy back our months. You can see how this could represent a cashflow issue for someone who is still required to make that $3,000 payment up until they get to 120. They also need to be saving, creating what I call a PSLF buyback side fund. They've got to also be redirecting money to come up with their $36,000 or whatever. It's just a little bit of a cashflow crunch as you think about this potential buyback. Is that fair? Any edits on that?

Andrew Paulson:
Yeah. The one other thing I would include there is that if you have hit your 120 payments and you're there, I usually recommend people will remain in repayment while they are reviewing your application because any of those overpayments you've made, suppose you pay 123 months, those extra three months of payments will be reimbursed to you when you hit your decade.

Tyler Scott:
Awesome. Great. Just be aware of that. You have 90 days to come up with that lump sum payment. It might not be a lot. If you're in residency right now, or it could be a lot. Then caveat number three is the whole buyback thing may not survive the court case at all because it was made through administrative rulemaking. You may not want to lean too heavily on that. It's worth knowing, but it's not foolproof.

As I've been explaining this to clients, as I've been meeting with them and they've been emailing me, the next question I understandably get from them is, “Okay, Tyler, sounds like a mess. I'm not sure I want to go on this trip into Mordor with the SAVE plan and this PSLF buyback. I just want to switch to IBR since that plan is statutorily protected.” What are your thoughts on that logical next question people are asking?

Andrew Paulson:
Yeah, it is a great question. It depends on where you are. We're going to go through some scenarios of how to think about it when you should, maybe when you shouldn't, but currently with the legal injunction that was blocking the SAVE program, they're not letting anybody switch payment programs. If you applied for the SAVE program or the IBR plan in the last three or four months, they haven't even moved you into that payment program yet and you're all left still in this limbo.

I want to shed a little bit of positive light though, the online application to switch payment programs to enroll into an IBR plan or to consolidate your loans was not available. It was just out and that was for two months. Last week, early October, they did reopen the application to again enroll into IBR plans and consolidations online.

Now before that, you could do a paper application where you fill out a PDF and then you upload it on your servicer site or you could fax it or mail it folks. Pretty old school stuff. For those of you that are interested, the online application is up and it's running, but I heard from a client last week who applied. They called Mojila, one of the student loan servicers, and they said, we still haven't gotten the directive from the Department of Education that we can process the application.

Yes, you can apply. I guess you can get in line, but they're still not processing that application. My hope is that before things settle out with the SAVE legal resolution that is probably on par, on track for next summer, that they're allowing borrowers to switch payment programs again.

Tyler Scott:
Yeah, that would be great. I've just been telling my clients, “Yeah, you can apply if you want. And so maybe if your income's really low or you're super close to forgiveness, you could apply to IBR online and get in line while everyone waits their turn.” But for most people, I've been saying, just let the dust settle. There's too many unknowns. There's a lot of uncertainty and we're going to get into those scenarios next, but that was a good recap. Thank you.

Let's talk scenarios. And our hope here is that you, the listener, can hear enough similarity in one of these four scenarios we're going to go through that this hypothetical conversation can at least give you an idea of what steps you may want to take or what you want to be considering. That's our intention here.

EXAMPLES OF BORROWERS AND WHAT THEY SHOULD DO ABOUT THEIR LOANS: SCENARIO #1

First scenario, let's start, we got a single doc. Maybe they're a couple of years from forgiveness under PSLF. Let's say they make $375,000 and they owe about the same amount and they are in the PAY plan because they were in before it closed. What should that person be thinking about?

Andrew Paulson:
Yeah. In this scenario where your income and your debt are pretty similar and you're on track to PSLF and you're already in the PAYE program, you've got the golden ticket right now. You are thrilled. If you are in PAYE currently, or you're in IBR, don't make any knee-jerk reactions. You're just fine. You're collecting credit for PSLF right now. You're continuing down that path. You don't have to try to switch anything around here and you just wait until your next income verification date, which you can find that on Federal Student Aid, but for a lot of you out there, your next income verification date probably falls next year.

Now that your repayment situation, that's all resolved, what can you do to improve the prospect of PSLF? Well, with payments based on your income, there's some things that you can do to tweak your income, and that is generally through retirement accounts. And a lot of doctors out there generally have two retirement accounts. Here I am talking to the financial planner who knows this inside and out, but there's a 401(k) or 403(b) or a 457, which usually you can contribute $23,000. Do I have that right, Tyler?

Tyler Scott:
Probably $23,500 next year when they get a little bump in 2025.

Andrew Paulson:
That's good.

Tyler Scott:
And can I say just quickly, Andrew, that when we say payments are based on income, they're actually based on adjusted gross income or AGI, which is what you're talking about right now. It's not our top of the line gross income. So, if we can take any above the line deductions or anything that lowers our AGI, that's where we want to go. Is that fair? AGI is our number in question.

Andrew Paulson:
Yeah. Thank you for AGI. Payments are based on AGI. Take this doctor here. If they are putting money in their 401(k), maybe they're maxing that out and they're maxing out their 457 deferred compensation plan, that's $46,000 pre-tax. That can really help lower your payments.

There's other sorts of pre-tax accounts. There are defined contribution plans, cash balance plans. There's health savings accounts. You can set up a solo 401(k) or a SEP IRA. We have so many resources on that on White Coat Investor about how that all works.

But suppose you're a doc who maxes out their 401(k) and 457, and you're putting $4,000 in an HSA each year. That's $50,000. How does that look when it comes to your payments? Well, if student loan payments are about 10% of your discretionary income and you just lowered your income $50,000, that'll save you about $5,000 a year. So, if you got three, four, five years left until you hit loan forgiveness and you're saving $5,000, that's huge. That's a big win-win here because you're putting money towards your financial goals, you're paying a little bit less in taxes, and you're lowering your student loan payments.

Tyler Scott:
Really efficient choice for a person in that situation. Are you confident enough in the PAYE plan, even though it's not as entrenched in that congressional statutory way that IBR is? Are you confident enough in the PAYE plan to tell this scenario, this doc who's in PAYE, that they in fact have the golden ticket, that they can stick with it? Am I hearing you right?

Andrew Paulson:
I am. Yeah.

Tyler Scott:
Cool. That's been my favorite email to send to clients. I am like, “Hey, no problem, man. You're already in PAYE or IBR. You don't have to pay attention to any of this noise. Just keep going on.” And so, that's a fun scenario.

EXAMPLES OF BORROWERS AND WHAT THEY SHOULD DO ABOUT THEIR LOANS: SCENARIO #2

Scenario two, let's talk about maybe someone in residency. They're a second year resident. They think they're going to work in academics or some other nonprofit as an attending. Maybe they make $70,000 right now as a resident. They owe $250,000 in federal student loans. And maybe they've been planning on getting married to their partner next year. And let's say that person makes $100,000. They don't have student loans. Our engaged nonprofit-minded resident is in the SAVE plan right now. What do you say to them?

Andrew Paulson:
Yeah. I think one of the first things is we want you to be getting credit for PSLF right now while you're in residency. That's a huge deal because there's a day that you're going to be making $300,000 in just a few years. And we'd much rather that you have those lower payments on the $70,000 of income.

I think this is a scenario where somebody could apply for the income-based repayment program now with the hopes that that takes effect early in 2025 rather than summer or fall of 2025.

And this also brings up another key point. If they have applied for IBR, what are they going to use for income verification? And this is something we haven't talked about, but when you're on income-driven IBR plans, they require you to re-verify your income, just like you do your taxes once a year. You got to do that or else you're going to get in trouble. But with income-driven plans, once a year, you're going to verify your income. Your servicer will let you know when you have to do that. And they either require a tax return or a paystub, some sort of income documentation to do that. Most people use a tax return.

In this case, this resident could use income from 2023. And by the time their payment readjusts, it'll probably be 2025. So they're in this two-year lag. And this is kind of neat because as their income goes up, they get married next year and then their spouses income is considered. And then in subsequent years, as their income continues to increase, well, what if their payments are based from two years previous? That means that they're going to be able to milk that lower income and lower payment for longer, which bodes really, really well when you're doing loan forgiveness.

Now, if your income verification date falls between May and September, you're probably thinking, “Well, I'm hosed. I'm going to have to use my income from the year previous.” But what you can do is you can file an extension on your taxes. And filing an extension, it’s super easy to do. It's usually very low cost. It delays your tax filing from April to October so that when your income verification happens, you can still use income from two years previous. That's a really common strategy.

Tyler Scott:
Because if they're going to ask me for my income in June, and if I filed my taxes in April, like on time, now I've got to show last year's income, which is probably higher. But if I filed an extension and moved my filing deadline from April 15th to October 15th, and they asked me in June for my most recent tax return, I get to point not to last year, but to two years ago tax return. And that's a great hack.

And as it relates to our engaged or wanting to be engaged resident, can you speak briefly about which plans allow us to file separately and exclude spousal income and which plans require that we show the entire household income?

Andrew Paulson:
Yeah. Back to IBR, SAVE and PAYE. And I'm also going to bring up the REPAYE plan because there may be a chance that if we do away with SAVE that they reinstate the predecessor REPAYE.

Tyler Scott:
REPAYE standing for revised pay as you earn, different than pay as you earn. So for a while we had PAYE and REPAYE, and then REPAYE got turned into SAVE.

Andrew Paulson:
Yeah, exactly. And so, the big issue with the REPAYE plan was that in this scenario, you've got a resident who makes $70,000 and their partner that they're getting married to makes $100,000. That is a household income of $170,000. And if you file as a couple jointly, then it would use the $170,000. But what if the spouse is thinking, “Well, I want to file my taxes separately so I can just base payments on my income.” Well, on the REPAYE plan, they didn't allow you that option. Even if you file separately, they would still incorporate your spouse's income.

That was a very key point and a big reason why married borrowers that had a spouse that made money really wanted to look into the others. So, then SAVE, IBR and PAYE, all of those have the ability to exclude spousal income. And in thinking about this scenario, if they're able to lower their income $100,000 through filing separately, that's going to be lowering their payments about $10,000 per year. So that can be a huge help when the goal is to end up paying the least amount over the term until you hit forgiveness. But it is usually almost always more expensive to file separately. It's kind of case by case.

But generally when I see income dispersion of maybe only $30,000, it might just be a few thousand bucks extra that you would pay to file separately. But if you're in a scenario where one of you is making $900,000 and one's making $20,000, it might be really, really expensive to file separately. So, definitely run the numbers jointly versus separately when you're looking at the benefits of doing it to keep your student loan payments low.

Tyler Scott:
Awesome. Thank you. And when you say more expensive to file separately, you don't have to pay TurboTax more. You don't have to pay your CPA more. What we mean by that is you are using now single filer tax brackets, which are both narrower and shorter. So more of your income gets taxed at those higher brackets and a number of deductions get phased out, credits go away. That's what we mean by it's more expensive. Your tax bill is often higher.

This is one of those in the weeds things that I think it makes sense to have a professional run for you is, “How much would I save on my student loan payments filing separately? And now compare that to a reasonable projection of how much more it would cost me in taxes.” And the details of that are beyond the scope of today. But is that a fair recap?

Andrew Paulson:
Yes. That's a great point.

EXAMPLES OF BORROWERS AND WHAT THEY SHOULD DO ABOUT THEIR LOANS: SCENARIO #3

Tyler Scott:
Awesome. Cool. That was scenario two. I like the context there of a doctor who could benefit from enrolling into IBR right now and who could consider filing separately. Now let's take maybe an orthopedic surgeon. They're worried about their income becoming too high to enroll in IBR. Let's say she has $400,000 in loans graduating this coming year and thinks she'll make $600,000 a year as an attending. This is a situation where the lack of a partial financial hardship could possibly prevent her from enrolling in IBR. So, what would you have her think about?

Andrew Paulson:
Yeah. This is a scenario that we run into a lot where maybe you don't have very much in student loans or you have $100,000 or $150,000 or your income is going to be way above it. You're in orthopedics or neurosurgery or cardiology, whatever it may be. Or you're just a high earning physician in your specialty. Can you get into the income-based repayment program? And if you make more than you owe right now and you file the tax return on income that is higher than your student loan balance, it's going to be tough to get into IBR.

Now remember there's old and there's new. And usually if you're making more, you're not going to qualify for old IBR. There's a little more breathing room where you can be making about $100,000 more than you owe and I am talking attending income to slide into new IBR. But definitely look into this if you're thinking about enrolling into income-based repayments.

I know there's some of you out there that are currently in SAVE or were previously in REPAYE. And if that's demolished, that goes away and you're thinking, “Well, I still want to do public service loan forgiveness, but now I can't enroll into any IBR programs.” There'll be more to come. We'll keep you posted on that because we don't know the answer with that yet. If they're going to reopen a payment program that doesn't have any income phase out because in the REPAYE and in the SAVE program, there was no income phase out. You could get into those at any income.

So, let's get back into this case study here and talk about what should this doctor be doing? Should they stay in this SAVE program or apply for IBR? I think there's a couple of key points that this doctor needs to think about. Number one, IBR is the only option for this doctor. We definitely want IBR.

Number two, they need to make sure that they apply prior to their income jumping up because they just graduated residency this year and now they're making the big bucks. And then thirdly, something we haven't talked about yet is there is a payment cap in the IBR and in the PAYE program. We'll talk more about how that works.

Now getting into this, this doctor with them applying to enroll into IBR this year, maybe they made $90,000 as a resident in 2023. Their income is less than their debt. They're making $90,000 and their student loan balance is $400,000. No issues there for them to go ahead and enroll into IBR.

Tyler Scott:
But not for long. This is a time-sensitive situation for them because they're about to be in a situation where they would have to report $600,000 of income. So, am I hearing you right? These people have a little bit of a narrow window to make the call.

Andrew Paulson:
There's a time frame and there's kind of a deadline here where this doctor wants to make sure that they have applied for the IBR plan before they file that 2024 tax return. Because think about it, this year you made half the year as a resident, so you made $40,000 or $50,000. And then you got your big paycheck and you're going to work your attending job for, I don't know, four or five months.

They're going to make like $250,000, $300,000, throw in a sign-on bonus, throw in a relocation bonus. Maybe they were paying you a stipend your last year. There's a really good chance this doctor could make more than their student loan balance this current year and be incomed out of being able to apply for IBR. Really, really, if you're in this scenario where your income is exponentially jumping, definitely look at doing that.

And the other point here is that the IBR plan has a payment ceiling. And the way that would work is on $400,000 of student loans, think of the payment cap is about 1%. That means your payments would get up to about $4,000, which is no measly amount. I know that's a mortgage payment. And that's a big payment.

But for those of you out there that are making $50,000, $60,000, $70,000, think about how high your payments could be. If you're making $60,000 a month, that's a $6,000 monthly payment if you're on an IBR plan that doesn't have any of these payment caps. That's another real benefit for those of you out there that are making more than your debt is you may end up being better off because this payment caps your payment and keeps it lower than it would be otherwise if you were in a repayment program like REPAYE or SAVE that didn't have the payment ceiling.

Tyler Scott:
Yeah, knowing which plans have a payment cap and which ones don't has been a key consideration as we've been helping people make these choices. Okay, this is wonderful. I'm hearing you say if you're graduating this year, or maybe you're getting married to another earner, or you got a big promotion. In other words, if you think your income is going up a lot, you want to review which plans you're eligible for now and which ones you may or may not be going forward. And you may want to get into the IBR now before your income jumps. And that gives you a known payment amount could be 15 or 10%. But at least it gives you the payment cap. Is that fair?

Andrew Paulson:
Yes.

Tyler Scott:
If income is going up, take a long look at IBR.

Andrew Paulson:
Yes.

Tyler Scott:
Awesome. One other thought on that. Let's say you get into IBR, and then later your income goes way up. Can I stay in IBR if I no longer have a partial financial hardship?

Andrew Paulson:
Yes. As long as you get in before your income has jumped up, you can stay in it for the duration of repayment. Being able to get in, usually we say as a resident, as a fellow, before you make your attending income, make sure you've applied for one of these payment programs, because it can really help with that payment. And they won't kick you out of it.

EXAMPLES OF BORROWERS AND WHAT THEY SHOULD DO ABOUT THEIR LOANS: SCENARIO #4

Tyler Scott:
Awesome. Cool. Okay, one more scenario. Let's say we got two doctors, they're married, and they live in a community property state, one of the 13 community property states. But two of them, Texas and California, they have a lot of our people. So this comes up a lot. Let's say one's an internist and the other is a cardiologist. The internist is interested in working at the VA or some other nonprofit. And the cardiologist is in private practice. I see this scenario a lot.

Let's say our internist is going to make $225,000 at the VA and the private practice spouse is going to make $475,000. The loan balance is $300,000. They're currently in SAVE. Should they switch or think about switching to IBR?

Andrew Paulson:
Yeah, I think the short answer on that is yes, they should switch to IBR. And now the long answer…

Tyler Scott:
Give me the long answer.

Andrew Paulson:
Let's talk about community property states. Tyler and I have worked intimately on a lot of clients that are in community property states, hundreds, thousands that are going through this and trying to figure it out. If you're living in California, Texas, Louisiana, Arizona, Washington, I missed some in there. If you're in a community property state, you really, really want to understand the tax ramifications, especially if your spouse is a doctor or somebody that makes money or makes good money.

Because this couple here should be filing separately usually. Because you don't want to have payments based on $700,000 of income. You want it based on just the internist who has student loans, who's making $225,000. But if you file separately, what ends up happening is instead of payments based on the $225,000 that the internist is making, they take the $700,000 of income and they divvy it up evenly between the two of you. You as the doctor on track to PSLF has to report $350,000. And your spouse, it also reports $350,000 on their taxes.

But what that does is it artificially increases your payment, number one. And the second issue here now is that that's higher than their student loan balance at $300,000. So they may not be eligible to even get into the IBR plan. And they may be stuck waiting to see what happens with SAVE or if the REPAYE plan is reinstated.

Here's the workaround. There's a loophole. The loophole is that when it comes time for you to verify income, instead of using the tax return that reports one half of household income in this scenario, $350,000, you can use your pay stub that's reporting the $225,000. By so doing, it allows you to enroll in the income-based repayment because now your income is low enough that you meet the partial financial hardship requirement. And secondly, now your payments are going to be based off at $225,000 instead of $350,000. That means a lower monthly payment as well.

Tyler Scott:
Awesome. Yeah. That's been a fun loophole to show people in those states and use that workaround. And I should clarify in my scenario, the $300,000 of loans in my question all belonged to our internist going to the VA, our private practice cardiologist there had no loans. I should have made that more clear.

Andrew Paulson:
And if I can just touch on one more thing on this case here, Tyler, is that this doctor now, once they get into IBR, they could continue to use a pay stub to file separately. But I know a lot of you are thinking, “But what is the additional tax cost going to be? How much deductions are we going to lose out on? How much higher is that tax liability going to be?”

And know that if they're in a payment program where their payment is capped, the difference between what the payment capped at which could be about $3,000 versus what it would be on their $225,000 of filing separately income may not be that big of a difference. Maybe this doctor could file jointly in future years. But these are the sorts of things that we can help you analyze through a one-on-one situation.

Tyler Scott:
The last little wrinkle there, and you had a great post, something about controversial topics in public service forgiveness or in student loans, which I loved. And one of those was that the IRS tax code allows married couples who filed a married filing separately return. The IRS allows you to amend those past year's returns back to a joint return after the fact.

Do you want to speak to that quickly? Where it's not illegal, some people might feel like it's ethically gray. We're not here to litigate that, but can you just speak to that file separately and amend back to jointly to recoup your tax savings you would have gotten?

Andrew Paulson:
Yeah. A lot of couples are going to file separately because it helps keep their student loan payments down, but sometimes they have to pay a lot more in taxes, $20,000, $30,000, $40,000, $50,000. I've seen everything. Suppose you're a couple and you file separately one year and you have to pay another $30,000 in taxes above what you would end up paying if you filed jointly. You have to pay another $30,000. You've got the married filing separately penalty tax.

Tyler Scott:
But we've saved maybe $50,000 or $55,000 in student loans.

Andrew Paulson:
$50,000 in student loan payments.

Tyler Scott:
We were net positive.

Andrew Paulson:
It was worth it. Then the next year you get PSLF. Well, up to three years after your tax return has been filed, you can amend it back to joint. Then you could pay a CPA to go back and amend that tax return for a few hundred dollars or $1,000. And then you could get back that extra $20,000 that you paid to file separately. And you could do that multiple times. There's no rule that says you can't do that. There's only a three-year period of time that you could go back and do that.

Tyler Scott:
The Department of Education and the IRS don't talk.

Andrew Paulson:
They're very siloed.

Tyler Scott:
People are like, “Wait a minute.” That is a useful piece of information to know. Andrew, thanks for going through all that and those scenarios. There's a lot of considerations to be aware of out there with our student loans. Touches on taxes and budgeting and retirement and which state you live in and marital things. As I said, there's so many variables.

If you need help, and I need help, and this is the world I live in, you can trust a pro like Andrew to help you get it right with all that's going on right now. So if you're looking for some assistance, go to studentloanadvice.com, book a consultation. I've never been more confident in our ability to provide value at $580 for a consult, and we're delivering these $50,000, $60,000, $280,000 savings. It's fun work to be a part of.

All right, everyone. Thanks so much for hanging in there with us. I hope that conversation was helpful. And I won't lie, there's a part of me that hopes that it was confusing, because that is the truth of this situation. But our intent, as always, at WCI is to be helpful and get you pointed in the right direction. This is a challenging area, and we appreciate you listening.

Before we go, I want to share a review that we had on the podcast, and it is entitled “Trustworthy advice.” Great title, five-star review. “Good to see trustworthy advice exists. Been following for a while now. Any conflicts of interest are clearly disclosed. You can get this advice elsewhere via books, blogs, etc. But it's compiled in an easy-to-digest format, so no need to scour the internet. Keep up the good work.”

Thanks for the wonderful review. Thanks again for your patience with me and with all of us while we've been trying to come and pinch hit for Jim here. Obviously, no one can do what Jim does. And that's not been our intention. Our intention has been to just provide an ongoing conversation and a space to connect as a community. We're all very excited to have Jim back next time. Thanks for your grace. And those of you who have sent nice emails to me or the editor inbox or to Megan, those are read and really appreciated. Thank you for your support.

SPONSOR

Today's episode is brought to you by SoFi, helping medical professionals bank, borrow, and invest to achieve financial wellness. SoFi offers up to 4.6% APY on their savings accounts, as well as an investment platform, financial planning, and student loan refinancing, featuring an exclusive rate discount for medical professionals and $100 a month payments for residents. Check out all that SoFi offers at whitecoatinvestor.com/sofi.

Loans are originated by SoFi Bank, N.A. NMLS 696891. Advisory services by SoFi Wealth LLC. The brokerage product is offered by SoFi Securities LLC, member FINRA/SIPC. Investing comes with risk, including risk of loss. Additional terms and conditions may apply.

Thanks again for being with us. Until next time, make sure your pets are spayed and neutered and don’t take any wooden nickels. Have a great day.

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.

INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 194 – Hospitalists become financially independent after 12 years.

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With 37th Parallel, you get access to institutional quality assets, conservatively managed with proven results. Their educational content on passive multifamily investing is also very good. Visit 37th Parallel, that's 37parallel.com/wci today for more information.

All right, welcome to the podcast. I hope you feel part of the community here. It is a large community of White Coat Investors. It's spread all over a bunch of different platforms, though. You may not realize this if you're only on one of them, but we have a large Facebook group. It's almost 100,000 people. We have a subreddit, if you're into Reddit, and the number of subscribers on there is like 80,000 or something like that as well.

We have 30,000-something Instagram followers. We even have a TikTok channel, and we still have the X channel. I guess it was Twitter before the X channel I started many, many years ago. A lot of people following us there.

But whether you're in our communities or whether you just follow the blog or podcast or whether you're on these social media channels, take advantage of the opportunity to connect with other WCIers. Get your questions answered, engage with the community, and you'd be surprised how much you can learn from other people on the pathway with you.

All right, we got a great interview today. I think you're going to enjoy it. If you want to come on this podcast yourself, you do not have to complete a milestone as impressive as this person's. We'll celebrate any milestone with you. I don't care if you just got back to broke after 28 years out of residency. We will celebrate it with you. I don't care if you just bought your first beater as a resident. We'll celebrate with you. Any financial milestone you reach, we will use it to inspire others to do the same because there is somebody in a similar situation to you. You can apply at whitecoatinvestor.com/milestones.

INTERVIEW

All right, after the interview, stick around. We're going to talk for a few minutes about retirement accounts for the self-employed. My guest today on the Milestones to Millionaire podcast is Kumar. Kumar, welcome to the podcast.

Kumar:
Thank you for having me.

Dr. Jim Dahle:
Let's start by introducing yourself a little bit. Tell us what you do for a living and what area of the country you're in and how far you are out of training.

Kumar:
I did my training in internal medicine. I graduated in April of 2012. So basically, during the 12 years out of my residency.

Dr. Jim Dahle:
Okay, and you're working mostly as what? You're in a clinic? You're a hospitalist? What do you do?

Kumar:
I work as a hospitalist. I've been working for the last 11 years. I left my full-time job. So now this year, I work maybe 10 days in the entire year. And I just switched to a per diem job but still as a hospitalist. But currently, I'm not a full-time employee or even a part-time as we speak as of now.

Dr. Jim Dahle:
Okay, should we call it part-time or should we call it semi-retired?

Kumar:
More like completely retired, I would say. Much more than semi-retired. As you know, I only worked 12 days in the entire last year.

Dr. Jim Dahle:
Okay, one day a month is essentially what you're working at this point.

Kumar:
Yes.

Dr. Jim Dahle:
You're 12 years out of training. You worked as a hospitalist. That in and of itself is pretty impressive to everybody, I think. But let's talk about what milestone we're celebrating today.

Kumar:
I reached my $5 million last month.

Dr. Jim Dahle:
Last month, $5 million. In net worth or in investable assets?

Kumar:
In just investable assets.

Dr. Jim Dahle:
Okay, so net worth even higher because you own your home, I believe, mortgage-free, right?

Kumar:
Yes, that's correct. It's totally owned. I didn't have any mortgage. I paid cash upfront. It's close to now $1.3 million as we speak, as of now, it would have value. If you add the house as well, the equity of the house, it would be close to $6.5 million around.

Dr. Jim Dahle:
Okay, this is a very impressive net worth. Aside from the fact that you're essentially retired, 12 years out of training, this is a very impressive net worth for a hospitalist that's only worked for 12 years. Fill in the gaps here. How did you get here? You got to tell us the story.

Kumar:
Yes, first of all, I'm an immigrant from India. I did my medical school from back of India, I did not have any student loan to begin with. When I started my residency, I started the clean slate. I had no debt whatsoever. I saved my residency up for three years. I met my wife at that time. She was also doing internal medicine residency as well. That's what we met. We married in 2012 after graduating from internal medicine.

Since then, we both have been practicing hospitalist medicine for the last 12 years. She continues to work. She just left her full-time job last month. She's taking a break for the three months, and then she'll continue to work part-time as well.

Dr. Jim Dahle:
Okay, a dual doc income, a dual hospitalist income. What do you think your income has averaged over the last 12 years between the two of you?

Kumar:
Somewhere around $600,000 to $650,000.

Dr. Jim Dahle:
$600,000 you made a year for 12 years. This is about $7 million or something you made. You basically have it all left. How did you manage that?

Kumar:
That is because of the power of compounding. When I started investing in 2013, I didn't have much knowledge. My brother is an investor banker. He set up my brokerage account. I have not heard of index fund or anything like that. I have not read any books. What I did, I just basically picked up buying stocks like Apple, Facebook, Netflix, Tesla, without knowing anything about it. I just bought them in 2013, and I just kept them.

Dr. Jim Dahle:
You were buying individual stocks starting in 2013. Has that been your approach the whole time, or did that change over time?

Kumar:
Most of the time, to be honest, that's been my approach. I'm the outlier. Though now I have read hundreds of books, and I know index fund works. You cannot beat the market and everything, you can listen to your podcast and the blogs. I've read all your blogs. Most of them, I've read your books. But again, that was after I started investing already. Now my investment did well. And again, it's not because I'm smart or anything. It was sheer luck that I bought all the banks. I have the Magnificent Seven. I bought NVIDIA in 2018 without knowing anything about NVIDIA. And today, as you know, where it stands.

I've compounded my money. I was just looking at my brokerage account before this interview. And I've compounded annually for the last eight years, more than 20%. At the same time, the S&P has already done an average of annually of 12%. So my cumulative return currently is 260%, while if I've invested in S&P, it will be 150%. I've beaten the S&P, again, not because of anything, just because of luck, by close to 9% for the last nine years or so.

Dr. Jim Dahle:
Yeah. Any plans to change your style of investing at this point? Do you plan to continue to invest in individual stocks?

Kumar:
Yes. Now I don't earn much. So what I do, like recently, I sold my stocks in Tesla. I bought Index Fund. I'm trying to switch from my individual, because I know it's quite a risky proposition going in the future, to change some of them to Index Fund, but gradually. I don't want to create too much of capital gain tax as well, because they have appreciated a lot. I understand, even if it is riskier, I've not left my job. My wife still works. I continue to earn. We are not withdrawing any money from our portfolio. We're just riding what's going. Even if it drops two or three million dollars, it won't change our lifestyle, because we don't need that money for next five, 10 or 20 years or so.

Dr. Jim Dahle:
What percentage of your gross income do you think you saved on average over the last 11, 12 years?

Kumar:
Oh, initially we were saving, after taxes, whatever I was getting, we were bringing home, almost close to 70%.

Dr. Jim Dahle:
70% of your net income?

Kumar:
Yes. We were living in a very low cost of area near Buffalo when I graduated from residency. I didn't read your book, but I was still living like a resident because my mortgage was $400 for the month. It was very cheap, though I spent or wasted money, a lot on buying cars and other stuff without knowing much. But after that we were good saver. We invested and we enjoyed our life but we were able to save a lot of money up front and that made a big difference.

Dr. Jim Dahle:
Now, most doctors have a lifestyle explosion when they leave residency. They start spending dramatically more than they were. Why do you think you didn't?

Kumar:
No, actually, I did. Because I bought my first car, it was a Mercedes, then I bought a 7 Series BMW, then I bought an Audi, then I bought a convertible Mercedes. There were three cars on my driveway, a Mercedes, BMW, Audi, which was more expensive than my entire house. I didn't waste my money. I went to fancy vacations.

But after that, to a certain extent, it all wins as we all know that you enjoy it for a couple of months and something you feel good, you put on the social media and stuff, and then everything just goes back and you're back to the treadmill. Later on I realized that these things are free. Now, the biggest thing money I think can buy is freedom. Right now, I wake up in the morning, we have one daughter, so we spend a lot of time with her. She's nine years old. That's the whole purpose of this approach of leaving the job is not that I hate my job or anything, it brings me money, but able to spend our time with her. So that is a very, very critical piece. And that made me to do all this so that I can be able to, especially the golden years, she just turned nine. We want to be there all the time for her. So that's our number one purpose.

Dr. Jim Dahle:
Yeah, those years between five and 10 are pretty magical, aren't they? I've got a nine year old too.

Kumar:
We have not hired any aid. We just take care for her. We spend lots of time with her all day long throughout the year.

Dr. Jim Dahle:
Now you're an immigrant. I don't know if your wife is an immigrant, but how did your upbringing affect how you manage your money, do you think?

Kumar:
Yeah, we both are an immigrant. My wife was also an Indian. We did our medical school back in India and did our USMLE and started doing our residency. From my family background, we came from a very I would say middle-class, typically Indian middle-class background where money was there, but it was not an abundance. We always learn from our parents to save. Saving was inborn in us, not that investing and being very smart with the investment, but saving was already built in.

During my residency in three years, when I finished my residency, I had more than $100,000 during my residency itself, where we were getting paid close to $60,000 every year. Out of that, I was able to close around $92,000, I still remember $93,000 I had saved. I did not invest it because I had no idea.

At that time, all we were talking about is people are busy doing their fellowships, researches, or talking about their cars. I was surrounded by people who had no idea what the investment word was. We didn't read your book, I wish I had read your book. And right now I would have been much more better and in a better position, but that time we had no idea. What we did was we saved the money though I wasted on other stuff, but we were always been a good saver to begin with.

Dr. Jim Dahle:
How much do you think you guys spend now? What do you think you'll spend in 2024?

Kumar:
I think give and take, we spend around $120,000 to $150,000 in a year because we don't have any debt. No loan, no mortgage, everything is clear. We live in a house so most of the money goes in paying our property taxes. And then we do a lot of vacations. So, we spend on that. And then my child goes to a lot of post-school activities, private tennis, private swimming, she plays golf. Basically those are our major expenses. But still I would say somewhere around $120,000 to maximum $150,000 in an entire year is more than enough for us.

Dr. Jim Dahle:
Do you remember the first conversation you had with your wife about money and how you guys were planning to manage your money? Tell us about that and how that went.

Kumar:
Yeah, my wife is not too much into that. She was used to work, money used to come. She just cares we have a house, we eat good food and go to vacation. She is not into it, basically I was the one making 100% decisions. We were earning exactly the same amount because our job, being working together at the same place, same job, our W2 salary was exactly a mirror copy of each other. We never did any extra moonlighting or extra work.

But most of the investment was done by me. Initially for the first five, six years, she didn't even knew that I was putting so much money in stock. She didn't know that we have saved so much of money because she would think that, “Okay, why do you have to work so much?”

It was in the later part of when we moved to this area, where we started discussing and she's been happy because we hardly worked anything harder or we did any more education. We are the least qualified doctors in America. We just did three year of residency. To say that you need a lot of, and we have worked less than 120 days a year. We work our full-time jobs. So it's been a very smooth sailing for us. And so, we are very lucky and fortunate to be at a position where we are right now.

Dr. Jim Dahle:
Yeah. How do you view your careers now? Do you consider being a doctor an important part of your life? Do you plan to practice more later, less later, about the same amount later?

Kumar:
Yeah. Right now, our priority, as I said, is all spending time with my daughter. That is the number one priority. I don't want to do any full-time, even a part-time job because you don't have the flexibility in your scheduling. When you work part-time, full-time you will have to ask for a vacation or days off. I want to be with her at least till she goes to the college, which is another seven, eight years or even more. That's the goal to do, but continue to do a part-time.

I don't want to leave the job altogether. Because it still earns me a decent income and then I don't want to have a big gap in my CV as well. That way I continue to work. Maybe when she is out of the house and to the college and stuff, then I might go back, work more or volunteer more.

I haven't thought that far ahead, but right now, my sole goal is to be at home with her and spend as much as of time. That's the whole thing why I pursued this financial independence, why I was investing aggressively, knowing that it might not work out because there's a very certain amount of time with my daughter, which was very, very critical. And once I achieved, there was no point of working as a full-time.

Dr. Jim Dahle:
Yeah. Okay. Somewhere out there, there's somebody that's just like you were 12 years ago. Maybe they're an immigrant, maybe they're not, but they are in medicine or family practice or something that maybe doesn't pay a gazillion dollars a year. And they want to reach financial independence relatively quickly. They want to do what you've done. What advice do you have for them?

Kumar:
I would say first thing is post residency when you start working, start saving. As you said, live like a resident for the next four or five years. During residency, please study some personal finance and have some literacy because that was one of the drawbacks which I had no personal literacy. I didn't even know how to file a tax and what's the brokerage account is till I started earning money. If someone can know that's a very good upfront itself.

But then before you start the family, if you're young, work as much as possible. Just focus on working, earning, save and keep investing. Just upfront that investment in the first five years will help a long way. After that, once you have reached somewhere good net worth, then you can start thinking of spending time with your family and other stuff.

But I think upfront, you need to save, save and save and invest money. As simple as that. Control your ego and stuff because you're a doctor. You will get time to spend all your money. But I think if you're done early, as you know, the component is how it works. It's just not the smartest person, but the person who starts the earliest has a very high chance of winning this whatever the race or whatever you call it.

Dr. Jim Dahle:
Well, Kumar, I congratulate you and your wife and your daughter on your success. Thank you so much for coming on the Milestones podcast to share it with others and inspire them to do the same.

Kumar:
Thank you so much for having me.

Dr. Jim Dahle:
All right, that was a fun interview to do. You don't see that very often. People become an FI just 12 years out of residency, especially in a specialty that most of us consider a relatively low paid specialty. This is not a neurosurgeon or an orthopedic surgeon or a plastic surgeon or whatever you consider to be the top earning specialties. It's internal medicine. It's being a hospitalist.

It's grinding out those 12 hour shifts, days and nights, admitting patients to the hospital, rounding on them, discharging patients, hassling with hospital administrators. It's not the world's easiest job, but you know what? If you work hard at it, you can get paid well. And if you save a big chunk of that income, you can obviously become wealthy very quickly.

Now Kumar admits that he got lucky with some of the stock picks he made, but let's be honest what's going on here. They make $600,000. They spend $120,000 to $150,000 once he got over his new car thing, after he got out of training. That leaves a big gap of money to save. When you're saving $300,000 or $400,000 a year that's $3 million or $4 million they save just in brute force saving.

Yes, it grew. Their money grew because they invested it and stocks have done well. The stocks they picked have done particularly well, but even if they just bought all the stocks, they'd still have $4 million or $5 million right now. It wasn't the stock picking prowess or luck as he describes it that enabled them to become wealthy. It was a high savings rate and working hard and earning well and putting a whole bunch of that into something reasonable.

And you too can do that. Most of us might pick a more moderate path. We might not save 70% of our net income. And I don't want you to think that you have to save 70% of your net income to be a White Coat Investor. You do not. I do recommend you save 20% of your gross income. That might work out to be closer to 30% of your net income. That is kind of required if you want to maintain your standard of living once you get to retirement. But you can watch it as you go and might be able to cut back sooner than you might think saving that amount.

But the point is, the more you save and invest, the sooner you get to financial independence and the sooner you're in control of your life, whatever you want to do with your life. If you want to go on mission work and on another continent, if you want to just be around to raise your nine-year-old, if you want to change your practice to something that you enjoy doing more, whatever you want to do is within your power.

As a doctor, you've already got a high income. The steps to becoming wealthy are make a lot of money, don't spend a lot of money, take the difference between those two and invest it in some reasonable way and then make sure you don't do anything dumb to lose it. That's basically all there is to getting rich.

But let's be honest, 90% of it is in the earning. Most Americans have an earning problem. If you're listening to this podcast, you probably don't have an earning problem. All you've got to do is do the rest right. And as I tell people a lot when I'm out on speaking gigs, you're a little bit like the Seattle Seahawks in the Super Bowl. I think it was back in 2017. They're on the two yard line. They've got the best running back in the NFL, Marshawn Lynch. All he's got to do is take two steps forward over the goal line and they're Super Bowl champions. But what do they do? They call a complicated pass play, throw an interception. The Super Bowl is over and they lose.

That's like doctors when they come to managing their finances. Basically all they got to do is take two steps over the goal line by virtue of having their high income. There's not that much else you have to do to build wealth and become financially independent. All you have to do is manage it in some reasonable way.

And so, that's my caution to you. Don't be like the Seahawks. Play smarter. You can and you can be successful and you can do this. Even if you don't want to do it in 12 years, it's totally fine to do it in 20 or 25 or 30 years if you want to.

FINANCE 101: RETIREMENT ACCOUNTS FOR THE SELF-EMPLOYED

Okay, I promised you at the beginning, we're going to talk about retirement accounts, retirement savings plans, whatever you want to call them for the self-employed. Self-employed means you don't have a boss. You are the boss. And so, that might mean you're getting paid on a 1099. For most docs, that's what it means. You don't get a W-2 at the end of the year. You get a 1099.

I'm not going to talk about K1s. People with K1s are in partnerships. And in a partnership, your retirement account options are mostly limited to what the partnership offers. Just like when you're an employee, you are limited to the retirement accounts offered by your employer. When you're a self-employed person, you are the employer. So you get to go out there and choose the employer-offered retirement plans.

So, let's talk about what those options can be if you are self-employed. The mainstay of retirement savings for the self-employed is what's called an individual 401(k). And this is just a 401(k) where there's only one person in the company. You can have your spouse in there as well, but that's it. Once you have more than your spouse, you got an employee beyond your spouse, you can no longer use an individual or a solo 401(k).

But these are awesome. If you have one of these, you should be so happy because it is a great way to save. If you make enough money, and you don't have to make that much depending on the type of contributions you make, if you make enough money, you can put $69,000 in there this year for those under 50 for 2024. It goes up with inflation each year, but $69,000 is a lot of money. If you put $69,000 away every year for retirement and you will retire a multimillionaire if you have any sort of reasonable normal career length.

The cool thing about these accounts though is you're in charge. You can go anywhere you want to open them up. Now, these days, I actually think it's worth passing on some of the free ones that you can open at Fidelity and Schwab. You can't do this anymore at Vanguard. They got out of this business recently.

But I actually think it's worth paying someone to set this up for you. And the reason why is if you get a customized one from some of the people we have on our recommended page, if you go to the tab and go down to retirement plans, you'll see the six or eight of people there that can help you do this. But they can put together a customized plan. And the benefit of that is you get to choose all the investments.

You can actually choose investments that aren't typically offered in 401(k)s. You can make it basically a brokerage window. You can buy anything available at the brokerage. That often includes some private investments if you're interested in those sorts of things.

And so, that's cool. But you can also put in some cool options. You can have a Roth option. You can have an option to take loans from the 401(k). You can allow after-tax employee contributions and in-plan conversions. When you put those two together, it's often called a mega backdoor Roth IRA. Yes, you could put all $69,000 in there as Roth contributions. There's a lot of cool things you can do when you have a customized plan. Your 401(k) offered by your employer or your partnership may offer some of those, but it's pretty uncommon that it offers all of them. But your individual 401(k) can offer all of them.

And as we've grown here at WCI, we had abandoned our individual 401(k)s. But we opened up a 401(k) that offered all those options as well. And so, it's been pretty awesome to be able to participate in that, not only as an owner employee, but I think the employees appreciate having a good 401(k) as well.

Okay, that's the first option. A lot of you out there are sitting there with a SEP IRA. And a SEP IRA is used by lots of people that are self-employed. The total contribution limit is the same as $69,000, but it has a number of downsides that make this less than ideal for most White Coat Investors.

One is you don't have as many options for like the mega backdoor Roth option and that sort of a thing. You actually have to have more income in a lot of situations to max it out than you do with an individual 401(k). Because you don't have the $23,000 for those under 50 employee contribution to help get you to that maximum contribution. A lot of times, a SEP IRA is not going to allow for after-tax employee contributions like an individual 401(k) can. So, those are downsides.

The other big downside though with a SEP IRA is it counts toward the pro-rata calculation when you're doing your backdoor Roth IRA each year. And so, that's why a lot of White Coat Investors avoid it. If they have a SEP IRA, they tend to open an individual 401(k) and roll the SEP IRA in there. It's just not ideal. It's not as good as an individual 401(k).

The only advantage really that it has over an individual 401(k), it can be opened a little bit faster with a little less paperwork. And you don't have to file a form called 5500-EZ. This is not a hard form to file. It's just an informational return you have to do for the IRS each year. It's due July 31st every year when you had more than $250,000 in the account at the end of the prior year. That's when you have to file.

And so, that's not a bad thing to file. It's not that hard to file. You just have to remember to do it because the penalties for not filing it are terrible. And if you botch it once, a lot of times they'll kind of forgive you if you ask them to and you can get out of those penalties, but they're really high penalties. So, if you have an individual 401(k) with more than $250,000 in it, you do have to file a 5500-EZ every summer. Don't forget to do that.

Okay, some companies, small practices or whatever, they decide to open what's called a SIMPLE IRA. And SIMPLE doesn't mean it's just an IRA. It's not a traditional IRA. It's a SIMPLE IRA. And the problem with the SIMPLE IRA is it's generally inferior to a 401(k). It's not even as good as a SEP IRA. You can't put as much money into it.

But in some situations, depending on who your employees are and how much they want to save, it might make sense if you've got a bunch of employees in your practice that don't want to save a whole bunch of money. A SIMPLE IRA can actually make sense to be the main retirement savings plan at your practice. But if you're paid on a 1099, you're just an independent contractor and you don't have any employees, you do not want a SIMPLE IRA. That is not the best plan for you. Don't open that.

The other thing you can do, I ought to mention this. We're getting into the weeds here a little bit. You can actually open what's called a cash balance plan. And this is a type of defined benefit plan or pension. And you can open a personal one, even if you're the only employee. You're paid on a 1099, you're an independent contractor, you can open a personal defined benefit plan. And depending on how old you are, you might be able to put a whole bunch of money in there.

My partnership has a cash balance plan like this. I'm allowed to put $120,000 a year in there. If I was working more and seeing more patients and earning more, I could max that out. Right now, I don't make enough to max that out. But I'm only 49. If you're closer to 60, you can put even more money in there.

So if you really want to defer a lot of money and dramatically lower your tax bill, you can open one of these plans. It costs a little bit more than your 401(k) does. The investment options aren't quite as awesome. There's a few more restrictions. Remember, this is a pension. Really, it's an extra 401(k), but it's masquerading as a pension. So, it has to follow some pension rules. But eventually, you're just going to roll the balance into your 401(k). So, it's like an extra 401(k). But it is something to look at if you want to save more than that $69,000, you can stuff into an individual 401(k).

Okay, the other things you can do are things that anybody can do, whether they're an employee or not. You can do a backdoor Roth IRA for you and your spouse. You got to be aware of the pro rata calculation if you got some money sitting in a SEP, SIMPLE or traditional IRA. But for most of us, if you're under 50, you can put $7,000 in there for you this year, and you can open one for your spouse and put $7,000 in there for them each year.

Obviously, it's a two-step process. You put it in the traditional IRA, then you move it to the Roth IRA the next day or the next week or whatever. So you're contributing to the Roth indirectly. And that's another $7,000 to $14,000 more if you're 50 plus that you can put in there.

Okay, everybody whose only health insurance plan is a high deductible plan can contribute to a health savings account. I think the limit for this year is $8,300 for a family. And remember, a family can be you and your kid. It doesn't have to be you and a spouse.

And so, that's another great savings account. It's triple tax-free. Yes, it can be invested. You don't even have to take the money out in the same year that you contributed or that you spent it on healthcare. You can save the receipt for decades if you want and pull the money out later, tax and penalty-free. After age 65, it acts just like your IRA, basically. Just comes out and you got to pay tax on it, but no penalty, even if you're not spending it on healthcare. If you have access to an HSA, there's really little reason not to max it out.

Okay, the other thing everybody has access to is just a taxable brokerage account. There's no contribution limit. There are no restrictions on when you pull the money out or what it can be spent on. Obviously, it's taxed as it grows. That's the downside to it compared to all these retirement accounts, but it is nice and flexible and you can put as much as you want into it. This is actually the biggest part of our savings now, just because we were able to save more than we were able to put into retirement accounts for a number of years. And that's the case for many people.

But don't forget, a taxable account is not the end of the world. You don't have to stop saving for retirement just because you've filled up your retirement accounts. You can always invest more into a taxable or non-qualified brokerage account. You can still invest it tax efficiently. Typically, people are investing in things like a total stock market index fund or your municipal bond fund or things like that to keep it tax efficient, but there's no reason you can't invest as much as you want there.

All right, I hope that is helpful to you as an overview of what is available to the self-employed when it comes to retirement accounts.

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Thanks so much for being with us today. We appreciate you listening to the podcast and being part of the White Coat Investor community. Keep your head up and your shoulders back. You've got this, we're here to help. We'll see you next time on the podcast.

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.