Who: Kim Reese, 44
Question: How can I pay off the debt I took out to go back to school?
Like many Americans, Kim was a victim of the Great Recession. She was laid off from her marketing job in 2009. So she decided to take matters into her own hands and enroll in an executive MBA program at Emory University, in Atlanta. “It’s a long-term investment for me to increase my earnings potential,” Kim says. “I had to sharpen my skill set.” The advanced degree comes with a hefty price tag. When she finishes next spring, Kim will have nearly $100,000 in government-sponsored Stafford and Grad PLUS student loans.
Kim had always planned to go back to school and saw this as an opportunity to finally do it. She’s recently divorced, has two kids in college and currently has no income. Student loans were the only option for paying for school. Luckily, Kim has never had to dip into her retirement savings -- a 401(k) from a previous employer to which she diligently contributed, plus a Roth and a traditional IRA. She hopes to land a senior management position in marketing when she finishes school and to buy a house after she finds a job.
Setting priorities. Once she lands a job, Kim should focus first on paying off her loans. The current unknown is what kind of position she’ll get and how much it will pay, says Scott Kahan, a financial planner in New York City. To pay off the loans in ten years, the standard plan, she’ll need to devote more than $1,000 a month to paying off debt.
“The best thing to do is live as frugally as she can when she starts working,” says Susan Veligor, a financial planner in Portland, Maine. Kim should track her cash flow to make sure she knows where every dollar is going. Veligor recommends that if you take out big student loans, you consider the money you earn when you start working as not really yours for the first five or ten years.
If Kim doesn’t get a job right after school, she may put her Stafford and Grad PLUS loans in deferment or forbearance, usually for a year at a time. “There’s a safety net for her,” says Veligor. She wouldn’t have to make payments, but the interest would accrue on the Grad PLUS loans and any unsubsidized Staffords. To reduce her payments, she could choose a graduated or extended repayment plan, which can spread the cost over 30 years.
To take more control over her retirement savings, Kim could roll over her dormant 401(k) into a Roth account (she’d owe taxes, but with no income the cost would be minimal). “If she’s not working at the company anymore, there’s no reason to leave the 401(k) there,” says Kahan. Kim can switch to a company such as Vanguard or Fidelity and have unlimited investing options.
What if she gets a job that offers a 401(k) plan? Should she contribute? That’s a tougher call. “I really encourage people to maximize their 401(k)s,” says Kahan, but if that means Kim would have to extend her loans, then it’s not worth it. If she can, she should try to contribute enough to a new 401(k) to qualify for any employer match. Overall, Kahan ranks Kim’s priorities as paying off her loans, contributing to retirement and, finally, buying a home.