Facing the student debt crisis: 3 strategies to establish control

Michael Foley: ©Northstar Financial

As the old proverb says, “The rich rule over the poor, and the borrower is slave to the lender.” For those with federal student loans, this rings painfully true. From promises of widespread forgiveness to halted payments, followed by a chaotic mess of legal disputes over repayment plans, federal student loan borrowers are on an emotional rollercoaster. This article has three purposes:

1. To give an unbiased summary of the last two years of the federal student loan debacle.
2. To provide actionable steps for borrowers to regain control over their student debt.
3. To call for meaningful reform of the embarrassingly broken federal student loan system.

Student debt crisis storyline

Before we dive into how borrowers can regain their freedom, it's important to understand the story leading up to today.

In 2023, the Biden administration attempted to offer forgiveness of $10k-$20k to borrowers under a certain income limit. However, the Supreme Court deemed this unconstitutional—a “slap in the face” for the administration. In response, the administration leveraged the Department of Education to introduce the SAVE Plan, which directly replaced the Revised Pay As You Earn (REPAYE) plan. While the SAVE Plan offered lower payments and excellent interest subsidies, its introduction set a worrying precedent: it was the first time a new plan replaced an existing one, without giving borrowers the choice to remain in their old plan.

Fast forward to June 2024, the Supreme Court overturned the longstanding legal precedent called the Chevron Doctrine. When Congress creates a law, clarifying questions often arise, so this legal precedent established expert "regulators" to address them without returning to Congress for each issue. These regulators were given the power and legal insulation to create “regulations” that acted like mini-laws without congressional approval. Over time, however, this power was abused, with regulators drafting laws far beyond Congress’s original intent. The Supreme Court struck this down as unconstitutional.

Sound familiar? Just last year, the Biden administration used the Department of Education (the regulator) to roll out the SAVE Plan without congressional approval, bypassing legislative checks. Once the Chevron Doctrine was overturned, weakening legal protections for regulations, the SAVE Plan was promptly sued.

Understanding the importance of the Chevron Doctrine’s repeal is critical for student loan borrowers. It means we must now differentiate between what is actually “baked into law” and what’s simply a regulation created by the Department of Education. Many of these regulations, such as the SAVE Plan, are now ticking time bombs, awaiting potential litigation.

So, what income-driven repayment options and forgiveness programs are firmly written into law? There are two: Income-Based Repayment (IBR) and Public Service Loan Forgiveness (PSLF). For now, PSLF remains safe since it is law. However, other regulatory programs like the PSLF buyback, which make it easier for borrowers to attain forgiveness, could face legal challenges down the road.

Strategy 1: Treat your mindset:

Humility: This is a debt that you took out to get the education that you desired and you made a promise to pay it back. These are borderline fighting words these days and although uncomfortably political in today’s environment, it's reality. Yes, the system is corrupt and misleading, but we must face it to move forward. Many borrowers have been lured into peeking around the curtain at life without student loans for the past four years now, which makes it a sobering reality to remember that you have six figures of debt to still repay. It takes a level of humility to reground yourself amidst the materialistic and outward displays of success that society often demands of physicians. As the proverb goes, “With humility comes wisdom.”

Choose contentment instead of delayed gratification: Delayed gratification is often a worshiped mindset that is respected in our culture today, especially in the world of medical education. It suggests the idea of enduring something for the time being, with the expectation that things will improve in the future and happiness will follow. This mindset can leave physicians feeling like happiness is always just out of reach. They may expect life to improve once they become an attending, only to encounter higher student loan payments, child care expenses, insurance premiums, let alone any increased lifestyle costs. In Man's Search for Meaning, Viktor Frankl discusses how people who only fixate on the hope that things will improve in the future can falter. He emphasizes that finding meaning in present suffering is more powerful than waiting for external circumstances to change. One of his famous quotes is:

"What was really needed was a fundamental change in our attitude toward life. We had to learn ourselves, and furthermore we had to teach the despairing men, that it did not really matter what we expected from life, but rather what life expected from us."

Frankl explains that success and fulfillment come from how we respond to life's challenges in the present, not from simply waiting for a better future. This shift in mindset helped many survive even the harshest conditions in concentration camps.

Wherever you are at with your student loan repayment journey, it is critical to choose contentment and gratitude for where you are at. This student loan journey is likely not going to be a short one and so the more that you can realize that contentment is a choice in your life, the sooner you will find emotional freedom from the debt.

Opportunist instead of the victim: We must also shift our mindset from that of a victim to that of an opportunist. Prepare to repay your loans yourself, but stay attuned to any opportunities to “play the game” of federal forgiveness programs.This mindset change moves you from one of dependence to one of strategy. Look at the student loan repayment options as the game that they are. We don’t build our life around games, but we’ll play them if it could potentially save us money!

Consider this: If someone wanted to control you, would they have an easier time if you were dependent on them, or if you took your own initiative and were self-reliant? Which do you want to be regarding your student loans?

Give money away: Being financially minded, giving money away didn’t really make much sense to me at first. The whole world of financial planning revolves around the concept of opportunity cost which says that if I do this with my money, then what else could I have been doing with my money instead that could have yielded a better return? Traditional financial planning looks to optimize every dollar in the budget to ensure it is allocated to generate the most money at the end of the plan. Having this as the customary objective in modern financial planning, this can sentence many borrowers to a life without giving which could be more detrimental than most think.

How am I supposed to recommend giving money away when a borrower has six figures of student loan debt?! This means negative returns, a negative budget line item, and an overall lower net worth. The antithesis of what we are trying to do as a financial planner when helping borrowers get out of debt! It is hard to justify giving when looking through this lens but when you change your perspective, giving can make much more sense.

The latest research shows that generosity can have a staggering impact on the giver, both physiologically and even financially. Generosity can decrease mortality rates (Journal of Health Psychology), decrease stress (UC Berkeley), as well as increase happiness and life satisfaction (Journal of Happiness studies). Also, although the point of giving is not to expect anything in return, Harvard researcher Arthur Brooks has found that for every dollar that is given away, that person can expect to see $1.60 come back to them in subsequent years. Once you start on this path, trust me, it is truly empowering. Giving really does break the power that money and debt can have over one’s life. Money can turn into an idol that you worship by way of opportunity cost and budgeting in modern finances, but when taking a look at the research and learning from time-tested wisdom, a new perspective comes to light. One that will bring more joy and satisfaction to life than you can imagine.

Pick a set percentage of your income each month and give it away to people and causes that you feel called to support. This allows for it to be proportionate so that it isn’t overwhelming when you aren’t making much money, but also becomes a blessing for others around you when you make more money as well. When it comes to what percentage to start with, just start with what you feel comfortable and go from there. No need to get legalistic about it or overthink it. This should be exciting and not done grudgingly or under compulsion.

Strategy 2: Consider shifting to IBR

The IBR plan is the only income-driven repayment option that’s firmly established by law. If you're aiming for PSLF or long-term taxable forgiveness, this is likely the safest bet. It would take an act of Congress to change this plan which makes it a much more conservative route for borrowers amidst the ensuing onslaught of legal attacks on other unprotected regulations. After the lawsuits around SAVE, it’s reasonable to assume that IBR may soon be the only income-driven plan available. Alternatively, SAVE could be replaced, but it would likely be with another repayment plan like REPAYE which was established via regulation, not law.

The downside to IBR is that not only will it result in a higher monthly payment than SAVE, but leaving it for another plan in the future could lead to interest capitalization, which means your interest would be added to your principal. Additionally, not everyone qualifies for IBR—it requires borrowers to show a “partial financial hardship.” However, once you’re in, even if your income increases, you won’t be removed from the plan. This is why it should be carefully considered before filing a tax return that could disqualify you from partial financial hardship eligibility.

When pursuing this option, it’s essential to determine your backup plans in case the expected forgiveness doesn’t occur as planned. Ideally, you should calculate how much is estimated to be forgiven by your projected forgiveness finish line and use that figure as a goal for building a side investment account. This approach puts you in a strong financial position: if the debt isn’t forgiven, you’ll have the funds ready to pay it off; if it is forgiven, you won’t be upset about having extra money that you can use for other purposes instead of your loans.

If you can’t afford a full backup hedge just yet, start with identifying what your expected tax burden would be if you were to pursue the long term forgiveness after 20-25 years. Use this as a starting place for your savings to put you back in the driver's seat and not so dependent on the forgiveness programs.

Strategy 3: Advocate for reform

Let me share a story: A man stood by a river, noticing a child in distress floating downstream. He threw a rope and saved the child. Soon, more children floated down, overwhelming the man as he tried to rescue them. Finally, he ran upstream and discovered the cause—a school bus had crashed into the river.

This story, illustrated in Dan Heath’s book Upstream, exemplifies our current situation. As a financial planner for health care professionals with student loans, I often feel like that man—rescuing clients downstream from the student loan crisis. But to stop the flow of borrowers into this broken system, we need to look upstream and call for reform.

Advocate to honor existing repayment and forgiveness programs: Borrowers took out loans expecting certain options for repayment and forgiveness, and these options should be maintained. We’re not asking for blanket forgiveness, but for the system to stick to its promises.

Reform society’s relationship with debt: Young health care professionals must be educated on the long-term consequences of borrowing more than the promise of forgiven loans. If we don’t teach financial stewardship, how can we expect the next generation to avoid the same pitfalls? We need to return to the principle that debt should be a last resort, used only to purchase something that will generate a return greater than the interest cost. Pre-committing future dollars through debt instruments has become normalized in our society and puts borrowers in a position to presume upon an uncertain future. Increasing debt literacy will greatly benefit young medical professionals, inspiring creative strategies to avoid debt in pursuing their medical careers and potentially helping to curb rising medical school costs.

Reform how student loans are issued: Access to student loans should depend on the borrower’s ability to reasonably repay the loan based on their intended specialty, rather than solely on financial need and the school’s tuition costs. It is sad to see that current eligibility requirements show little to no concern for whether the debt will be a good investment for the student or not. Suppose we change the eligibility focus to the borrower’s return on investment and ability to repay the loan. In that case, this will help look after the borrower’s best interest as well as our government’s fiscal responsibility as the lender. The student loan system could learn from business lending, which requires a detailed review of an applicant’s ability to repay. We need to advocate for aspiring health care professionals so they aren’t burdened by unmanageable debt.

There’s no need to reinvent the wheel; it’s simply time to look upstream and stand up for the vulnerable, dedicated professionals who are making sacrifices to care for others. We owe them a system that works.

Michael Foley, CFP, CSLP, is a comprehensive financial advisor at North Star Resource Group with a specialty in serving the medical community. Are you a medical professional with student loans looking for financial planning help? Michael and his team would love to meet you! Contact: FoleyTeam@northstarfinancial.com

Included Disclosure Michael G. Foley CFP®, CSLP® - Associate Partner, Financial Advisor- 6720 N Scottsdale Rd Ste 290, Scottsdale, AZ 85253 Phone: 480-712-7285 The views depicted in this material are for information purposes only and are not necessarily those-of Cetera Advisor Networks, LLC. They should not be considered specific advice or recommendations for any individual. This is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific, legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought. Neither Cetera Advisors Networks LLC nor any of its representatives may give legal or tax advice.The examples presented in this video are for illustrative purposes only and should not be deemed a representation of past or future results. Securities offered through Cetera Advisor Networks LLC, member FINRA/SIPC. Advisory services through Cetera Investment Advisers LLC. A registered investment adviser. Cetera is under separate ownership from any other named entity.