Law Schools

An Orthodontist's One Million Dollar Student Loan Debt Exposes The Good, The Bad, And The Ugly About Income Based Repayment Programs

At what point does paying your student loans in full no longer make financial sense?

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If you thought owing $100,000, $200,000, or even $300,000 in student loans was bad, try owing over a million. At what point does paying your student loans in full no longer make financial sense?

Recently, the Wall Street Journal featured the story of Michael Meru, an orthodontist who owes $1,060,945.42 in student loans. The interest accrues at a rate of $130 per day. This translates to around $3,900 per month, or $46,800 per year.

But don’t feel too bad for him. Last year, he earned $225,000. He owns a home with a mortgage in Utah. He drives a Tesla. He and his family have vacationed in Havana.

So how is this orthodontist able to afford all of the above with his crushing debt? Brace yourself. Thanks to the federal government’s income based repayment (IBR) program, he pays less than $1,600 per month towards his student loans despite earning $13,333 per month after taxes. Since his payments are not even making a dent on the interest accrued, the $601,506 he originally borrowed ballooned to his current seven-figure balance. Given these numbers, it is very likely that he will stay on the IBR program for the 25 year period, after which the balance of his student loans will be forgiven with possible income tax consequences.

Dr. Meru’s case is extreme as only 101 people out of 41 million borrowers owe more than $1 million in student loans. But orthodontists go through four years of dental school and (for some reason) pay additional tuition for post-graduate clinical training. This means a newly minted orthodontist can have student loan debts easily exceeding half a million dollars. Of course, you won’t see these numbers advertised in dental school brochures because it will scare away potential students with even a modicum of financial literacy.

With this in mind, I noticed that the debt-to-income ratio for some lawyers can be similar. While the average law school debt can vary depending on location and tuition discounts offered, the new normal seems to be a minimum of $200,000 considering current average tuition, costs, and living expenses. A small but growing number of graduates are coming out of the shadows to report total debt of over $300,000. For the majority of law school graduates who don’t get the new $190,000 starting salary, they are more likely to earn between $40,000 to $65,000 according to the infamous bimodal salary distribution curve. So when you are owing $200,000 – $300,000 in student loans and your after-tax income is $3,000 to $4,000 per month, you too may wonder if it would make more financial sense to be an IBR-lifer.

Of course, everyone’s situation is different. Over time, a lawyer’s salary can increase. And if you work hard, maintain a positive attitude, say your prayers, and eat your vitamins, a small-firm lawyer can earn an average of $198,000, at least according to the lawyers surveyed by Martindale Legal Marketing Services.

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A few weeks ago, I explained why small-firm lawyers should pay off their student loans as soon as they are financially able to. It is worth it to live on a shoestring budget for a few years because the financial and psychological benefits of paying off the loans are immense.

But when the calculations show that you will have to work 80 hours per week until you are 80 years old to pay off the debt, then it’s not worth it. If paying more than half of your take-home income covers just the interest accrual, then you are probably better off getting on an IBR plan. At some point, you have to live your life. If you work to the point of killing yourself, then no one gets paid.

The usefulness of IBR has been debated for some time. A recently published article from the Brookings Institution used Dr. Meru’s case to show that the IBR program is not only unsustainable, but it will only benefit rich graduate students and well-endowed universities.

Academics, unsurprisingly, disagree. One even argued that there should be more debt in the form of expanded income-based repayment programs to keep college affordable. These people seem to think that IBR programs are a kind of government subsidy or back-end scholarship. The problem with this argument is that IBR programs were designed to help needy graduates keep their loan payments affordable during tough times. But they were expected to pay more and eventually pay the loan off once their financial situation improved and stabilized. If this were really a back-end subsidy, then the government would not expect full repayment of the loans.

As far as I’m concerned, Dr. Meru and others in similar situations are not doing anything wrong by being IBR-lifers. While it could be offensive to see someone on an IBR program living an upper-middle class lifestyle, it is allowed under the law. Many of the comments in the WSJ article expressed no sympathy for Dr. Meru and claimed that what he was doing was morally wrong. Oh please. Dr. Meru has a greater moral duty to provide for himself and his family. He has no moral duty or obligation to please internet keyboard warriors who would have done the exact same thing if they were in Dr. Meru’s shoes.

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When your student loan balance is high enough and income is low enough, you might be financially better off being on an IBR program as opposed to paying off your student loans in full. Dr. Meru’s one million dollar (and growing) student loan balance is a clear example of this. New law school graduates with $200,000+ of debt and who don’t get a six-figure starting salary will have no other choice but to enroll in an IBR program. We may one day see if the federal government (especially under this administration) will take steps to motivate colleges to reduce costs.

Shannon Achimalbe was a former solo practitioner for five years before deciding to sell out and get back on the corporate ladder. Shannon can be reached by email at [email protected] and via Twitter: @ShanonAchimalbe.

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