Background

In Part 1, we discussed a satisfying way to determine the right balance between paying down your student loans and saving for other important financial goals. Read that first, if you have not, because one way a financial planner like me can lose credibility is to tell you to not worry about your debts and just invest all of your available excess cash. That is not what I’m telling you, and Part 1 illustrates the priority of paying down the debt.

However, there are scenarios in which it may make sense to focus on other financial priorities as you pay down your debt on its regular schedule, without adding additional payments to pay it down faster. The biggest factors to consider will be the types of loans you have, the interest rates, and the status of some of the financial priorities below:

Key Takeaways:

You Can Balance Student Loan Payments and Saving for the Future
Paying off Student Loan Debt May Not be the Top Priority
There is Such a Thing as “Good” Debt

Paying off Low Interest Loan Debt May Not be the Top Priority

From a strictly academic perspective, allocating excess cashflows to your debt may not have to be your top priority. In fact, there are very valid places to park money first before trying to speed up the pace at which you pay down those loans.

Liquidity Reserve – In many cases, it may make sense to build up a 6 to 12-month cash cushion as fast as possible while making the standard payments on your student debt. This will afford you the ability to maintain your day-to-day life should you temporarily lose employment, including the ability to continue paying down debts.

It’s very boring and doesn’t really feel great, because hopefully you’ll never use it. But the reality is that you probably will use it, at some point. It may not be this year, or next, but life happens and it’s critical to have an emergency cash reserve in place for when it does. Build it once, and then move on to the next thing.
Disability Insurance – While you likely have some degree of disability coverage through your firm, the actual disability income you receive will often be significantly less than your current salary, and taxable to you as income on top of that – meaning that you’ll keep even less of the lower disability income pay you receive.

If you suffer a debilitating injury or illness and can’t work for a period of months, years, or the rest of your “normal” career span, you do not want to be in a situation where that future income is completely forgone and all you have left is the debt you incurred to get where you are now. One of the biggest financial assets you have as a BigLaw Associate Attorney is your future income stream. Don’t risk losing it if something terrible happens to you!

401(k) Plan Contributions – Especially in cases where your firm matches some amount of your own salary deferrals into your retirement plan, this is a good choice for many people. You can think of it as getting a guaranteed return on your investment for the dollars you defer into your plan, up to the amount that the firm matches.

Of course, paying off your student loan debt is a guaranteed return of your interest rate, while the returns on your 401(k) are not guaranteed at all. You have to decide whether you believe the potential for higher after-tax returns in your 401(k) are worth it, as compared to the guaranteed return of paying off your debt. Just remember, money stashed away by a BigLaw Associate Attorney into a 401(k) likely won’t be accessed for decades.

Whatever realistic chance there is for a significant downturn in any given month or year, the chances of your 401(k)-retirement nest egg having a lower after-tax return than the interest rate on your student loan debt over the next 20 - 30 years may be lower than you think. Again, this depends heavily on the interest rate(s) and term(s) of your loans.

Health Savings Account (HSA) Contributions - Similar to 401(k)’s above, if your employer offers an HSA option for health insurance, they may also offer a contribution to your account. If so, you should consider contributing.

HSA’s have an often overlooked and underrated feature from a tax perspective, in which they can be “triple tax free” - contributions may be tax-deductible when you make them, growth is tax-deferred while the money is in the account, and when you use the money for qualified medical expenses, the distributions are tax-free. So, the money may never be taxed. This makes the HSA a great retirement savings vehicle and a solid candidate for funding prior to paying more than you need to on your student loan debt.

Summary

The Devil is always in the details, so it’s important to carefully consider the terms of any debt that you consider. If you have a meaningful amount of student loan debt, and many BigLaw Associate Attorneys do, please use your resources and/or find a qualified professional to work with to help you navigate all the options available to you for handling the debt in the most efficient way possible.

I highly suggest working with a student loan expert such as those found at BigLawInvestor.com, and/or make sure your financial advisor is competent in this area. One thing you can look for is whether they list any specific expertise or credentials as it relates to student loans, such as the CSLP® designation (Certified Student Loan Professional).

Generally speaking, BigLaw Associate Attorneys should be very careful when it comes to making decisions about how to handle their student loans - refinancing, consolidation, etc. There are a lot of moving parts and choices to make, particularly if you’re married, and double particularly if your spouse also has student loan debt. Please, seek out the advice of a professional that deals with this stuff on a regular basis!

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