Last week I made a new friend with whom I’m very impressed. I’ll call him Caleb. This young man just graduated from B.U. with a degree in business management earlier this year. His family is from the Cape, and while he’s living in Boston with some buddies right now, he hopes to come back to settle down in a few years.
Caleb’s now working for a high-tech firm in Watertown where he’s managing a new project for them which they hope to launch publicly next year. It’s a lot of responsibility, and he’s learning a terrific amount. But Caleb has his sights set on larger goals eventually. He wants to start his own business. After all, Caleb’s a serial entrepreneur. He worked his way through high school and college and is brimming with a million ideas for how to make money.
Caleb and I got to talking, and he was interested in my experience, since my name is on the building, and that’s his goal too. Caleb is looking for advice on how to make sure that he’s ready, willing, and able to start his own business when the time is right.
Like a lot of people his age, Caleb’s already behind the eight-ball in a big way. He’s already carrying significant student loan debt. What’s more, his first payments on that debt are due soon. That’s put a bit of a damper on his dreams: Between rent, car payment, and other expenses, he’s already experiencing some penny-pinching. What’s more, there’s more on the way as his first student loan bill is due in December.
Caleb’s not alone, of course. Student loan debt is the second highest consumer debt category, behind mortgages and in front of credit card debt and auto loans. Students in the U.S. owe $1.5 trillion, according to the U.S. Department of Education. These numbers are staggering, and they’re only getting worse – the cost of higher education is continuing to rise, and the cost of borrowing money is increasing as well.
A recent study published by researchers at Northeastern University notes that student loan debt is having a chilling effect on entrepreneurship in America. The research suggests that a person with the average student loan debt in the U.S. – about $30,000 – is 11% less likely to start a business than someone who graduates debt-free. Entrepreneurs seeking loans for new small businesses are at a disadvantage when they walk in with $30,000 or more of existing debt to pay – it’s a credit risk for banks.
As the labor market has tightened, some employers are trying to find new, innovative ways to attract and keep talent, and a tax decision made by the IRS over the summer may show one way forward.
You see, the IRS said that it was okay for Abbott Laboratories, based in Illinois, to match their employees’ student loan payments with contributions to a 401(k) retirement savings account. Under the terms of Abbott’s arrangement, employees who contribute at least 2% of their paychecks to student loans are eligible to earn a 5% 401(k) contribution from Abbott – even if they’re not already making contributions to their retirement accounts. It helps Abbott’s employees stay on track with student loan repayment while simultaneously setting money aside for their retirement.
To be clear, the IRS’ guidance on this issue was specific to Abbott – it was what’s called a Private Letter Ruling (PLR), and the IRS says PLRs may not be relied on as precedent. But some experts expect other companies to follow Abbott’s model (and, ostensibly, get their own PLRs from the IRS), which may pave the way for the IRS to offer a Revenue Ruling which would codify this once and for all.
Caleb isn’t working for Abbott, and his employer doesn’t offer any benefit for employees saddled with student debt, but this does gives us some insight about how widespread this issue is and what employers are trying to do to help. It’ll be interesting to see if more employers find new, innovative ways to help their employees manage student debt.
To that end, I also encouraged Caleb to live within his means. “YOLO” (You Only Live Once) is a popular saying now amongst the young folks. He’s under a lot of pressure to go out with friends, have a good time, go on vacations and do other things now that he’s a working stiff, but running up credit card debt is the last thing he needs if his goal is to start his own business. He’ll need to prove to banks that he can use credit and resolve debt responsibly when it comes time to hang out his own shingle.
My advice to Caleb was to make paying back his student loan debt a priority. I suggested that he set up an automatic loan payment from his checking account to make sure that debt was paid on time each month. When Caleb goes to start his business, the bank will look carefully into his financial background to assess risk. Paying back loans and revolving credit bills on time is crucial to maintaining a good credit score.
Then I suggested that he find ways to pay that debt down early.
“I bet you can shave a year off your repayment schedule,” I told Caleb. He perked up when I said that!
Finding a way to pay an extra $25 or $50 or more each month will shave thousands in interest off the loan, and enable Caleb to pay it back earlier. To do so, Caleb will need to instruct his lender about how to apply the extra amount – fortunately the Consumer Finance Protection Bureau (CFPB) offers guidance and a sample letter to help.
I advised Caleb to also look into Income-Based Repayment (IBR). It’s a repayment option for federal student loans to help make their debt repayment more affordable by using a sliding scale to determine how much you can pay, based on your income. The U.S. Small Business Administration offers some details about how IBR works at their Web site.
IBR and Pay As You Earn (PAYE) repayment programs for student loans have become increasingly popular over the past few years as student debt has continued to rise. But it’s a band-aid on a much bigger problem. Regardless, young graduates like Caleb are finding themselves with new challenges that previous generations didn’t have to deal with.
The good news is that Caleb is on the right track. By focusing on long-term goals – the timely and appropriate repayment of debt, protection and bolstering of his own credit rating – he’s going to be well-prepared for the next phase of his life, when he’s ready to take what he’s learned in school and on the job and make his mark on the world.
That’s why I encourage Caleb, and you, to be vigilant and stay alert because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, a wealth management firm with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at email@example.com.
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