For older students, paying loans requires blueprint

NEW YORK — Advisers may want to exercise some tough love when their clients approach them about going back to school for an advanced degree.
“Going back to school [as an adult] is a financial decision, not a want or a need,” said Sarah Kaplan, a retirement plan specialist with AXA Advisors LLC in New York. “Clients need to consider the financial impact first.”
Graduate students borrowed approximately $27 billion from federal programs and private lenders in the 2005-06 school year, according to The College Board, a non-profit educational organization in New York. That is an increase of 193% from the amount 10 years earlier.

Grace period
Like college graduates, who borrowed almost twice as much last year, advanced-degree holders after graduation are granted a grace period during which they are not required to make payments on their loans. Once borrowers begin repaying their loans, they are given 10 years to pay off their debt. Also, depending on the amount owed, they can consolidate their loans and stretch the repayment period to 25 or 30 years.
Paying student loans is easier for people in their 30s than for younger people, said Kevin Davis, a certified financial planner with Consolidated Financial Services Inc. in Dallas. Two of his clients, 33 and 36, have recently graduated from law school. “The strategy is different in this case. They have a decent amount of assets compared to others their age. They’re paying mortgages and maxing out their 401(k)s.”
While each has more than $100,000 in student debt, their salaries are also in the six-figure range, and they have cash to put into savings, he added.
Since these clients don’t have children, and spend the bulk of their time at work, they can save money. “They work about six days a week,” Mr. Davis said. “Plus, they’re single, so their overhead is low, and they don’t take major vacations.”
When paying back their loans, clients need advice on how they should prioritize their cash. Knocking out high-balance credit card debt and paying student debt as quickly as possible are usually top priorities — but planning strategies should strive for balance.
“When a client wants to go back to school, we come up with a plan [for] the debt,” Ms. Kaplan said. “You’d want to adjust how you’re planning with them as their goals change.” Her clients have approached her with plans for medical and other doctoral degrees, Ms. Kaplan said.
“The leveraging they can use to get to a higher earning potential will outweigh their debt concerns,” she added.
However, planners should remind clients of the risk that a graduate degree may leave them better educated but poorer. Last year’s round of Master of Business Administration graduates expected to earn an average starting salary of $92,360, according to the Graduate Management Admission Council in McLean, Va., while holders of newly minted doctorates in English earn $47,357 as assistant professors, according to the College and University Professional Association for Human Resources in Knoxville, Tenn.
“Ask yourself how much your salary will increase as a result of going back to graduate school,” said Manisha Thakor, a chartered financial analyst and co-author of “On My Own Two Feet” (Adams Business, 2007), a personal-finance guide. “For someone who wants to go to a pricey art school, it’s tough to be an artist. And you’ll want to think long and hard about what life is going to be like if you can’t pay your loans back.”
Prioritize debt
However, Ms. Thakor noted, if graduates don’t learn to prioritize debt elimination and savings, it doesn’t matter how much they’ll make — they won’t be financially secure. “I’ve met people who make $200,000 a year and don’t have a penny to their name in savings,” she said.
While advisers should caution clients about the pitfalls of returning to school, they should proceed on a step-by-step basis when incorporating student debt as part of a long-term financial plan, Ms. Kaplan said. “Clients think more about the big number as opposed to how much they’re managing on a daily basis,” she said. “It’s important to let them know that not all debt is bad and that it’s the same mentality as a mortgage: You’re taking out debt to acquire an asset.”