I just got my MFA in May and it’s time to repay a whopping $70,000 in federal student loans. Because I am able to write so much off of my taxes, I qualify for a $0 income-based repayment. If this continues, the entire loan amount and interest will be forgiven after 25 years or so ($133K with interest), but that means showing poverty on my taxes for 25 years. Should I pay $0 or should I pay what I can truly afford ($200/month) even though this will only chisel away at the interest? — LMM
I think the best way to answer a big question like this is to start with your goals. What do you want to do? What are your plans? Think about the next 25 years and consider where you want to be at the end of it, and what it’s going to take to get there. Can you make a plan to achieve those goals during your prime working years, while making next to nothing on paper?
I’m going to assume that since you went to the trouble of getting your MFA you have some serious ambitions. And I imagine that you’re also becoming aware that navigating the volatility of an art practice over the long-term requires business savvy and resources.
What I’ve learned, eight years out from finishing my MFA, is that opportunities are unpredictable, things pop-up that you want to self-fund, and there are times when you don’t know where your next paycheck is coming from. It’s been tremendously important for me to build my own assets in order to smooth over the lean stretches in my income, allowing me to continue to work on my own projects without having to dump my goals for a job at Starbucks.
Alongside that, I have found tremendous value in amassing a down payment to buy my home, setting aside money for my kid’s college tuition, and working on my retirement savings. I’m not going for crazy riches, but I also don’t want to have to worry about being evicted, sending my kid into a chasm of debt repayment, or worrying about how I’m going to pay for groceries when I’m 80.
This stuff didn’t occur to me when I first graduated, when all my goals were centered around my art career. But since then, I’ve gotten married, and had a kid, and the financial landscape has gotten a lot more complicated. Now, I’m so grateful to my former self for everything I did to create financial stability straight away, so that I could evolve with inevitable changes that you can’t predict.
So, in my opinion, even though the idea of waiting it out, living under the radar and having your loans forgiven sounds incredibly appealing, you’d be giving up the opportunity to use your most powerful working years to achieve all your other financial goals. Unless you have a secret underground vault that you’re steadily filling with piles of under-the -table cash, you’re not going to be able to accumulate the supportive assets to make your art practice bullet proof, or do all the other stuff you’ll want to do — whatever they are.
My hope for you is to take the skill of living frugally, that you’ve already honed as a student, and work hard to increase your income over the next 25 years. That way you can cross off those loans while making a few other powerful moves with your money, including: establishing a healthy cash reserve for emergencies, regularly funding a retirement investment account, and looking long-term towards your other goals so you have the resources to make them happen.
Our one totally free, non-renewable natural resource is time. Because of the magic of compounding investment returns, the earlier you start saving, the less money it will take to achieve your financial goals. I would argue that 25 years of time is far more valuable than the $133,000 of principle and interest.
As people of modest means, time could be our biggest asset, so you don’t want to throw it away. You invested in your MA to be at the top of your game, but flying under the radar will keep you playing small.
Here’s just one example of how investing in yourself over time will easily offset your student loan debt. To contribute to a Roth IRA (a tax-advantaged retirement savings account), you need to show earned income on your taxes in at least the amount you contribute — the maximum being $5,500 for anyone under 50-years-old. So if you were able to make your loan payment and show at least $5,500 of additional income in order to send the max contribution annually to a Roth IRA, then a modest 6.5% annual rate of growth over 25 years would likely set you up with $345,000 of tax-free money. Now just imagine how much you would have if you started with $5,500 and increased your annual savings from there…not too shabby!
The question now is, how do you plan to raise your prices, grow your art practice, or establish multiple streams of income so that your loan payment doesn’t seem as daunting?
If you want to turbocharge your student loan pay-off, check out 5 Creative and Fresh Ways to Hack your Student Loans. Trying a few of these strategies could chop years off your repayment time and thousands of dollars of your interest.
I hope this helps LMM. With an MFA your potential is huge, not just with your creative endeavors, but in your ability to earn, save and pay-off those loans. Keep in touch and let me know how it goes!
Want to join the discussion in real time? Head on over to the Smartly Facebook Community, Artists Making Dollars and Sense. Can’t wait to see you there!