Disability Insurance 101: why you need it, what to include in your policy, and how to purchase it

When we’re first starting our careers, our focus is trying to advance and increase our pay. With our tight budgets, one of the last things on our mind is paying for added insurance. Trust me, I get it. However, as [future] high-income earners, long-term disability insurance is essential. It may not be at the top of our priority list, but it should be.

What is it and who needs it?

Unless you are already financially independent or were lucky enough to have a trust fund in your name, disability insurance is a must. Although we’d like to think we’re invincible, we are not. If some unfortunate event occurred that caused you to become disabled and prevented you from doing your job, you’d still need a way to support yourself. You can’t predict whether you’ll be disabled in the future so you must insure against that risk right now.

You may be tempted to wait to purchase this coverage when you make more money, but I’d caution you against that. The younger, healthier, and earlier in your career you are, the more you need disability insurance. You have your whole life ahead of you with decades of potential high earnings, long-term disability insurance protects you in case this were to change.

Do you still need it if you have a group policy through your employer?

More than likely. Long-term disability insurance may be offered by your employer, but that policy may not offer sufficient coverage. Most employer group policies only pay out 60% of your income if you get disabled, up to a certain maximum per month. The amount they provide may not be enough to cover your monthly expenses, pay back your student loans, and still allow you to save for retirement. As a rule of thumb, the higher your salary, the more likely you are to need an individual long-term disability insurance policy, outside of your employer.

Secondly, group policies may be less likely to pay out if you do become disabled because their definition of disability may be too broad. In other words, it may be harder to meet your job’s definition of disability to even apply to receive the benefit. For example, you may consider yourself disabled because you can’t do your current (high-paying) job as well, but the insurance company might deem you able to do some other (lower-paying) job and refuse to pay out, leaving you to deal with the decrease in pay on your own. You want to protect yourself against that risk by getting your own individual long-term disability insurance policy.

Some people may be able to purchase a group disability insurance policy through certain professional organizations. Although these policies seem enticing, they can have several drawbacks. The premium may not be “level,” meaning the cost of the policy may increase every few years as you age, eventually costing you a substantial amount as you get older. It also may not offer sufficient future-purchase options that allow you to upgrade your coverage as your salary increases.

What to look for in a good policy?

A good individual long-term disability insurance policy has 3 components: enough coverage, a specific definition of disability tailored to your own occupation, and additional riders for added protection. Let me explain.

Along with enough coverage and a specific definition of disability catered to your [high-paying] job, you also need to purchase disability insurance “riders.” Riders are added protections you pay for to ensure that you have all the coverage you need. Examples of riders you should consider purchasing are the: cost-of-living-adjustment (COLA) rider so that your payout will increase with inflation each year, residual and recovery rider so that you are compensated for any partial disability until you are back to your full productivity, and a future purchase option so you can purchase more disability insurance if your salary increases without being denied or charged outlandish rates because of your age or medical conditions.  

How do you purchase it?

As a graduating medical student, I knew I needed disability insurance. I emailed a few vetted brokers/agents that had a track record of working with high-income professionals and entered some basic information on their websites to get quotes. Once I found a policy that had the benefit I wanted with the riders I needed and an own-occupation form of disability, I then chose the cheapest policy.

The insurance agent asked me a bunch of medical questions as he filled out the application on my behalf. He inquired about my hobbies, medical history, and travel plans to discern my “disability risk” as requested on the form from the insurance company. I then reviewed the information in a secure portal and signed the form online. I was approved within 24 hours.

Are there any good deals for doctors?

Yes! Many physicians-in-training qualify for something called the guaranteed standard issue (GSI) policy at their residency or fellowship training program. The GSI policy not only gives you a discount on the price but it also guarantees you will get approved. Most disability insurance comapnies will assess your risk for being disabeled in the future by asking about your personal and family medical history. If you have a chronic condition, have had a series health scare in the past, or have a benign condition like an essential tremor they could deny you coverage. This is not the case with a GSI policy. Everyone who submits and application can get approved. Since these policies don’t require any “medical underwriting” or extensive approval process they are a great option for physicians who are still in training and looking for an individual disability insurance policy at a lower rate.

To summarize: Disability insurance is a must-have for high-income professionals. We can’t predict what may happen in the future so we owe it to ourselves to get insurance that will “protect our income” just in case we were unable to work for some reason. Oftentimes, group policies from our employer are helpful but not sufficient. We need an individual own-occupation disability insurance policy with extra riders until we become financially independent. Be aware that you may be able to get the guaranteed standard issue policy at your training institution which is a great option for many people. If you don’t already have a policy, I encourage you to get one today.

Tell me, was this helpful? What additional information about disability insurance would you still like to know?

Types of Insurance We All Need (in addition to health insurance)

Many of us are young and healthy with our entire lives ahead of us. As we continue to progress in life, we need to make sure we are doing so with the right protection. In other words, we need insurance. I don’t just mean medical coverage and car insurance though. Let me explain.

1.     Almost everyone needs long-term disability insurance. Unless you have a huge trust fund, enough passive income to completely cover your monthly expenses, or enough retirement savings to deem yourself financially independent, you need disability insurance. Why? Because if some unfortunate event were to occur that prevented you from working, you’d still need a way to support yourself. Disability insurance guarantees you a certain monthly income if you were to get fully or partly disabled, suffer from some medical illness, or get into an accident that prevented you from working your job. Since you can’t predict whether you’ll be disabled in the future, you need to insure against that risk right now. The younger, healthier, and earlier in your career you are, the more important it is to have disability insurance.

Although long-term disability insurance may be provided through your employer, group policies from your employer may not offer sufficient coverage. The payout from your employer is usually capped at a certain amount and may not fully replace your income. Plus, group policies may be less likely to pay out if you do become disabled because their definition of disability may be too broad. In other words, it may be harder to meet their definition of “disabled” and thus you may be less likely to receive the benefit when you need it. My point? Most high-income young professionals should purchase an individual, long-term disability insurance policy outside of their employer.

2.     You may also need life insurance. Life insurance guarantees a portion of your salary to your spouse or dependents should you pass away sooner than expected. This is critical if someone else depends on the money you make. I will be honest and say that as a single female with no kids, I don’t have an individual life insurance policy. However, if I get married to someone who is dependent on my income or have kids, it will be one of the first things I purchase.

There are two types of life insurance: whole life insurance and term life insurance. Term life insurance provides a benefit to your family if you die during the term of the policy (usually 30 years). Whole life insurance provides a benefit to your dependents regardless of when you die. Whole life insurance may sound more appealing, but you may want to think twice before purchasing it. Unlike term life insurance, whole life insurance is insanely expensive (about 10x more than term insurance), has a lot of hidden fees, and is unnecessary for many high-income earners who can provide money to their families in a more efficient manner.

My point? Most people need term life insurance to make sure their families don’t struggle financially if they were to die sooner than expected (within the next 20-30 years). If you were to die after that time, then you should hopefully have enough money saved (via retirement accounts and other high-yield investments) to take care of your family.

3.     Some professionals need malpractice/liability insurance. Most physicians are familiar with this type of insurance and most non-physicians don’t have to worry about it, but even still, I think it deserves a quick blurb. Malpractice insurance protects you in case you make a mistake at work that severely impacts someone else’s quality of life. You want to ensure that the patients or clients you work with can’t sue you and take everything you own. The ideal amount of liability insurance depends on your career specialty and other risk factors that put you at increased or decreased risk of being sued.

There are two main types of malpractice policies you can purchase: a “claims” policy and an “occurrence” policy. Claims policies cover you if someone files a claim against you during a certain period of time or while you work for a certain organization. The downside is that if someone waits to file a claim against you when you no longer work for that company, then a claims policy will not cover you. On the other hand, an occurrence policy covers you for any event that “occurred” during the time frame you were at the organization or under the policy. With an occurrence policy, if someone waits years to sue you then you are still covered because the action in the suit “occurred” during the time you were covered under the policy. As you can imagine, occurrence policies are more expensive but offer much better coverage. If you are working a job that only offers a claims policy, then you need to make sure you have what’s called a “tail” (added protection that will cover you in case someone sues you after you’ve changed jobs).

My point? Consider getting malpractice or liability insurance. The best kind is an occurrence policy, however, that is also the most expensive. If your job already covers the cost of a “claims” liability insurance policy, be sure to purchase “tail” coverage so that you have liability insurance after you change jobs.

4.     Consider adding an umbrella insurance policy to supplement your car and home insurance . While liability insurance covers you if someone sues you for something you did at work, umbrella insurance covers you in case you’re sued for something you did outside of work (i.e. civil disputes, business deals, etc.). For example, umbrella insurance can pay for your legal fees if your dog bites someone in the neighborhood, you accidentally injure someone at a social function, or some toddler gets injured at your child’s birthday party. It also acts as additional automobile and homeowner’s insurance. Although umbrella insurance doesn’t cover your own injuries or damages to your own property, it does protect you and cover your legal fees from harm you may cause to someone else.

Since umbrella insurance is added insurance, you can only purchase it after you have already purchased a certain amount of automobile or homeowner’s insurance. As a rule of thumb, umbrella insurance is purchased in benefit increments of a million dollars and it is usually best to purchase enough to fully cover your net worth (including the value of all your assets and potential future income). A policy with a benefit coverage of $1 million usually costs $100-$300 a year.  

To summarize, get insurance and enough of it. In addition to medical coverage, car insurance and homeowner’s insurance, most high-income professionals need disability insurance if they themselves are dependent on the income they receive from their jobs. They also need term life insurance if someone else, like a spouse or kids, is dependent on their income. Malpractice/liability insurance is useful in case someone tries to sue you for something you did at work and an umbrella insurance policy protects your net worth from unforeseen lawsuits outside of work. As [future] high-income young professionals, it is imperative that you get the insurance you need to protect yourself and your net worth.

The Best Student Loan Repayment Plans for Medical Students and Residents

If you have ever tried to learn about student loan repayment plans you might have felt overwhelmed and confused. Instead of spending days researching information like I did, I’ve created a summary of the different repayment plans in a question-and-answer format with some key takeaways for graduating med students and current residents. 

1. What is the Standard Repayment Plan and who should choose it?  

With the standard repayment plan, you will pay off your student loans in 10 years by making “fixed” monthly payments. This means you will pay the same amount each month regardless of how much money you make. The government will determine your monthly payment by adding all of your student loans (and the projected interest that will accumulate on them), dividing that number by 10 [years], and splitting the amount into fixed monthly payments. 

This is not the ideal plan for graduating med students and residents, especially those with around $200,000 in student loans. Unless you have very little money in student loans, the monthly payments required under this plan will be higher than you can afford on a resident salary. Unfortunately, you will be automatically enrolled into the standard repayment plan if you don’t select a different repayment plan.   

2. What is the Graduated Repayment Plan and who should choose it?

With the graduated repayment plan you will also pay off your loans in 10 years, but your monthly payments are not fixed. Instead, they will start out low, and increase every 2 years, until you have fully paid off your student loans in 10 years.

This is also not an ideal plan for graduating med students and residents. The payments under this plan will still be higher than most residents can afford. Don’t get me wrong, paying off your loans in 10 years instead of dragging it out over 25 years will save you money in interest. However, if you can afford the high payments under this plan and want to pay off your loans in a few years, you could save even more money by simply refinancing your loans with an outside company since they can offer you can even lower interest rate.  

3. What is the Extended Repayment Plan?

Through the extended repayment plan you will pay off your loans in 25 years by making fixed or graduated payments. This plan is for people who don’t qualify for an income driven plan and want to spread their loans out over 20-25 years. It is not ideal for medical students and residents since we qualify for income driven repayment plans during residency.

4. What are the income-driven repayment plans?

The Federal Department of Education understands that some people may have acquired a substantial amount of student loan debt that they may not be able to repay with their current salaries. Instead of handing you a monthly student loan bill that may be higher than your mortgage, these income-driven repayment plans base the size of your monthly student loan payments on your income.

Keep in mind that there are several different types of income-driven repayment plans and that the names may change over time. As of 2024, the 4 types are Pay-As-You-Earn (PAYE), Saving-on-a-Valuable-Education (SAVE) which replaced the Revised-Pay-As-You-Earn plan, Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).

Most of these plans cap your student loan payment at 5-15% of your discretionary income. Your discretionary income is your income minus whatever the poverty line is for your family size. In other words, if your income is low, your student loan payment will be low. As your salary increases, the size of your student loan payment will increase. After 20-25 years (depending on the type of federal loans you have) your student loans will be forgiven. Keep in mind that many residents and attending physicians will qualify for public service loan forgiveness which forgives their student loans after only 10 years of payments.

5. Should you enroll in an income-driven repayment plan like Pay-As-You-Earn (PAYE) or Saving-on-A-Valuable-Education (SAVE)?

As graduating med students or residents, you should consider enrolling in SAVE, especially if you have at least tens of thousands of dollars in student loans. With the SAVE plan your student loan payment is never more than 10% of your discretionary income, which is ideal for residents trying to make ends meet on a $60K salary. The amount of your income-driven repayment is recalculated each year after you file your taxes.

Of note, if you file your taxes as a graduating med student with zero income, then there is a high possibility your student loan repayment your first year residency will be zero dollars. Having a student repayment of zero dollars will actually count towards one of your 10 years of required payments under the public service loan forgiveness program. If you don’t file your taxes and instead opt for a grace period (the default option) then that time will not count toward public service loan forgiveness.  

6. What are the advantages of the new Saving-on-A-Valuable-Education (SAVE) plan?

SAVE is the new plan that has replaced the old revised-pay-as-you-earn (REPAYE) plan. Although REPAYE and PAYE were similar, SAVE and PAYE are much different. In fact, many many people will benefit from being in the SAVE plan and the PAYE plan is being phased out.

SAVE has many perks like:

• You pay a smaller percentage of your discretionary income. Instead of paying 10%, you now will pay 5% to 10% depending on the percentage of undergraduate vs graduate/medical school loans you have. If you only have loans from undergrad you will pay 5%. If you only have loans from graduate school or medical school you will pay 10%. If you have a mix of both, you will pay between 5% to 10% depending on the ratio of undergrad to graduate school loans you have.

• The definition of discretionary income is different which allows you to pay less per month. Under the old REPAYE plan, the PAYE plan, and the IBR plan the amount you pay per month is your adjusted gross income (AGI) minus 150% of the poverty line for your state and family size. Under the new SAVE plan it is different. With SAVE you pay your AGI minus 225% of the poverty line for your state and family size. This difference allows more of your income to be protected from the student loan calculation resulting in a lower monthly payment. In other words paying 10% of your discretionary income in the SAVE plan will result in a lower monthly payment than paying 10% of your discretionary income in any other plan because the definition of discretionary income in the SAVE plan is different in a way that favors the borrower.

• No unpaid interest gets added to your loan balance. This means that any interest accruing on your loans that isn't covered by your monthly payment will be automatically forgiven. If you’re like most physicians who graduate medical school with around $200,000 in student loans, it’s very likely that your income-driven payments in residency will not even cover the interest that is accruing on your loans. Enrolling in the SAVE plan will prevent that unpaid interest from being added to your loan balance. For example, let's say your monthly payments over the year add up to $5,000 but you have $20,000 in interest being added to your loans each year. This means you have $20,000 in interest minus $5,000 in payments which leaves $15,000 in unpaid interest each year. Under most repayments plans, that unpaid interest would be added to your loan balance causing the amount you owe to increase. Under the SAVE plan, that is not the case. The $15,000 of unpaid interest that wasn't covered by your monthly payments will be automatically forgiven.

• You have the ability to exclude your spouse's income, if you file your taxes separately. Under the old REPAYE plan, you could not exclude your spouse's income when calculating your student loan payment. With the new SAVE plan, you can. As long as you and your spouse file your taxes "married filing separately" instead of "married filing jointly" you have the ability to exclude his/her income from consideration when determining your monthly student loan payment.

7. Who should consider enrolling in Pay-As-You-Earn (PAYE) or Income-Based-Repayment (IBR)?

The SAVE plan is the best option for most people. However, there are 2 advantages of PAYE and IBR that some people may benefit from.

1) The payment cap. PAYE and IBR will cap your payments at the standard 10-year repayment plan level even as your income rises. This means you will pay payments that are either 10% of your discretionary income OR...whatever your payment would be if you enrolled in standard 10-year repayment plan, whichever one is lowest. This may benefit some highly paid physicians who don't want to make payments based on their income and would rather make payments based off the standard 10-year repayment plan. The higher your salary and the lower your student loan balance the greater chance you may benefit from being in PAYE or IBR. Look on the federal website for their payment estimator to see whether PAYE or IBR could save you money.

2) An earlier timeline for IDR Forgiveness. The other advantage of PAYE or IBR is that you have a chance to get your student loans forgiven in 20 years instead of 25 years. Although some people enroll in other student loan forgiveness plans like Public Service Loan Forgiveness (PSLF) which will forgive their loans after making 10 years of qualifying payments, not everyone qualifies for that program. If you do not qualify for PSLF, you are still eligible for the default Income driven repayment forgiveness. With this program, your loans will be forgiven after making 20-25 years of qualifying payments. Everyone in the PAYE plan and many people in the IBR plan will have their loans forgiven in 20 years (instead of 25 years) under this default income driven repayment forgiveness program. Those enrolled in the SAVE plan will have to make 25 years of qualifying payments. There is no forgiveness in 20 years under the SAVE plan.

Of note, PAYE and IBR are very similar. Those who do not qualify for PAYE may want to consider the IBR plan. PAYE plan is being phased out over time. A person should consider PAYE or IBR if they are not going for PSLF and would benefit from making payments based on the standard 10-year repayment plan instead of making payments that are 10% to 15% of their discretionary income. Be aware that the PAYE plan is being phased out over the next couple years.

8. What the heck is Income Contingent Repayment (ICR) and who should enroll in that one?

Income contingent repayment (ICR) is a type of income-driven repayment plan for those with Parent PLUS loans. People with these loans are those who took out student loans on behalf of their kids to help their kids pay for college. My point? This plan is only for those who have Parent PLUS loans. If you aren't sure, check your loan type on the federal student loan website.   

9. Can you change from one student loan repayment plan to another?

Yes. Oftentimes people may choose one of the income-driven repayment plans after they graduate from school, but then change to another type of plan as their salary increases or their life circumstances change. For example, a recent graduate might choose to enroll in SAVE for a few years to enjoy the benefits of the government interest subsidy, then change into PAYE if their income skyrockets so that there is a cap to place on how high their payments can be. Switching was much more common when the old REPAYE plan was in place. Now that there is the new SAVE plan much fewer people need to switch plans but it is still possible.

Trying to get your student loans forgiven? Consider public service loan forgiveness

Public service loan forgiveness got some bad press in the news in the past, but as a physician, I am still enrolled in it. Just in case you have some questions about the program, I’ve answered some common ones below:                                                                                                          

1.     What is Public Service Loan Forgiveness?

Public Service Loan Forgiveness (PSLF) is a government sponsored student loan forgiveness program. If you work in public service for a non-profit organization, academic institution, or government agency and make 10 years of on-time qualifying monthly payments towards your student loans, the government will “forgive” your remaining student loan balance.

This program was designed for public servants like teachers and police officers who have lots of student loan debt but may be unable to pay it off in a reasonable time, partly because the salary they receive working in public service is less than the salary they would have received in a different profession. The goal of the program is to allow people with a passion for public service to pursue careers in that field without saddling them with an eternal burden of student loans.

The great thing about this program is that many health care professionals qualify too. Before you roll your eyes, hear me out. Many doctors, such as myself, obtained an average of $200,000 in student loans during medical school. Then we entered residency where we were mandated to spend 3-7 years earning a government salary of around $60,000 while working 80 hours a week before we could make “the big bucks.” If we choose to continue working in an academic setting or for a nonprofit health system, we qualify for public service loan forgiveness as well.

2.     Wait, isn’t it sketchy?

I’ll admit, there was some bad press about public service loan forgiveness (PSLF) in the past. During that time, people who thought they met the requirements were finally able to apply for loan forgiveness. Unfortunately, many people were not granted this forgiveness and hearing this news scared many people who were depending on this program.

Although this is less than ideal, there are several reasons why previous applicants were unable to get their loans forgiven. When the program first came out, the rules were vague. There was a lot of misinformation about how to enroll and many people who thought they qualified for the program did not actual qualify for it. Nowadays, the requirements for PSLF are much easier to understand. Now that people are more aware of how to properly enroll into the program, many people who have met the qualifications have gotten their student loans forgiven.

3.     Is it wise to depend on this program?  

A few years ago there were some proposals to eliminate PSLF, or potentially limit how much money can get forgiven through it. Many people got worried that the program would change and didn’t want to depend on it. Nowadays, most of that worry has gone away.

The department of education has made several changes to the program that 1) make the rules much easier to understand and 2) have expanded the number of people who qualify for forgiveness.

As of 2024, many many physicians and other professionals with $200,000 or $300,000 or more in student loans have gotten their debt completely forgiven with the PSLF program.

4.     How do you qualify?

According to the website, you need to have direct federal student loans, work full-time in public service via a 501(c)(3) nonprofit or academic institution, and submit 10 years worth of on-time qualifying payments (i.e. Pay the full amount of your student loan repayment each month through one of the income-driven repayment plans).

5.     How do you actually enroll?

Go to the student loan website, complete the PSLF form, and have your employer sign off on it. Your employer can submit it themselves once they sign it electronically, or you can upload the form yourself, if you have your employer sign the form on paper. Once you’ve submitted the form, the federal loan servicer “Mohela” will verify whether you submitted the paperwork correctly and confirm whether you qualify. Mohela is the official servicer of the PSLF program (they took over for the pervious company Fedloans). You must contact Mohela annually to verify all of your payments and re-submit the employer verification enrollment form so that they know you still work in public service for a qualifying organization. If you have a different loan servicer (such as Nelnet, Navient, Great Lakes, etc), your loan servicer will be switched to Mohela as soon as you enroll into Public Service Loan Forgiveness.  

6.     Do you need to protect yourself if something goes wrong?

I understand that going for PSLF is a risk. There is a chance that the government could change the rules of a program that allows relatively high earning doctors to avoid paying hundreds of thousands of dollars in student loans. If you’d like to protect yourself you can consider creating a “student loan investment side fund.”

Instead of using the money you’re saving in PSLF to buy a better car, a larger home, or have a wealthy “doctor” lifestyle, you can save that money. Specifically speaking, you can take money from each check and put it into a high-yield savings account or put money in an account that is invested in a combination of real estate deals, index mutual stock funds, and money market funds. That way, if PSLF changes in the next few years or for some reason you can’t get your loans forgiven, you will have created a nice nest egg of money that you can use to quickly pay off the rest of your student loans.

If the PSLF program stays the same, then you can keep on investing that money and use it to pay for your retirement or your kids’ college education.

Tell me, are you thinking of going for Public Service Loan Forgiveness too?

How To Tackle Student Loan Debt

If you’re like me, or one of the millions of Americans who have student loan debt, I understand your plight. Learning about the different servicers, figuring out the repayment plans, and familiarizing yourself with terms like “refinance” and “consolidation” can be a bit daunting. Although many young professionals may have already come up with a plan to tackle their student loans, there can be a bit of a learning curve for new graduates. Here are some simple steps to help you tackle your student loan debt:

Step 1 = Figure out how much student loan debt you have. If you filled out a FAFSA form and received student loans from the federal government, then you can go to https://studentaid.ed.gov/sa/ to see your total student loan debt balance. You will need to input your FSA username and password in order to login (this is the same username and password you used to fill out your FAFSA form). Keep in mind, the total amount of student loan debt you have will include the principal (how much you actually borrowed) and the interest (the amount the government charges you each year until you pay the money back). If you took out private loans from outside banks, foundations, or corporations you will need to contact them directly (if they haven’t already started contacting you first) to determine how much you owe.

Step 2 = Find out the interest rates and the servicers of each loan you have. When you took out a student loan from the government, it was issued by the Federal Department of Education. However, there are different sub-departments within the Department of Education that handle your loan repayment. These “sub-departments” are called loan servicers and they are who you actually contact when you repay your student loans.

For example, I took out loans through the Federal Department of Education, but my loan servicer is Nelnet. Thus, Nelnet is who I pay when my loan is due. You might have taken out a loan through the Department of Education just like me, but have a different servicer (such as Great Lakes, Mohela which took over for Fedloans, Navient formerly known as Sallie Mae, etc). You must pay back your particular loan servicer directly. Once you login into the website and find out the servicer each of your student loans, you need to look at the interest rates on these loans. Chances are that you have different interest rates on each loan since the interest rate may have fluctuated as you took out loans from year to year. Your goal is to determine the range of interest rates you have on your student loans.

I know this may sound complicated, but it’s quite easy. I’ll walk you through what it was like for me. As soon as I logged into the website I had to accept a waiver. Then, I was able to see the total amount of student debt I owed (which was pretty high given my status as a medical student, but I digress). Anyway, I could also see the number of loans I had taken out and the fact that all of my loans had the same servicer (Nelnet). You may have different servicers for different loans, so be careful. Once I saw this listing of my student loans, I could then expand the tab (by clicking an arrow) and see the amount of each loan, the interest rate on each loan, and the date on which my next payment on that loan was due. If I click “view details” I can see the date on which I took out the loan and the interest that has accrued on it up to this point, among other things.

Step 3 = Understand the pros and cons of student loan debt consolidation. Debt consolidation is when you combine all of your loans into one giant loan with one interest rate. Consolidating your loans has advantages and disadvantages. The advantages of consolidating your loans (through the federal government) is that you combine all of your loans into one giant loan. Your new interest rate will be the weighted average of the interest rate on all of your loans. If you do not consolidate then you will have a different loan for each semester in which you took out money, each with different interest rates and potentially different loan servicers. This can get confusing.

By consolidating (through the federal government) you are able to combine all of these loans into one loan and focus on paying that one loan only. Having one giant loan, instead of many different smaller loans, tends to look better on your credit report. Another advantage of federal consolidation is that any loan that may not have counted towards loan forgiveness programs can now count towards those programs after you consolidate your loans (through the federal government).

The disadvantage of consolidating your loans is that any interest that has accrued on your loans will be added to the principal amount. Let me explain. If you took out unsubsidized loans, then interest accrued on those loans while you were still in school. Once you consolidate your loans, all of the interest that has accrued on your loans to that point will be added to the principal amount of the loan. For example, if you have taken out a total of $50,000 in student loans and $3,000 in interest has accumulated on the loans during that time, then if you consolidate your loans you will have a new loan with a new principal amount of $53,000 (that includes the $50,000 you borrowed plus the $3,000 that had already accumulated in interest).

I should mention that you have the option to consolidate your loans through the federal government or through a private company or bank. Although a private company may be able to offer incentives to get you to consolidate through them, I would advise you to consider consolidating through the federal government instead, if you choose to consolidate in the first place. The advantage of consolidating your student loans through the federal government is that you are still eligible for many of the benefits that come with federal student loans.

The federal government is much more understanding when you go through life changing situations. If you lose your job, become disabled, or have some life altering event that prevents you from making your student loan payment you can ask the government to put your loans into deferment or forbearance. Although they are slightly different, both of these options will grant you temporary relief from having to pay back your loans for a few months up to a few years. Most private companies will not give you this option.

Plus, many federal loans can usually be “forgiven” after a certain length of time. In fact, many federal income-driven repayment plans and programs will forgive your loans after 10-25 years. So unless you are secure in your job and are making a lot of money, I’d suggest consolidating your loans into one giant loan with the federal government if you feel you need to consolidate at all. Doing so, allows you to keep the protections that come with federal loans and makes your student loans easier to manage in the process.  

What am I doing? Consolidating. Even though my loans are already with the same loan servicer (Nelnet) with fixed interest rates, I need to consolidate in order to waive my grace period and start making payments under Public Service Loan Forgiveness as soon as I can. Graduates have a 6 month grace period before they have to start paying back their loans. While most graduates appreciate this grace period, I plan to opt for Public Service Loan Forgiveness (PSLF). Under PSLF, I'll be enrolled in an income-driven repayment plan that caps my repayment at 10% of my income until my loans are forgiven. However, PSLF doesn't kick in until after the grace periods ends. If I wait 6 months for the grace period to end, I will miss out on 6 months of low payments that could count towards PSLF. In order to waive the grace period, I must consolidate.

My point? If you have multiple loan servicers, variable rate loans, loans that don’t automatically qualify you for a loan forgiveness programs, or plans to pursue PSLF specifically, then consolidating through the federal government may be beneficial for you as well. 

Step 4 = Think twice before you refinance your loans. Although refinancing can be similar to consolidating, the terms are different. Consolidating your loans is when you combine all of your loans into one giant loan and the interest rate you pay is the average of the interest rate you had on each individual loan. Refinancing is different. Refinancing is when you combine all of your loans into one giant loan and pay a LOWER interest rate than what would have been the average on all the loans. Refinancing can only be done outside of the federal government through a commercial bank, credit union, or some outside company.

The advantage of refinancing is that you pay a lower interest rate than you would have otherwise which can save you thousands of dollars. The disadvantage of refinancing is that you lose the protections and benefits that come with having federal loans. After you refinance, you are no longer eligible for federal deferment or forbearance if life takes a turn. Most importantly, you are no longer eligible for federal student loan forgiveness programs. Unless you are certain that you will not be pursuing any student loan forgiveness programs and have enough job security that needing deferment or forbearance is unlikely, then you may want to wait to refinance.

What am I doing? Choosing not to refinance right now and revisiting the subject in a few years. As a graduating medical student who will start residency training as a physician, I am in a unique situation. My plan is to enroll into an income driven repayment plan through the federal government. I will pay my student loans on time each month until I finish residency training and fellowship. Afterwards, I will decide to work in academics or private practice. If I choose academics I will keep my loans with the federal government and opt for public service loan forgiveness (which forgives my loans within 10 years). If I do not choose to work in academics, I will refinance my loans with a private company and plan to pay them off in 5 years.

Step 5 = Enroll into a repayment plan that is best for you. There are many different repayment plans. You need to check with your loan servicer to see which repayment plan options you qualify for or use the repayment estimator to get a general idea. If you don’t choose a plan, you will be automatically enrolled in the standard repayment plan which puts you on track to pay off your loans within 10 years. Although this plan will save you money in interest payments, the monthly payment required may be higher than you can afford.

If this is the case, enroll in one of the income-driven repayment plans. These plans only require you to pay 5% to 15% of your income in students loan payments and will automatically forgive your loans after 20-25 years, if you haven’t already paid them off. (If you opt for public service loan forgiveness, then your loans will be forgiven in 10 years).  Income driven repayment plans are ideal for anyone who plans to get their loans forgiven via public service loan forgiveness or some other type of loan forgiveness program.

Step 6 = Look into loan forgiveness programs and submit the necessary paperwork. I alluded to this above, but as you think about your student loans it’s important to consider whether or not you are considering some sort of loan forgiveness program, most notably public service loan forgiveness. Although this program will forgive your loans after making 10 years of payments, you need to ensure that you have properly enrolled into it.

You can refer to the student loan website but essentially you need to have direct loans through the federal government, work at some sort of academic institution or non profit organization, and make 10 years of on-time qualifying payments. If you know you want to enroll in this program, then you can fill out the form on the student loan website.

To summarize: there are 6 steps you need to take to start tackling your student loans. First, go to the student loan website and figure out how much money you owe. Then, determine your loan servicer and the interest rate on each of your loans so you can figure out who to contact to start repaying them. Next, you need to understand the pros and cons of federal debt consolidation so you can figure out if you should combine your loans into one giant loan or not. Remember to think twice before you refinance your loans since doing so will make you ineligible for federal loan forgiveness programs. After that, enroll into an income-driven repayment plan, if your monthly payments under the standard plan are higher than you can afford. Lastly, look into government loan forgiveness programs and submit the necessary paperwork to enroll.

Tell me, was this helpful? Do you feel more like you have a game plan on how to tackle your student loans?

Your FICO Credit Score: How to check it, understand it, and improve it

As you get older and start “adulting” you will begin to hear a lot about your “credit score.” Here’s a crash course of answers to common questions so that you can learn some of the basics.

Question 1: What is a FICO credit score?

Your credit score is a 3 digit number that determines your reliability as a borrower. Although there are several different types of credit scores, the FICO credit score is the most well known and used type of credit score. FICO stands for Fair Isaac Corporation (that’s the company who invented the formula).

Question 2: Why should I care about my credit score?

You should care about your credit score because it plays a huge role in your ability to live as an independent adult. Before you rent an apartment the company will check your FICO credit score. If the score is too low they may not let you rent the apartment. If it is just “okay,” they may still let you rent the apartment but may instead charge you a larger deposit to do so or require you to have a cosigner.

Apartment buildings are not the only people who check your credit score. Car companies, phone companies, and banks do the same thing before they loan you money to buy a car, allow you to purchase a home, or provide you with a contract for your own cell phone plan. Once again, if the score is below average companies will charge you a higher interest rate to borrow money, if the score is really low, they may not loan you the money at all.

Question 3: How can I figure out my credit score?

There are estimates and “official” scores. Getting the official score may cost you money, although there are a few companies who can give you a free reporting a couple times a year. Nevertheless, you can get your credit report from annualcreditreport.com and get your official FICO score from myFICO.com. Unless you are about to purchase a new car or buy a home, getting a ballpark estimate of your credit score should suffice. You can usually get a free estimate of your FICO score from your bank. In fact, this feature can usually be added to the credit card statement you get from your bank each month.

Question 4: What is a “good” credit score?

As a rule of thumb, anything under 500 is dismal. It will be tough for you to borrow anything from anyone, let alone rent an apartment, buy a car, or secure any type of loan or credit card.

Anything above 760 is great. With a credit score above 760 you should be able to rent an apartment with ease and secure a loan for a car or home with no problem. Banks will probably reach out to you and ask if you’d like credit cards and you’ll start receiving notices of different low rate loans you qualify for. Simply put, banks will want to work with you because they know they can count on you to repay the loan.

Credit scores between 500 and 760 are on a sliding scale. The higher it is the easier time you’ll have securing loans for whatever you need them for (ie. small business ventures, a car, a new home, etc). The lower the credit score, the harder it may be for you to secure loans. In this case, you may have to pay a larger interest rate to borrow money and you may even need to have someone cosign your [car, home, or small business] loans.

Question 5: How is my FICO credit score computed?

Your FICO credit score is based on a combination of factors but there are 4 main components:

1. Your credit history. This is the length of time you’ve had access to credit (like credit cards, bank loans, etc). The longer your credit history, the better. In other words, someone who has had their credit card for 10+ years is going to score higher in this area then an 18 year old college student who just opened her account. Your credit history accounts for 15% of your credit score.

2. Your debt compared to your total credit limit. This is the amount of credit you’ve used compared to the amount of credit you have access to. The lower the percentage the better. For example, if you have a $16,000 limit on your credit card and your credit card balance is $8,000 then you’ve used half of the credit available to you so your percentage is 50%. However, if your limit is $16,000 and you’ve only charged $4,000, then your percentage is 25% which is much better. You get more “points” for having access to credit and showing the self-discipline of not using much of it. Why does this matter? Well because the mere fact that you have a high credit limit shows that banks don’t mind lending you money. The fact that you haven’t used much of that money shows that you are more diligent in your use of credit. Thus, this factor plays a large role (30%) into computing your credit score.

3. Your credit mix.  This includes the types of credit you’ve had (which is 10% of the score) AND the timing of when you received this credit (another 10% of your score). Credit card companies like to see that you can repay a variety of loans. Even though showing that you can pay off your credit card balance is great, companies also like to see that you can be relied upon to make fixed payments toward something for a certain length of time. If you have only had credit cards then you will not score as high in this area as someone who has paid off a car loan and is actively paying a mortgage or student loans consistently. Moreover, if you’ve just received different types of loans you won’t score as high in this area as someone else who has had various types of credit for a longer length of time.

4. Your track record of paying your bills on time. By paying your bills on time, I mean paying them a few days before they are do. Credit card companies want to know that they can count on you to give them their money when they ask for it and not a moment later. The more consistent you are at paying your bills on time, the higher you will score in this area. In fact, your track record is so important that this area is weighted the most in calculating your credit score (35%).  

Question 6: How can I improve my credit score?

1. Pay off your debt. As you pay down the debt you owe you will decrease your ratio of credit used to credit available which will increase your credit score. Plus, you will improve your payment history. Both of these factors combined account for 65% of your FICO credit score.

2. Be on time with your payments. If you don’t have the income to pay back all of your debt right now, you are not alone. Many of us have credit card debt or student loans that we are still working to pay back as well. Even if you can’t pay off your full balance at once, focus on making on-time monthly payments a few days before your bill is due. Doing so will improve your “payment history” which will improve your overall credit score.

3. Increase your credit limit. If you are already making on-time monthly payments on your credit card then another way to increase your score is to increase your credit limit. For example, if you have $2,000 in credit card debt and a $6,000 limit, the ratio of your credit used to credit available is (2,000/6,000) 33%. However, you were to increase your credit limit from $6,000 to $8,000. Then all of a sudden your ratio of credit used to credit available is (2,000/8,000) 25% which is better. The easiest way to increase your credit limit is to simply call the bank and ask for an increase. Most credit card companies will re-evaluate your case every few months and automatically increase your limit if you are eligible, but calling the bank yourself might speed along this process.

To summarize, your FICO credit score is a 3 digit number that tells companies about your reliability as a borrower. It ranges from 300-850, the higher the better. If your credit score is too low you may have a hard time renting an apartment, buying a car, or even getting your own cell phone plan. You can get a free estimate of your credit score from your credit card company, but official scores may cost you money. Generally speaking, your FICO credit score is based on 4 main factors: your credit history, the total debt you have compared to your credit limit, your credit mix, and your track record of paying your bills on time. If you want to improve your score prioritize paying off your debt, increasing your credit limit, and making on-time payments when your bills are due.

Do you have any questions? Is there anything more you'd like to know about your FICO credit score?

Credit Card 101: The Basics

Despite your established career and long list of accomplishments, there is one area that may need a little fine tuning…personal finance. While you may be getting along okay right now, you can do better. Here is a reminder of some credit card basics:

Try to get the lowest interest rate you can. A credit card allows you to borrow money, usually up to a certain limit. It can be convenient during times when you don’t have access to cash or need to quickly get yourself out of a financial bind. However, whenever you use credit cards to purchase things, the bank charges you a fee. This fee is called “interest” and the amount of interest you pay is deemed your “interest-rate.” The lower the interest rate, the less of a fee you pay to borrow the money and use the credit card. Since most people end up needing a credit card every now and then, banks typically give you a small window (up to 1 month) with which to pay back the money you charged to the card. If you pay back the money within that amount of time, then you are not charged an interest fee on the money you borrowed. Your goal is to get a card with the lowest interest rate you can so that in the event that you do use the credit card and are unable to pay off the full balance by the end of the billing cycle, you aren’t charged a huge fee.

Be wary of 0% interest rates. Now this advice may seem counter to what I just said, but hear me out. Oftentimes, when you first sign up for a credit card, banks will offer you a 0% interest rate for the first 6-18 months. This means that you can borrow money “interest free” for that amount of time. While this is a good deal if you plan to pay off your balance quickly, more often than not, it’s a trap.  When college students, young professionals, and any adult in a financial bind realizes they can borrow money to purchase things now with no penalty for doing so, they tend to borrow more than they would have otherwise. Once the 6-18 month interest-free period ends, the interest rate often skyrockets to almost 20%, which can be a recipe for disaster for anyone seeking to get out of debt or build wealth in the near future. If you have one of these credit cards, you need to practice self-control to make sure you are not borrowing more than you can pay back.

Consider getting a credit card from a credit union instead of a commercial bank, if you can. Credit unions (like Navy Federal, USAA, etc) are nonprofit banking institutions. Because of that, they have several advantages over typical commercial banks (like Bank of America, Chase, Wells Fargo, etc). One advantage of credit unions is that they tend to charge lower interest rates on credit cards and bank loans. I can tell you from personal experience that the interest rate on the credit card I have from a credit union is DRASTICALLY lower than the interest rate on the credit card from a commercial bank. In fact, the interest rate is so much lower that I never even use the other credit card.

Another advantage of credit unions is that they usually have better customer service and are more forgiving when you make a mistake. When I first got a credit card in college I was terrible at keeping track of things. I would sometimes forget to pay off my credit card balance, not because I didn’t have the money, but simply because I forgot to do so. If I had made that mistake with a commercial bank they might have charged me a late fee for not paying my balance on time. However, since I was part of a credit union, I just called them and explained my oversight. They “forgave me” and removed the late fee EVERY. SINGLE. TIME.

You should know that you cannot just walk into a credit union and ask for a credit card. In order to receive services from a credit union and use them as one of your banks, you have to meet certain requirements in order to become a “member.” For example, some credit unions are only available for teachers and their families, another credit union may only serve members of the military and their families, and other credit unions may be strictly for hospital employees and their families. You just have to search for credit unions in your area, find one you are eligible for, and sign up.

Pay more than the minimum balance each month. When you charge money to a credit card, they usually don’t demand that you pay off the full balance right away. Oftentimes they only demand a small amount called a “minimum payment.” What they don’t tell you is that if you only pay the minimum payment each month, you will still be charged interest on the amount that’s left over. As a result, they will charge you even more money in interest and it will take you much longer to pay back the full amount. Moral of the story: pay more than the minimum payment and try to pay off the entire balance at the end of each billing cycle if you can.

Find out when your billing cycle ends each month. If you are going to be diligent about paying off your credit card balance each month or even just making sure you aren’t late on any payments, it is essential that you know when your billing cycle ends each month. Why is this important? Well because if you happen to use your credit card near the end of your billing cycle, then you must pay off the balance much sooner or else you will be charged interest on the amount you borrowed. For example, if your credit card interest rate is 14% and you purchase something for $100 on your credit card the day before your billing cycle ends, then you must pay back that $100 the same day or else the bank associated with your credit card will charge you an added fee of $14 and your bill will now be $114. I should note that most credit card companies will give you a grace period of about 25 days after you charge something, but not all credit card companies provide that benefit. Check to see if your credit card has a grace period and figure out when your billing cycle ends each month so you can coordinate your payments in a way that prevents you from paying interest.

Look at your statement each month. This may sound a little basic, but trust me it bodes reminding. If you have your credit card payment set up for automatic withdrawal from one of your checking accounts you may be tempted to occasionally forgo looking at your bank statements. Let me caution you against that. It is important to check your statement, even if you have very few charges, to make sure there are no errors. The people who process your statements are human and sometimes mistakes are made. You’ll never know they are there unless you check. Plus, sometimes you may be charged extra fees you are unaware of.

Check your FICO score periodically. Along with checking your statement, it is essential that you periodically check your credit score aka your FICO score. This score is a credit rating from 300-850 that determines how reliable you are as a borrower. The higher the score, the better. Your credit score is what is used to determine whether or not you qualify to rent an apartment on your own (without having your parents cosign for you). A higher score will also allow you to purchase a car or a home for a lower interest rate or fee. Check your FICO score periodically to get an idea of where you are at. Any score above 750 is pretty good, scores under that can use some work. Most credit card companies will give you a free estimate of your FICO score with each credit card statement.

Call the bank once a year to lower your interest rate. It is essential that you do what you can to lower the interest rate on your credit cards. Technically, your interest rate doesn’t matter as much if you pay off your credit card balance each month, but you want the interest rate to be low just in case. If there is one thing I’ve learned, it is that life can be unpredictable at times. We plan as best we can, but sometimes expenses can still catch us by surprise. Whether it’s a toothache that turns into an urgent dental procedure or an acute injury that turns into an expensive doctors appointment, you never know when you may need to use your credit card to cover an expense. Do your best to get the interest rate on your credit card as low as possible. While you may not be able to immediately alter the interest rate a credit card company starts you off with, you can however, ask for them to change the rate once you have had the card for awhile. In fact, I make a personal habit of calling my bank once a year to politely ask them to lower my credit card interest rate. Even with my status as a full-time medical student with no salaried income, they lower it EVERY. SINGLE. TIME.  Some times we have not because we ask not. Call your bank and ask them to lower yours as well.

Avoid Cash Advances. When you get a credit card, they may offer you something called a “cash” advance. This means that you can get a certain amount of money in “cash” for a particular fee. The problem with this convenience is that it ends up costing you a lot of money. Many credit card companies charge you a higher interest rate to do a cash advance than they do to purchase something directly with the card. Plus, they usually have rules that prevent you from paying back this cash advance (that is costing you lots of money) until after you have completely paid off your credit card balance. This means that you could easily fall into the trap of being stuck paying a super high fee for the cash advance for much longer than you would have liked. The bank profits a lot, which is why they offer it, but you end up paying a lot more than you may have anticipated which is why it’s best to avoid that option if you can.

Consider using credit cards for points and free perks. If you are at the point where you consistently pay off your credit card balance in full each month, then you may want to consider something else: using credit cards for points and perks. Many rewards credit cards from companies like American Express, Chase, Citi bank, Capitol One, and Bilt allow you accumulate credit card points from normal purchases that you can transfer to airline and hotel loyalty programs for tremendous value. For example, I was able to accumulate points and transfer them to the Virgin Atlantic airline (a Skymiles partner of Delta) and get a first class flight to South Africa on points. Many other people transfer points to hotel and resort chains to get free stays at international resorts and Caribbean vacations. Recognize that although using these travel rewards cards can result in huge perks, they can also be a huge risk and financial catastrophe for anyone who doesn’t pay their credit card balance in full each month.

To summarize, if you are like most people, you probably didn’t take a personal finance class in school. No worries. I’m here to help you learn the basics, especially when it comes to credits cards. When you first get a credit card, try to get one with the lowest interest rate you can (that way you won’t be charged as much money when you use it). However, be careful when you get 0% interest credit cards, because the interest rate tends to skyrocket to almost 20% after a certain time period which can get you into trouble if you aren’t careful. If you can, try to get a credit card from a credit union instead of a commercial bank. Chances are the interest rate will be lower and the customer service is usually better. When you use your credit card, try to pay more than minimum balance each month. Find out when your billing cycle ends each month so that you can pay off your balance before the added interest payment hits. Also, don’t forget to check your bank statement each month (to make sure there are no false charges or hidden fees) and look at your FICO credit score periodically since your FICO score is what apartment buildings will look at to see if you can get an apartment without needing someone to cosign or buy a home without paying a high interest rate. Be aware that you can call your bank once a year to get your credit card interest rate lowered. Lastly, try to avoid cash advances if you can and consider using credit cards for perks and rewards if you are someone who pays off your balance in full each month.

8 Reasons Single Young Professionals Pay A Lot In Taxes (and what they should do about it)

It’s tax time and if you’re like most Americans you’re either hoping for a refund or praying you don’t owe Uncle Sam money you already spent. Unfortunately, many single young professionals are in the latter group, my brothers included.

After doing some research, asking other young professionals, and talking with my father (who is a government auditor) I began to learn several key reasons why my brothers’ tax rate, and yours too, may be much higher than the average. Here’s what I discovered….

1. They make a lot of money. This first reason is self-explanatory. In order to pay a high amount in taxes you usually have to be earning a high income. While everyone’s definition of “high income” may vary, it’s safe to say that if you are a single young professional making at least 6 figures per year (in any city except San Francisco, LA, DC, or NYC) then you are probably doing pretty well for yourself. Our tax code is progressive, which means that the more money you make the higher percentage you pay in taxes. While this may be a huge drag for many people in the higher tax brackets, the government provides services and protections we all benefit from and we can’t expect those struggling to provide for their basic needs to fund it. Much of the burden falls on the high earners.

2. They earn most, if not all, of their income from their employer. Earned income, such as the salaries we get from our jobs, is taxed at a much higher rate than passive income or investment income. So, if you get all of your money from your job and have not started generating other revenue streams from various investments or business ventures then you will be taxed at a higher percentage. Some young professionals make a good portion of their income from commissions due to sales or may earn end-of-the-year bonuses from their job. If these bonuses or commissions come in the form of a separate check, they are taxed at an even higher rate (22% in 2018). This means that nearly a fourth of the extra money they earned went directly to the government in taxes. Whether it’s all “earned income” from salary or a combination of salary, bonuses, and commissions, the issue is that the type of income they receive is taxed at a high rate.

3. They are single. It is no secret that married people have lower tax rates than single people. Just look at the tax brackets and you’ll see that a married couple making the same amount of money as a single person will pay much less in taxes each year. Why? Well because back in the day it wasn’t as common for both adults in a marriage to be employed. Typically, only the male worked and the wife stayed home to raise the kids. Thus, the government gave a tax break when people got married because it assumed that there was only 1 person working and didn’t want to overtax that one person who had to also use part of his (or her) earnings to financially support the non-working spouse. Nowadays, it is much more common that both people in a marriage work, but that tax benefit is still in place. Many young professionals are single and have waited longer to get married, thus they end up paying a higher portion in taxes. (Of note, this rule is reversed for couples that make over $600,000 a year, but for most folks, married couples pay less in taxes than single people.)

4. They do not have kids. The government wants people to procreate. Having kids that grow up to be productive members of society benefits the country as a whole and solidifies our viability as a nation. But kids cost money. Those little humans have so many needs and require a plethora of resources that can be quite expensive. The government understands this fact and has various tax breaks in place for people who have kids as a way of saying “here’s a small token of our appreciation for taking care of the little people.” Parents get a tax credit for raising kids, additional reimbursements for childcare costs, and other tax deductions for educational expenses. This does not make up for how much parents spend since kids are quite expensive, but it does help. Many single young professionals don’t have kids, so they are ineligible for these credits and tax breaks.

5. They do not have any dependents. Along with receiving a tax credit for having kids, there are also tax deductions for taking care of other people. Anyone who takes care of someone who can not, or does not, care for themselves (such as a child, disabled person, non-working relative, or elderly parent) can file his or her taxes as “head-of-household” instead of “single” which makes them eligible for larger tax deductions that save them even more money. Now I’m not suggesting that young professionals become fiscally responsible for other people, but I am pointing out the noticeable difference in tax savings that come from changing one’s tax filing status from single to Head-of-Household.

6. They do not own a home. Many young professionals prefer to live in major cities. They like being close to their jobs and having the convenience of apartment-style living (i.e. free maintenance repairs, in-house gyms, the freedom to move to another place after the lease ends, etc.). As a result, they pay rent. The only bad thing about paying rent and living in an apartment is that they are ineligible for one of the largest deductions in the tax code: the mortgage interest deduction. Many people who own a home have a monthly mortgage payment (since they didn’t pay the full cost for the home up front). While a portion of this mortgage payment is used to pay off the amount they borrowed from the bank, another portion of this monthly payment goes towards “interest” (the fee that the bank charges for loaning you money for the home). The government wants people to purchase homes and have reliable housing so there is an incentive in the tax code that allows homeowners to deduct the portion of their monthly mortgage payment that is “interest” from their taxes. When you first buy a home the “interest” portion of the mortgage payment is a fairly large percentage, so the mortgage interest deduction adds up to a large amount in tax savings. Thus, while many single young professionals are paying rent, some of their counterparts have purchased a home. Even though the monthly payment for the person who lives in a home may be the same or slightly higher than the cost of rent, the person who lives in the home is able to deduct a large portion of their monthly payment from their taxes and could be saving tens of thousands of dollars each year.

7. They are not putting much money into retirement accounts. Although some jobs may not offer a 401K, the majority of salaried jobs have a retirement account in place for their employees. The advantage of these accounts is that many of them are “tax-deferred.” This means that when you contribute to retirement plans like a 401K, you aren’t taxed on the money you put into the account until years later. As a result, the more money you put into your retirement account now, the lower your tax rate will be when you file your taxes each year. Despite these tax savings, many single young professionals don’t put as much money into their 401Ks as they can. To be fair, it is usually because they prefer to have more money available to them during each pay period. They might have other uses for that money, want to prioritize paying off their student loans, or may simply desire to live a more affluent lifestyle. While these are all understandable reasons, the fact that they are not contributing more to their 401Ks raises their tax rates.

8. They do not have enough money coming in from investments. The profit you make from investments (whether it is investing the stock market, real estate, or various businesses) is taxed at a much lower rate than earned income from your job. Sometimes it can even be shielded from taxes entirely. If single young professionals really want to lower how much they pay in taxes, they may need to invest the money they have in ways that can decrease their tax rates and add to their monthly incomes.

Despite all of these reasons for a high tax rate, my solution isn’t necessarily to get married, start having kids, or quickly buy a home or condo. While those are all viable things to do, I don’t advise that anyone rush into a decision like that. Making a decision in haste could have endless repercussions that could far outweigh the tax savings.

Instead, single young professionals should start actively investing more of their money. I am not suggesting that they randomly buy some stocks they saw on Bloomberg, or start investing in things they barely understand (like Bitcoin). Single young professionals should strongly consider starting a side business or begin investing in things like commodities or real estate. They will have to increase their knowledge on whichever route they choose so that they make educated investment decisions. Nevertheless, becoming an active investor or business owner will not only lower their tax rate, but it will also increase their monthly revenue and make them less dependent on the salaried jobs that keep taxing them at high rates.

To summarize, many single young professionals pay a lot of money in taxes. While each person’s situation may differ, there are usually 8 main reasons their tax rate is so high. They make a high income, they get most of their money from their jobs, and don’t actively invest a significant portion of their income. They also are single (and forgo the tax benefits of being married), many don’t have kids or dependents (which may save them money overall, but still make them ineligible for the plethora of tax incentives available to parents). Plus many of them prefer the perks of apartment style living (and are ineligible for deductions available to homeowners). Lastly, they do not contribute as much to their retirement accounts (which would further decrease their tax rates). Until these single young professionals decide to get married, procreate, and find a home, they should strongly consider investing more of their money. Profit earned from investments can not only add to their monthly incomes, but it can also substantially lower the amount they pay in taxes. A pretty sweet deal, if you ask me.

Do you agree? What things do you think you could start doing to lower your tax rate?