Six months after completing their PhDs, many of psychology's newest professionals make student-loan payments that are the size of a monthly mortgage. Some also bear the added burden of sky-high credit-card debt--the cumulative consequence of dissertation costs, new suits for interviewing, licensure-prep materials and expenses from moving from graduate school to internship to postdoc to first job.

The 1997 Doctorate Employment Survey by APA's Research Office revealed that at least half of practice-oriented new doctorates owed more than $30,000, and 29 percent of those new professionals had more than $50,000 in debt. One-fifth of new doctorates in the research subfields owed more than $30,000.

Startlingly, some of these new professionals actually file for bankruptcy.

Hit hardest are those who haven't had research assistantships and other student stipends to offset high costs of graduate education and, for some, low starting salaries. But perhaps the biggest problem is the fact that financial planning is not a top priority during graduate school, say students and new professionals.

"Investing and managing money is something new professionals need to know, and they don't teach you in graduate school," says Corey Habben, PsyD, chair of the American Psychological Association of Graduate Students (APAGS) New Professionals Task Force. "So a lot of people learn through trial by fire."

Habben is among a growing number of new professionals and professors who want to turn that problem around and empower the new wave of psychologists. He and Stuart Tentoni, PhD, senior psychologist and counseling coordinator of the University of Wisconsin­Milwaukee Norris Health Center, have developed a session for students and new professionals to be held at APA's 2000 Annual Convention in Washington, D.C., Aug. 5 at 10 a.m., "How to invest and survive on a psychologist's salary." At the session, financial planner Bart Boyer of Parsec Financial Management in Asheville, N.C., will speak about investing, debt management and financial pitfalls, and Tentoni will offer tips on how to balance saving and investing with sensible consumerism.

As a lead-in to the session, financial planners offer new professionals some options and solutions for handling some of their biggest financial concerns.

Some of new psychologists' burning financial questions are:

Which should I concentrate on first--eliminating my credit card debt or my student loan debt?

Eliminate credit card debt first, says financial planner Ellen DeNelsky, a certified financial planner in Cleveland who is associated with Wall Street Financial Group. "Student loans are something that need to be whittled away in the long haul--you can't put your life on hold because of that huge debt," says DeNelsky, who is married to psychologist Garland DeNelsky, PhD, and has spoken on retirement planning at past APA Annual Conventions.

"The interest rates charged for student loans are much better than if that debt was amassed in credit card debt, so whittle down that debt right away."

While $60,000 or more in student loans seems overwhelming, that money is more of an investment than a financial loss, she says. Even most home mortgage lenders will consider a student loan to be an investment--the same can't be said for credit-card debt, which will only work against a prospective homebuyer, she says.

How can I best manage my student loan debt?

Educate yourself about loan repayment options, says Sharon Simons, assistant director of financial aid at the University of Wisconsin­Milwaukee. She recommends visiting the Web site of the U.S. Department of Education, www.ed.gov, which offers information on each type of student loan, outlines the different loan repayment options and has sample repayment charts that can help new professionals identify the best repayment plan.

Two repayment options that can trim loan payments for recent graduates include the graduated repayment plan and the income-sensitive repayment plan. Under a graduated repayment plan, loan payments are lower at first and increase over time. An income-sensitive repayment plan bases monthly payment on yearly income and the loan amount. "As your income rises or falls, so do your payments," Simons says. The downside? These repayment options can cost more over time because you are paying off the principal balance more slowly, says Simons.

An alternative repayment option that can reduce payoff time and save money in interest over time is loan consolidation--merging all student loans into one loan. Consolidation worked well for new professional Terri Wall, PhD, who directs the counseling center at Jacksonville University in Jacksonville, Fla. She consolidated her student loans through Direct Loans, www.ed.gov/DirectLoan, a repayment plan offered by the U.S. Department of Education, and is saving money in interest.

But debt consolidation is not always the best option, says financial planner DeNelsky. "The interest rate could be higher than before, and in that case it would make more sense to tackle the loan with the highest interest rate first, and make your way down the list."

To avoid choosing an option that could be financially harmful, examine all the repayment options, says Simons.

"It's not one size fits all," she says. "Students have the ability to tailor their repayment plan as their circumstances change--all it takes is a phone call to the loan holder about options."

Should I worry about retirement planning now, or focus on debt reduction?

Make retirement planning and debt management top priorities, says Boyer. Lowering debt, however high, should never be an obstacle to savings goals, he says.

"There will always be hurdles to savings," says Boyer, citing a new house, a new car, and future children's education as examples. "Never allow those hurdles to stop you from saving and building wealth--saving in the first years as a professional is crucial."

Good options for new professionals with little disposable income are funding a tax-free Roth Individual Retirement Account (IRA) each year, investing $50 dollars a month in a mutual fund, and taking full advantage of retirement plans offered through an employer. Investing in the stock market is best saved for a time when more disposable income is available, he says.

"Save something in the first year, because if you do nothing the first year, you're likely to do nothing the next year," he says. "If saving is difficult, put away 3 percent of your income the first year, then build up to 5 percent, then 7 percent and on up to saving at least 15 percent of your income each year."

How can I avoid building more debt?

Live within your means, say DeNelsky and Boyer.

"You get out of school, have a first job and for the first time in years, feel like you're in the real world," DeNelsky says. "However, your income may seem bigger than it really is."

New professionals often spend more than they should with those first paychecks--on a new wardrobe, computer or car--because they are tired of living like graduate students and watching the conspicuous spending of peers who didn't attend graduate school, says DeNelsky.

To avoid this trap, strengthen your finances for a few years before buying a house, advises Boyer. He also warns against leasing a car--buy a used or affordable new car instead. The option to lease with no down payment seems attractive in the beginning, says Boyer, but leasing will result in a financial loss.

"You are essentially financing a car 100 percent with nondeductible interest and holding on to it through its highest depreciation period," he says. "And after two or three years you have nothing to show for it."

Another pitfall is having no liquid emergency fund to tap into when a family illness requires a cross-country trip or a water heater breaks, says DeNelsky. She advises everyone to put emergency money in a money market account, which will pay a better interest rate than a regular savings account.

"Otherwise, that emergency expense will go on a credit card, and that can lead to a cycle that spins out of control."

Further Reading

  • Bogle, J. (1999) Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor. John Wiley & Sons.

  • Orman, S. (1997) The Nine Steps to Financial Freedom. Crown Publishers.

  • Siegel, J. & Bernstein, P. (2000) Stocks for the long run: The definitive guide to financial market returns and long-term investment strategies.McGraw-Hill.

  • Staley, T. & Danko, W. (1998) The Millionaire Next Door: The Surprising Secrets of America's Wealthy. Pocket Books.