Burdened by Student Loans, He Weighs Career, Financial Trade-Offs

Mark Olsen, 33, borrowed so much money to attend graduate school that he now must work in an unrelated field just to make the loan payments.

This is not the future Olsen had planned when he was accepted at USC’s film school in 1995. He graduated last year with more than $80,000 in student debt and no clear idea how he was going to pay it back.

“There tends to be self-delusion in film school. You think you’re going to be the next hot thing and that money won’t matter,” said Olsen, who works as a marketing communications consultant in Los Angeles, making $71,000 a year. “Then you join the real world and realize you have to struggle like everyone else.”

Olsen now appears to be straddling two worlds with two highly disparate visions for his future. On the one hand, he wants to pursue the screenwriting career for which he studied. On the other, he wants the trappings of a more stable life, including holding a steady, good-paying job, buying his own home and saving for retirement. He’d also like to pay off his student debt “sometime before my own kids are in college,” said Olsen, who is currently single and childless.

Temecula, Calif., financial planner Karin E. McKerahan said Olsen is actually on track to achieve most of his goals. But he must strike a better balance between his short-term and long-term desires.

“If he wants to accelerate his student loan repayment and save for a new car, he must choose to spend less now and redirect some of his savings from retirement funds to short-term savings,” McKerahan said. “And if he would like to pursue his dream of screenwriting . . . it would be wise to delay the purchase of a home to retain his flexibility and to keep his fixed monthly expenses low.”

To find out what was most important to him, McKerahan asked Olsen to describe his ideal vision of what he would like his life to be like in five to 10 years. Olsen saw himself as a screenwriter and a family man with his own home.

Olsen has known some success in the writing field. One of his plays was published and has been performed several times. Just being accepted to the USC graduate school was an achievement, because admission is quite competitive.

“There was never any question. Once I was accepted, I was going to go, because it’s so hard to get in,” Olsen said.

In matching fantasy with reality, however, Olsen realized he was not willing to leave his job and take the financial risks of trying to be a screenwriter full-time with no guaranteed income or retirement plan.

Buying a home would further tie him down, McKerahan warned. Olsen currently rents a Manhattan Beach home with two roommates, paying $500 a month in rent. Olsen would have to make much higher monthly payments to purchase a similar home, particularly because he has no money saved for a down payment.

McKerahan also tried to dampen Olsen’s enthusiasm for paying off his student loans early. It’s true that Olsen could save about $50,000 and shave 13 years off his loan repayment schedule by making extra payments of $200 a month. But his consolidation loan, which stretches his payments over 30 years, is fixed at 7.6%, which makes the loan relatively inexpensive, McKerahan said.

“Mark should be able to earn more by investing his money instead of reducing this loan over the long term,” McKerahan said.

In fact, Olsen needs to inject more financial flexibility in his life, the planner said. Olsen saves more than 17% of his income, pumping the maximum 15% his employer allows into a 401(k) and contributing $2,000 to a Roth IRA. At the same time, he has little money saved for emergencies.

Olsen said he wants to catch up with his retirement savings, because he spent so much time in school rather than earning money. In addition to his USC degree, he has a graduate degree in playwriting from a university in Britain.

He is also reluctant to have money sitting in a low-interest account, rather than working for him in the stock market.

But an emergency fund equal to at least three months’ expenses is designed to help people deal with inevitable financial setbacks--a job loss, a natural disaster or a big car repair.

“And these things never happen alone. It’s usually two or three things happening all in a row,” McKerahan said. “An emergency fund means you don’t have to go into debt on credit cards or declare bankruptcy if a financial crisis occurs.”

Olsen got a real-life demonstration of McKerahan’s point just a few days after meeting with her. His grandmother died, forcing him to buy a last-minute plane ticket for her funeral. Then, on his way to the airport, he received a $300 speeding ticket. He also learned that his current contracting job may end in four to six weeks, which will require looking for a new job.

McKerahan recommended Olsen look for ways to reduce his expenses and, if he is unable to cut back, to reduce his 401(k) contributions temporarily and divert the extra money to savings. He should also try to save a down payment for a car to replace his aging 1990 Mustang, she said.

Even if Olsen were to cut back to a 10% 401(k) contribution permanently, he still would be in good shape for retirement, McKerahan said. Assuming he earns an average 11% return, his 401(k) would be worth more than $1 million by the time he was 60, while his Roth IRA would equal almost $750,000. Whether or not that would be enough to retire at that age depends on his spending needs in retirement. In any case, he could boost the fund by saving more in later years or by delaying retirement until age 65, McKerahan said.

McKerahan suggested ways for Olsen to save money in other areas of his life, too.

His Roth IRA, for example, was invested in mutual funds that charge an upfront sales fee, reducing the amount of money available for investment. Transferring the money to a no-load, low-cost fund family such as Vanguard could boost his overall returns. Likewise, his 401(k) money was in actively managed funds that charged annual expenses of 1% to 2%. Index funds would offer him diversification at a lower cost, McKerahan said.

Olsen took McKerahan’s advice to heart. He immediately moved his retirement money to lower-cost funds, and switched to using a debit card instead of cash so that he could better track his spending. He also taught himself how to use more of the features in Quicken, his personal finance software, so he could set up and track a budget.

He found areas to save right away. He eliminated his bimonthly maid service and took on housecleaning chores himself, saving $80 a month. He canceled his Internet service provider and switched to a free ISP service, which saves $20 monthly. He resolved to eat at home six nights a week--a big change for a man who sometimes ate three meals a day in restaurants.

Olsen applied the same skills to drawing up a “time budget” so that he could keep his day job while pursuing his writing. Now he devotes an hour and 45 minutes each day to working on a novel and has given himself 12 weeks to complete the first draft. As befits a Los Angeles writer, he has already met with an agent to discuss the work’s commercial possibilities.

“I’m psyched about this because I’ve got a great story to tell,” Olsen said. As for his writing schedule: “This is my time and I intend to keep this promise to myself.”

The one area where he disagreed strongly with McKerahan was over his $15,000 portfolio of individual stocks. McKerahan urged him not to add any more equities to this taxable portfolio but instead to invest any extra funds in low-cost index mutual funds. The index funds would assure that he was adequately diversified, something that is impossible to achieve with a small portfolio of stocks.

But investing in individual stocks has become a hobby for Olsen, and he’s reluctant to give it up.

“I enjoy following the market and my stocks,” he said. “Thus far, I’m up about 27% on the year, which beats my 401(k) and IRAs. I think it’s possible to continue building my portfolio without being fiscally dangerous. . . . It’s a great way to learn about personal finance.”

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Liz Pulliam Weston is a personal finance writer for The Times. She can be reached at liz.pulliam@latimes.com.

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(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

Investor: Mark Olsen, 33

Occupation: Marketing communications consultant

Gross annual income: $71,000

Goals: Pay off $79,000 in student loans, buy a home, replace aging car, pursue writing career, retire at age 60

Current portfolio

Assets: About $15,000 in individual stocks; about $1,000 in a money market account; 401(k) worth $4,000; Roth IRA worth $21,500; 1990 Ford Mustang worth $2,500

Debts: About $79,000 in consolidated student loan debt with a 7.6% interest rate and May 2027 payoff date

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Recommendations

* Decide which of his goals is most important. Pursuing a writing career may mean putting off buying a house, for example, while paying off the loans early may require delaying retirement.

* Use debit card rather than cash to better track expenses and find areas of overspending.

* Raise his hourly consulting rate, which has remained the same for two years.

* Consider reducing 15% contribution to 401(k) temporarily in order to build up an emergency fund equal to three months’ expenses and save for a new car.

Don’t add more individual stocks to his portfolio; instead, concentrate on diversification using mutual funds.

* Replace load funds (mutual funds with upfront sales charges) with no-load funds.

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Meet the planner

Karin E. McKerahan is a fee-only financial planner in Temecula, Calif., who specializes in financial planning, investment counseling and tax advice for middle-income clients. She is a member of the National Assn. of Personal Financial Advisors.

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The Situation

* Investor: Mark Olsen, 33, communications consultant

* Annual income: $71,000

* Problem: Has so much student loan debt from film school that he is forced to work in an unrelated field.

* Possible solutions:

Pursue screenwriting as a part-time option. To increase financial flexibility, contribute less to retirement funds and don’t accelerate student loan payments.