By Dr. James M. Dahle, WCI Founder
Those of you who have been hanging around this website for a while know I think most doctors should pay off their student loans within 2-5 years of completion of their training. This task is becoming more and more difficult with the downward pressures on physician incomes and the upward pressures on student loan burdens.
However, accepting the reality of massive student loan burdens, inviting your loan into your house like a family member to stay for the long-term is still a mistake. A student loan is not a mortgage, even if you can get it to a very low interest rate (and most cannot.) Here are 10 reasons you should pay off student loans as quickly as possible:
#1 Greater Asset Protection
Bankruptcy
One aspect that few people pay much attention to with regards to the investing vs student loan question is the asset protection angle. If you are sued for everything you own and have to declare bankruptcy, those student loans are still there. It would have been much better to pay them off than to have invested or even bought a home (in many states with low homestead limits).
Divorce
However, the truth is that you are far more likely to lose money in a divorce than you are to a lawsuit, especially if you carry adequate malpractice and umbrella insurance. But even here, paying off the loans is a better idea. Consider a divorce — your ex-spouse gets half of what you've saved and invested plus alimony. But he isn't going to take half of your student loan burden. That's all yours.
#2 Paying Down Debt Is a Guaranteed Return
Paying down debt can be a fantastic investment but one of the best parts about it is the rate of return is guaranteed and knowable up-front. It's the interest rate of the debt! 5% loan = 5% investment. Guarantees are worth something, just look at how much all those permanent life insurance and annuity purchasers are willing (although admittedly, perhaps unwittingly) to pay in fees in order to have some sort of guarantee.
#3 Paying Down Debt Is a Solid Return
Not only is the return guaranteed, but it can be quite good. Student loans these days are generally 5-10% (most often 6%-8%). Even if you refinance them down to 3%-4% variable or 4%-5% fixed, that's probably still an attractive return, especially when compared to what other equally safe investments are paying (i.e., 1%-3%).
#4 Student Loans Are Not a Mortgage
Too many people equate student loans with a mortgage. Somehow both of them get thrown into the same category of “good debt.” I don't buy it. There are several reasons why student loans are inferior to a mortgage.
Not Backed by an Asset
Student loans aren't backed by an asset. I mean, if you decide you no longer want to have a mortgage, you can just sell the property it is attached to, pay off the loan, and walk away with whatever is left. (Yes, I know you can be underwater.)
However, a student loan doesn't come with an asset. In fact, in a post a few months ago we learned that sometimes they don't even come with the ability to earn a living. One guest poster I've had felt like his student loans were a mortgage he took out on his brain, and he just hoped no one would foreclose.
Bankruptcy Exposure
You're in a tight horserace to pay off your debt and build a nest egg before you can no longer earn a high income.
Unlike a mortgage, student loans don't go away in bankruptcy as we've already discussed.
Higher Interest Rate
Mortgage rates are lower than student loan rates. Mortgage rates are currently around 4%, but medical school student loans start at 6%.
Dave Ramsey, perhaps our nation's leading expert at getting people out of debt, makes a special exemption in his baby steps for a mortgage. The student loans get thrown in with the credit card loans and payday loans — to be paid off completely before you ever do anything with money except a $1000 emergency fund.
Interest Is Often Non-Deductible
Student loan interest isn't deductible to most practicing doctors—they make too much money. Even below the phaseout, your deductible interest is capped at just $2500/year. At 6%, that means your maximum deductible loan is just $42K. That's a rare doc getting out of medical school with such a tiny loan.
#5 Pay for Your Education While You Still Appreciate It
When you first get out of training, you're very grateful for all the time and money you invested. You are enjoying this awesome new income. It feels like money is coming out of your ears. Guess what? That feeling goes away after a while. And then that student loan burden just feels like a huge weight hanging over your head.
Get rid of it before the novelty of being an attending wears off. I frequently recommend living like a resident for 2-5 years out of residency. That allows you to get a jump start on retirement savings, pay off all your student loans, and even save up a down payment on your dream house.
#6 Paying Down Loans Builds Wealth Too
A typical doc may come out of residency with a net worth of -$250K. Net worth is your assets minus your debts, everything you own minus everything you owe. Getting rid of debt boosts your assets just as much as acquiring assets. A dollar of debt paid down is exactly as good as a dollar invested. The investing vs paying down loans discussion can be complicated, but just realize that both paying off debt and investing are good things to do with your money. If you live like a resident, you can probably do both just fine.
#7 Allows You to Carry Less Disability Insurance
Consider a doc with a $4000 per month student loan payment. In order to be able to cover that, as well as support her lifestyle, she needs a disability benefit that is $4,000 higher than it would otherwise have to be. That costs ~ 5% * $4,000, or $200 per month. That's $2400 a year she could be investing or even spending. That effectively boosts the return on that “investment.” I'd say the same thing about life insurance, but most student loans go away at death. If yours don't, add that benefit in too.
#8 Lower Interest Rate Risk on Variable Loans
Anyone investing in fixed income investments is running interest rate risk. If rates rise, your bonds will be worth less money (because a bond purchaser would prefer to buy a new bond at a higher rate if you don't discount yours sufficiently.) Likewise, if you have a variable rate student loan, you are also running interest rate risk. If rates go up, you will pay more interest each month on your debt. That doesn't mean a variable rate student loan is necessarily a bad idea, but paying it off quickly certainly lowers your interest rate risk.
#9 Improves Your Cash Flow
Overall returns are important, but cash flow is also important. Many companies have gone out of business not because they weren't making money, but simply because they weren't managing their cash well. Most real estate investors have known the pain of a negative cash flow investment.
Your personal cash flow is improved when you minimize your fixed expenses, even if your overall expense is the same. That's because if something happens, you can simply cut back on your variable expenses and redirect that money to the emergency need.
However, a big student loan payment is a fixed expense. If something happens to your income, that payment doesn't change. As one Boglehead said recently about paying off his mortgage, “I don't know if it was a good deal or not, but I do know that I only need $6,000 a month now where I used to need $8,000.”
#10 Increases Happiness
There's a proverb: the borrower is slave to the lender. Who wants to be a slave? Paying off debt helps you to be financially free. You're free to use that money for another need, or cut back at work and not make the money at all. The more financially independent I become, the more I enjoy my job(s).
Lots of people pay off their mortgages early mostly for the psychological benefit. Very few of them, despite understanding the math behind borrowing at a low rate and investing at a higher one, then go take out a home equity loan in order to invest. I don't think those people are ignorant; I think they've honestly stumbled on to something that makes them happier. You simply make different decisions in your life when you don't owe a ton of money. You have more choices, and that's worth a lot.
What do you think? Do you think student loans should be drug out for decades? Why or why not? Does the interest rate matter? Do your alternative uses for the cash matter? How long do you think a doctor making $200K should take to pay off $200K in student loans? Comment below!
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WCI,
I just paid off 180k in 3 years on a 200k salary. It felt great!! I honestly have you to thank for giving me the information to help me make the right decision. You also convinced me to fire my financial advisor, for which i’m also grateful 🙂
Silly Alex
You could have used the 180,000 to buy 600k+ in rental properties and used the profit to pay off your loan.
You failed to see that one gets rich by using other peoples money.
A+ for saving $180,000 that quickly
F+ for blowing it on your loans
Justsayin
Why not use the $180K to buy $6,000,000 in rental properties instead of just $600K?
Oh, that’s right. You’re ignoring risk.
I spend most of my time looking at, anticipating and ‘stress testing’ my thesis prior to purchasing a property.
Ignore risk, nope we’re good ‘ol friends and hang out frequently. Personally think risk is standing still, not growing, playing it ‘safe’.
Would encourage Alex to repeat – save up that money again and get it working for them. As for the 180k to buy 6M – only if it has positive cash flow
JustSayin’
WCI
I must wholeheartedly disagree that paying off student loans early is ALWAYS the best thing to do. While I certainly agree that having a $4000/month loan payment at 5-6% interest is toxic and should be eliminated as quickly as possible, there are situations where the loan payment and interest rate make it far less favorable to pay loans early (some of these situations have already been pointed out). I will use my own example to help illustrate this as I go through each of your points.
Presently I have a federal consolidated loan at 2.5% fixed rate with a balance of about 130k. The monthly payment is about $650.
1.Asset protection- paying off student loans is not a means of asset protection. In the example you provided of a lawsuit in which I lose everything I have, including my home and all financial assets (and assuming I also lose my job and my future hope for reemployment in which case I would no longer be able to afford my loan payments), the $650 monthly payment (and any creditors who come after it) are not going to be in the top 10 of things that keep me up at night. If I am concerned about asset protection, I would make sure that any employer 401k/403b and 457b are maxed out, as they are not subject to creditors in bankruptcy or (as far as I understand) lawsuits. While there is a very low risk of losing 457b assets if the employer goes bankrupt, I would argue that is more unlikely than a lawsuit that takes everything I own for my present employer.
2. Guaranteed return: while there is certainly a guaranteed return on the interest rate of the loan, in my case, 2.5% is pretty paltry. I would be better served in this case to pay of my home mortgage at 3.125 percent. Although the actual “guaranteed return” rate after tax exemption is lower than 3.125 percent, the fact that I still have access to that money (either through heloc, home equity loan, or sale of the home) if I need that money for something in the future gives me a certain peace of mind.
3. Solid return: I will restate, 2.5% is not that solid. I also think this is a good place to bring up the value of compounding growth. 2.5 percent paid against a student loan on which you are already making minimum payments does not compound. If I can get 2.5% compounded over time, it is a better investment than the savings on the loan interest.
Example: If I make the decision to pay my loan back over 4 years, I am paying about 36k yearly to make that happen.
36k/12months = 3000 monthly. If I invest 2350 (the left-over monthly payment after my minimum 650) over that 4 years at 2.5% interest, I will have about 117,000 in the account and about 114,000 left to pay on the loan. If desired, I can use that money to wipe out the loan completely with some leftover, or I can transition the funds into a more aggressive portfolio to capture more compounding growth over time (which I assume you would be doing with that extra 3k monthly after you paid the loans back, rather than using a low risk 2.5% return vehicle).
4. Not a mortgage: I agree it is not the same. But for my situation, it seems that paying the mortgage early makes more sense than paying off my student loan.
Example: If instead of paying my student loans at 2.5%, I paid down my mortgage at 3.125% with the ~113k, I could recast my mortgage over its current amortization schedule (my bank allows me to do this for $150) to lower my monthly house payment and then put some of that extra cash into student loans, other investments, additional mortgage payoffs, etc. This option would also leave me 113k extra home equity I could choose to leverage for other purposes (or cash if I sell the home), which is not an option if I simply pay down my loan.
5. Pay for your education while you still appreciate it. This is a subjective statement and has no objective data to support it. I could just as easily say “Spend all your extra money on things you enjoy while you are still healthy and young enough to appreciate it.” There is no equation for this. But I will say that if I have 117k invested after 4 years and 114k of loans to repay when the burden of that loan is weighing heavily on me, I can always pay it back immediately (I recognize I have conveniently left out taxes for simplicity’s sake).
6. Paying down loans builds wealth too. But the interest doesn’t compound…and as you have touted many times on this site, compound interest growing over the longest period of time possible, is the true driving force for building wealth.
7. Allows you to carry less disability insurance. In my example, that would be 32.50 a month. Over the 4 years we are discussing, that is about 1500 bucks. After that, I am self-insured, since I can use the 117k to pay off the loan at once, or keep paying the 650 monthly for a LONG, LONG time. Furthermore, if I become disabled, I will be very happy I kept that 117k in liquidity rather than squandering it away on student loan payments I can never recover or leverage in an emergency.
8. Lower interest rate risk: My loan is not variable, so this does not apply.
9. Improves you cash flow: So does paying down my mortgage and then recasting it—only better!
Example: If I have a 15 year 3.125% fixed mortgage (presently that is my rate, though I made up the loan amount) and pay the extra 2350 monthly from the above scenario over the four years I would have been paying off my loan, then recast my mortgage over the remaining 11 years, my payment (not including property taxes and insurance for simplicity’s sake) goes from $2089 monthly down to $1014 monthly. Instead of eliminating $650/month, I eliminated $1075/month (this actually remains about the same regardless of the loan amount from 300k to 800k and up)! My cash flow is actually better than if I had eliminated my student loan instead.
10. Increases happiness: Again this is a subjective statement. I would definitely be happier with a low interest student loan, more equity in my home and a payment of $1075/month less after 4 years, than having 113k less equity, only $650 a month less in payments and no student loans.
Finally someone who gets it
It’s been surprising to see the direction this comments thread has taken. Usually when that happens it is because I didn’t do a very good job explaining myself in the post.
The intention of this post wasn’t to argue that paying off loans is always better than investing. I had hoped to make that point clear under # 6 when I wrote:
and included a link to my post on paying off debt vs investing, which gives a careful analysis of considerations in that difficult decision, such as interest rate, available retirement account space, tolerance for debt, expected future returns etc.
As I wrote earlier in this year about my plan to pay off my mortgage (effective rate 1.6%) it can make a lot of sense to carry very low interest debt while investing, so that is what I’m doing with that particular debt.
Now, all that said, the purpose of this post is really two-fold:
1) Too many people are carrying low interest debt and SPENDING, not investing. I think it’s a mistake to drag out your student loans for decades in order to live the high life when you could be free of that burden in 2-5 years by living like a resident.
2) Too many people are carrying high interest debt, and the risk they’re taking trying to beat that return by investing probably isn’t appropriate.
Now a few comments at PC:
1) The asset protection issue is this. If you’re sued for everything you have, you will still owe your student loans. So in that particular, and very rare, scenario, you would have been better off paying down even very low interest loans rather than investing, even though mathematically you would come out ahead on average investing.
6) I think you misunderstand compound interest with regard to loans. Paying off loans, unless they’re somehow subsidized, saves compound interest just as much as investments compound it.
I’m surprised the after-tax rate on a 3.1% mortgage isn’t lower than the after tax rate on 2.5% student loans for you. My after-tax rate on a 2.75% mortgage is about 1.6%.
One other thing. Don’t underestimate your desire to have a constantly increasing standard of living throughout life. Paying off your loans early in your career before you’re used to that attending income will probably be the psychologically easiest time to do so.
In my opinion, this is the strongest argument for paying early. It is psychologically the easiest time and it builds good habits. I finished with ~200k in loans. Made 100 in payments in the first year while maxing HSA, his/hers 401ks and backdoor IRAs. I think we could have easily spent a bunch of that, but by setting a New Years resolution to pay off 100k I got focused on making it happen. Once the loans are gone, I plan to roll those payments into taxable accounts to continue building net worth. Paying down debt seems to raise the floor of possible financial futures, while aggressive investing raises the ceiling. Both are worthwhile actions and both put you ahead of spending on cars or lawn care.
That’s an interesting way to think about it. I’ll have to ponder that a bit- raising ceilings and floors.
what are your thoughts on the public loan forgiveness program? I have a large amount of student loan debt but have about 3 years of qualifying payments under my belt and only 7 years to go. Shouldn’t I be paying as little as possible towards my loans in hopes to have the remainder forgiven?
I don’t like that phrase “in hopes of.” Are you going to work for 7 more years for a 501(c)3 or not? If not, then refinance your loans and pay them off ASAP. If so, go for PSLF. The sooner you can make that decision, the better.
Thank you very much for the help! Yeah I don’t like the the phrase “in hopes of” either but from my understanding of the numbers I will end up saving a lot if I go the PSLF route. And yes I do plan on staying in my current job which is a 501(c)3 for seven years. I guess things can always change but that is the plan. Do you have other thoughts on the PSLF program? Are you doubtful that the government will follow through?
If you’re planning to stay then it is an easy decision for you. Go for PSLF. If you’re worried about it going away, save up on the side. If PSLF disappears, use the side fund to pay off the loans. If not, that’ll give your nest egg a big boost or you can use it to pay off a mortgage or something.
My opinion, worth what you paid for it, is that you will get PSLF if you play by the current rules and you are currently enrolled.
I recently posted a question about this topic on the Bogleheads forum. The answers were roughly a 50/50 split. I’m thinking about going for the “sleep better at night” approach and just put everything on hold to knock off my remaining loan debt over the next 6 months. However I’m having a hard time justifying having to pay Uncle Sam an extra $~17k by not fully funding my $53k tax deferred SEP. In reality, it will likely be closer to $7k loss since I should still be able to funnel in $30k for 2016 once the loan is payed off. But I guess I’ll at least be gaining 6% on the $75k loan payoff. I think I’m willing to pay a little extra for some piece of mind.
Fund sep
Make 6k moonlighting
Use the 75k to buy a rental property and use income to pay off loans
Get financial independent by using other peoples money
Pay off loans down the road.
Justsayin
Found this site and the book to be incredibly informative and helpful- thanks to WC and all who have contributed throughout.
Forgive me if this is information is already out there (or deemed as common sense to most), but I haven’t seen it come up here at all. My question: Is it better to make as many payments to student loans earlier in the tax year in order to minimize the capitalization of interest? For example, making two payments a month on loans in the early part of the year and backing off in the later part to contribute that money to investment/savings/discretionary areas. In my limited understanding of this area, it seems like for a large loan (350k plus on our families end) this could make a huge difference overall in terms of interest paid over the life of the loan while still being able to reap the benefits of tax breaks for investing. Can I dump my last few months of paychecks at the end of the year to max out any investment tax incentives or are there ways that this is limited? I understand that most company matching requires a per paycheck contribution but are there any other obstacles to this plan?
You get a similar benefit to front-loading retirement accounts. I don’t see a free lunch there. Sure, you have less interest on the loan but you also lose compounding of the investment.
Paying off debt should be a top priority. Thanks for the 10 reasons and insight! Student loans in the U.S. now top $1.5 trillion…
https://fred.stlouisfed.org/series/SLOAS
The growing student debt is an outcome of automation. There are 3 powerful trends to consider before taking student loans in the first place…
https://frugalfortunes.com/universal-basic-income/
Hear hear! I worked like a psychopath to pay off every penny of debt i had. Debt free is worth whatever it costs.
Ridiculous
Debt is the past , invest for the future! Stop fixation of wasting precious years paying off debts.
Focus on making more money period end of story
Stop thinking small
Give me a billion dollars of real estate debt for rentals any day.
‘The borrower is slave to lender’…hmmmmmmm
Much rather buy cash flowing real estate and use other people’s money to pay down my debt
So much nuance to paying down early – docs start saving/investing ‘late’ and excessive focus on paying off debt delays the potential compounding of the investments.
Much rather build a rental portfolio which pays off my debt then strive to pay off debt then dive into collecting assets.
Med school debt is the past – I favor focusing on the future!
JustSayin’
The comments were just as illuminating as the post for this one.
If anything, it’s a great topic to debate.
Bottom line, as others have stated above: if you can actually put the extra capital towards paying down the student loans, mortgage, or towards furthering investments, you can’t go wrong!
Personally, I’m finding myself coming down towards the viewpoint of Justsayin’.
But strategies can always change. We will see how my real estate adventures go!
— TDD
Yes, you have mentioned that on every post I have written in the last year with even a hint of suggesting that unlimited quantities of debt might not be the best idea. We get it, you like leverage and it has worked well for you….so far. But you are not meeting the same folks I am where debt has severely impacted their lives and they feel imprisoned to it. Like the doc I met this week who owes $600K in student loans and now can’t do the international medical missionary work she would like to be doing because she has to take care of that debt. I’m all for focusing on the future, but if you ignore a past like that, it’ll wreck your future.
You should run these on Thursday’s instead of Tuesday’s. You know…Throwback Thursday. Tuesday’s are for Taco’s 😉
Either way, these should be fun. Glad you are doing this as even for us 2% er’s that have been around for the entire blog, it is good to re-read and re-fresh!
I love the horse race analogy: “You’re in a tight horse race to pay off your debt and build a nest egg before you can no longer earn a high income.” So true.
Nest egg connotes protection and conservation
I prefer cash cows myself – cash flowing cash cows!
JustSayin’
Is there an interest rate that if attained, you would recommend investing (via 401K) over paying down debt? For example, I recently got my 280K navient student loan debt refinanced to 4.85%. At that rate I would have thought maybe I can leave it alone and start contributing more to 401K, or do you think the threshold for that should be lower? And if so, what rate?
No right answer there. More details here:
https://www.whitecoatinvestor.com/pay-off-debt-or-invest/
Personally, I find 4.85% guaranteed pretty attractive. If I had an investment like that (I don’t) I’d put a lot of money toward it.
Make more money!
Everyone acts as if situations are static.
Make more money and stop neurosing over small problems.
Justsayin
Hello all,
I am a family physician in 1st year of practice. Just wanted to get advice on my personal loans.
Recently paid off $55,000 in private student loans and have $40,000 in federal student loans remaining at ~ 6.25% interest rate, currently auto debits $650 monthly from my bank account.
Would you recommend paying it all off right away or refinance them with SoFi etc? I am leaning towards repaying it all in full since even with refinancing the interest rate would likely drop to ~ 3.5 or 4% (just assuming this based on comments in this forum) and I am currently earning only 2% interest on my bank savings account (worth $80,000). So I do have the funds to pay it all off but my divorce process is also about to begin so I am saving about $40-50k for that and of course future paychecks are also there for divorce costs. Pay off the whole 40k?
Much Thanks!
You have $40K in 6.25% student loans and an $80K savings account? Yes, I’d pay it off. Might even decrease how much you lose in the divorce.
Thanks for the advice. I should add that I am currently working in ontario canada and the loans are in USD. The current exchange rate is really not in my favor (need to pay $133 canadian to get $100 US). No guarantee which way the exchange rate will go in near future but if I wait for exchange rate to improve I am losing money in interest too (about $2500/yr). What do you think about investing part of my savings into mutual fund or ETF( which can very well earn 5-6% interest in long run), and only pay off part of the 40k loan?
Sort of depends on what you’re saving for and what your time horizon is. If this is for retirement or medium to long term, certainty better in the market than a savings account. If you need it next year, might not be such a great plan to put it into the markets.
I find a guaranteed 6.25% “investment” very attractive in US dollars, Canadian Dollars, Pesos, Yen, and Euros. I’d pay off the debt.
I paid off the $40k based on the recommendations here. Thanks! Definitely a good feeling to get that taken off my chest. I have $37k left in my savings account earning 2% interest. One last loan pending… $28K at a canadian bank at interest rate of 3.25%. Pay it all off? I understand that since interest rate is not that high, investing in ETF etc long term will likely be a better investment but given my upcoming divorce I am leaning towards paying it all off since it’s not a good idea to do investments with a pending divorce. Agree?
Well, the divorce certainly throws a wrench into it. I suspect that in a divorce you’ll lose half the cash and keep all the debt, so yes, I’d pay off the debt with the cash! But it might be nice to have some cash around to pay the attorneys and other divorce related expenses.
I found myself bungling around the blog again to address this issue, which I know you’ve covered ad nauseam. Hopefully you won’t mind yet another swing at this. Here’s the background: my wife is a highly specialized physician and I run a quasi government agency. This year our annual W2 income will be ~$515k and we live in a low cost, deep south state. We max out our retirement accounts, including backdoor Roths, and have almost $500k saved for retirement at ages 40 and 44. We own 5 properties including our primary residence, all of which are mortgaged. We have term life, monthly contribute to 529s for all 3 kids, have a taxable brokerage account, and live a very comfortable lifestyle with frequent vacations and a nanny. Our current net worth is about $850k.
We have about $200k remaining in med/grad/law school debt. The highest interest rate is 5.3% on about $50k. The rest is all at 2.75%, 3.25%, and 4.3%. We pay about $1700/mo. on student loans on about $26k of net monthly income. This does not stress us out – as real estate investors with mortgaged property we’re used to debt. We certainly want to pay it off and regularly pay over the minimum payment each month. At some point we will accelerate debt pay down and pay them off long before they are due. For perspective, our student loan debt was closer to $300k just 5 years ago.
My problem is that I simply cannot rationalize paying off such low interest debt when we have 20-25 years until we’re retirement age and compounding is the greatest variable impacting what we ultimately save. We are paying over on the 5.3% student loan, but why should I prioritize paying down the 2.75%/3.25% debt – especially when its federal and will be discharged at death? If my retirement accounts and the 529 are all earning 8%+, why would I prioritize paying down 3% debt if I have limited funds?
For additional context, I manage our finances in custom spreadsheets that include a net worth tracker, cash flow tracker, and retirement model (spreadsheet/math geek here). As far as I’m concerned, I have to take advantage of retirement accounts to reduce our very high tax burden and maximize my remaining compounding time. I need the 529 for the compounding (although I get no current tax benefit – kids are 5, 5, & 7). Frankly, we will not be able to balance 3 young kids without a nanny and vacations and other types of discretionary spending. We don’t desire to live in a small, cheap home and eat ramen, and we’ve shown the ability to live our lifestyle while steadily increasing our net worth and savings. We feel as if we are good stewards of our finances, manage them meticulously, and continue to evolve in our perspective to personal finance.
So am I wrong for not prioritizing our low interest student loan debt? I feel like everything I read is saying we must do that, but the math doesn’t work and I feel the other variables are important mitigating considerations that I don’t see dealt with an adequate level of nuance.
Or maybe I’m just in denial. What say you?
Uhhh….5 properties and a net worth of only $850K and a six figure student loan? You seem particularly debt numb to me. Do you really need to run that kind of leverage risk to reach your goals? If so, then proceed. If not, might want to deleverage a bit, no matter the interest rate.
I’m skeptical that your properties are all even cash flowing, which is a whole different issue but related to all the leverage.
At any rate, you’re pretending to yourself that you’re doing a good job “managing” debt, but you’re already in your 40s with a 5.3% non-deductible student loan. That’s an awfully attractive guaranteed return these days and not something most multimillionaires I know in their 40s are toting around. Maybe they have a 1-2% student loan, but not a 5% one.
I guess given your income and amount of leverage you’re taking, I’d expect your net worth to be a lot higher than it is at this point in life. I think you’re probably at least a little in the trap that lots of docs fall into where they feel like they can out invest their interest rate and so intend to invest the difference, but they’re not actually investing the difference.
At any rate, your money and your call, but I’d deleverage, starting with the student loans.
Thanks for that. The properties generally cash flow, although I had an eviction this year and some major repairs, so this year will be an exception on one. The others cash flow and I expect to be cash-flowing fully next year (new tenant in January).
My focus has been on the 5.3% student loan and I’ve been wondering if I should up the focus on paying it off. If I’m hearing you correctly, get rid of that loan ($50k). Maybe I need to aggressively pay it off before increasing savings anymore. I take it you feel differently about the lower interest student loan debt?
Thanks
Yes, I would up the focus.