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  • Retirement Investing vs Loans

    Hello,
    I recently graduated med school and am an intern in a 3 year program. I do not plan on pursuing PSLF. I have about 300k in unsubsidized federal student loans at around 7%. Right now they are 0% until the fall (due to CARES act). I am wondering how to spend the next few intern paychecks. I'm living at home and do not have many expenses.

    1) Put a large sum of my paychecks towards my loans since they are 0% interest right now. This will help lower the interest burden when they get consolidated. I assume theres no penalty in paying off the loans right now since REPAY hasnt kicked in yet.
    2) Put 6k a ROTH IRA (my employer has no match) and the rest on student loans.

    Please let me know what you think, thanks.

  • #2
    I'd vote for $6000 in Roth and all the rest on Student loans. If you could get that to half by the time you are done in 3 years, you could finish the rest in 18-24 months! That would be amazing! Do a Roth each year.

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    • #3
      #2
      "Oh look another bajillion point declin-Ooooh!!! A coupon for pizza!!!!" <--- This is what everyone's IPS should be. ✓✓✓

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      • #4
        One more thing I forgot to mention. My employer offers an after-tax retirement plan up to $19,500. So I can effectively do 6k ROTH IRA + 19,500 in the employer retirement account (no match though). At what point do I stop putting money into retirement and into student loans?

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        • #5
          there's a lot of variables that you don't know about yet or haven't listed. do you have a small emergency fund in place? paid off all high interest loans? paid off all your recent moving expenses? do you have a budget to see how much money you'll have left over?

          once you have all your finances in order and still have money left over, then yes. definitely fund roth IRA. after that, it's up to you about investing more in retirement or paying off loans. with REPAYE, your interest rate is essentially 3.5% which isn't bad. mathematically/historically, you'd do better investing the rest, but these aren't normal times so who knows what'll happen in the short term. there's also no harm in paying off loans early.

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          • #6
            Originally posted by Nysoz View Post
            there's a lot of variables that you don't know about yet or haven't listed. do you have a small emergency fund in place? paid off all high interest loans? paid off all your recent moving expenses? do you have a budget to see how much money you'll have left over?

            once you have all your finances in order and still have money left over, then yes. definitely fund roth IRA. after that, it's up to you about investing more in retirement or paying off loans. with REPAYE, your interest rate is essentially 3.5% which isn't bad. mathematically/historically, you'd do better investing the rest, but these aren't normal times so who knows what'll happen in the short term. there's also no harm in paying off loans early.
            All of my loans are federal student loans at 7% ish (right now they're 0% till September). I have no high interest loans, no credit card debt, no moving expenses, I have a small emergency fund already in place. From now until September 30th (when my loans will get consolidated) I will have earned 14k (after taxes and expenses) to decide to either invest into retirement or pay down loans before they get consolidated.

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            • #7
              then it's down to risk tolerance. your loans will be basically 3.5% under REPAYE during residency. historically investing in the s&p averages around 8% (some years up 40% some years down 50% and every number in between)

              so over your lifetime investing should win out, with a lot of ups and downs along the way.

              paying off your loans is guaranteed and also a mental relief to be done sooner than later.

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              • #8
                I agree with Nysoz above. It is much more important to build assets early on in your career, than paying down low interest fixed debt.

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                • #9
                  This just goes to show how much doctors are ok with debt. At some point, personal finance is about behaviors and decision making. I would want to break the behavior of accepting debt as soon as possible. I would crush the student loans ASAP.

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                  • #10
                    why not both? 14k: 6000 for roth ira, 6000 for student loans, rest for Efund/expenses or into either two choices again. Doesnt have to be all or none. just realized that was choice 2. sorry. choice 2.
                    Last edited by billy; 07-01-2020, 06:45 PM. Reason: reread post

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                    • #11
                      Originally posted by Nysoz View Post
                      then it's down to risk tolerance. your loans will be basically 3.5% under REPAYE during residency. historically investing in the s&p averages around 8% (some years up 40% some years down 50% and every number in between)

                      so over your lifetime investing should win out, with a lot of ups and downs along the way.

                      paying off your loans is guaranteed and also a mental relief to be done sooner than later.
                      I agree with this. However, what changes is that my loans get consolidated in Septmeber. From my understnading, if you pay down the loans before the grace period ends (and while interest is 0%) it lowers the amount that gets capitilized. Also, it sounds like now is the only time I can pay down y student loans without penalty. If i pay down my loans later, it will lower the REPAY rate and thus woiuldnt make sense. Thats why im stuck whether or not to full attack my loans and wait to do roth IRA after september 30th. Or do a combination of both roth IRA and loans.

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                      • #12
                        Originally posted by billy View Post
                        why not both? 14k: 6000 for roth ira, 6000 for student loans, rest for Efund/expenses or into either two choices again. Doesnt have to be all or none. just realized that was choice 2. sorry. choice 2.
                        Thats probably the best idea!

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                        • #13
                          Originally posted by rocky4x4 View Post

                          I agree with this. However, what changes is that my loans get consolidated in Septmeber. From my understnading, if you pay down the loans before the grace period ends (and while interest is 0%) it lowers the amount that gets capitilized. Also, it sounds like now is the only time I can pay down y student loans without penalty. If i pay down my loans later, it will lower the REPAY rate and thus woiuldnt make sense. Thats why im stuck whether or not to full attack my loans and wait to do roth IRA after september 30th. Or do a combination of both roth IRA and loans.
                          I guess I'm confused about what you're trying to say/do. Right now, your loan principal is staying the same because of the 0% cares act. When that ends, interest will start accruing at 7%, but depending on the type of loan, get subsidized to an effective 3.5% for 3 years. Since most people can't pay off the interest of the loan, seems like that gets capitalized into your principal the next time your interest is calculated.

                          "If you have a Direct Subsidized Loan, no interest was charged while you were in school, and none will be charged during your grace period. If you have a Direct Unsubsidized Loan, interest accrued while you were in school and will continue to be added during your grace period. If you have a Direct Unsubsidized Loan and you do not pay the interest as it accumulates—even while in school—it will be capitalized to the loan when you enter repayment. Capitalization means the interest earned will be added to your original loan amount, making your principal balance larger."

                          https://www.ama-assn.org/residents-s...r%20repayment.

                          I wasn't aware of any prepayment penalty on student loans either. But yes, you can split up your extra money into any sort of ways you feel comfortable.

                          EM-CCM MD to me, lifestyle choices and savings rate is different than having debt. if you have the ability to stick to your investment thesis, then it's more of a math equation in the long term (historically). investment returns at 8% compounded makes you more money than 3.5% loans compounded is costing you. if you panic sell at the bottom then it's a different game altogether.

                          now if you're funding a lifestyle increase with debt, then that's a different story and why a lot of america has problems. debt doesn't have to be bad, it's just a tool and up to individuals how to use it.

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                          • #14
                            I think I need to start taking out ads at WCI as I'm a broken record about this: FOR ALL STUDENT LOAN PEOPLE - STOP WORRYING ABOUT CAPITALIZATION! IT'S JUST NOT THAT BIG A DEAL AND THERE IS NO WAY AROUND IT (in most circumstances). IN FACT, ITS THE BEST DEAL OUT THERE IN TERMS OF LOADING UP UNPAID INTEREST WITHOUT IMMEDIATE COMPOUNDING! as noted [email protected], you don't just get to skip it coming out of school.

                            And agreed again with above - there is no such thing as 'prepayment penalty'. Jury is still out on whether or not paying more affects your repaye subsidy - play around with it yourself to see what happens, but i feel more comfortable these days than i did a few years back that this shouldn't factor significantly into your decision.

                            to EM-CCM MD - it's basic arithmetic and calculus, not some 'being okay with debt attitude'. It's fine that you don't like debt (nor do i!) and behavior matters of course, but realize that yours is an emotional response and not necessarily an academic/intellectual response - the fact that someone is here asking indicates to me that they have the behavioral aspect down.

                            Actionable advice - fill up the tax sheltered stuff now. don't spend $$ on lifestyle creep and worry about the loans later.

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                            • #15
                              Originally posted by rocky4x4 View Post
                              Hello,
                              I recently graduated med school and am an intern in a 3 year program. I do not plan on pursuing PSLF. I have about 300k in unsubsidized federal student loans at around 7%. Right now they are 0% until the fall (due to CARES act). I am wondering how to spend the next few intern paychecks. I'm living at home and do not have many expenses.

                              1) Put a large sum of my paychecks towards my loans since they are 0% interest right now. This will help lower the interest burden when they get consolidated. I assume theres no penalty in paying off the loans right now since REPAY hasnt kicked in yet.
                              2) Put 6k a ROTH IRA (my employer has no match) and the rest on student loans.

                              Please let me know what you think, thanks.
                              I am also a new intern. I think it is best to contribute the 6k into the ROTH IRA first, as Dr. Dahle often mentions that if you don't use this tax-advantaged space, it is gone forever. Also, I dont think there is ever a penatly for paying extra on student loans, just that any additional payments go to interest first.

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