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380k debt , EM applicant, guidance

Home Student Loan Management 380k debt , EM applicant, guidance

  •  osteoson56 
    Participant
    Status: Student
    Posts: 2
    Joined: 12/04/2018

    Hello all,

    Currently reading WCI, quick situational points:

    – Current M4 applying to ACGME Emergency Medicine programs, currently at 9 interviews

    – 380K total loan debt, average interest between 6-7% with one private loan of 30k at 11% (2008 loan), no assets no savings or investments

    – just married, renting apartment, wife makes 90k/year, she has 50k in a savings account earning little to no interest

    – she has no debt individually from school or anywhere else

     

    Questions:

    – Who should be paying rent and expenses for the next few months, my loans for the rest of my M4 year while she continues to save or her and I spend less loans/give them back?

    – Should we buy a home in residency if we are >75% likely to be living in same area after?

    – What do we mean when saying that if you buy a house you won’t “break even for 2-5 years?” if you break even, thats no net loss, but if you rented for 2-5 years thats 20-50K loss. Please explain.

    – In residency should we be throwing all of her income toward the loans while living off my income?

    – Should we be doing anything else with our income instead of paying off the loans, renting/living expenses, and setting up life insurance/retirement accounts while in residency?

    – What can we do with her 50K in savings (she wants it as a down payment on a house, I want less debt)

    – Drive a toyota, own it, not buying a new car anytime soon.

     

    Any other tips much appreciated. Thank you to all and I hope to continue to contribute as I progress through my training.

    #171631 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2010
    Joined: 06/24/2016
    • Who should be paying rent and expenses for the next few months, my loans for the rest of my M4 year while she continues to save or her and I spend less loans/give them back?
      • Take as little loans as you can reasonably get by doing so.  You should be able to live off $90K/year.
    • Should we buy a home in residency if we are >75% likely to be living in same area after?
      • No.  Don’t.  Renting isn’t “throwing money away;” it’s paying to live somewhere and protecting liquidity and flexibility.
    • What do we mean when saying that if you buy a house you won’t “break even for 2-5 years?” if you break even, thats no net loss, but if you rented for 2-5 years thats 20-50K loss. Please explain.
      • Because living somewhere costs something whether you buy or rent.  If you spend $1,500 in rent for 36 months, you spend $54,000.  But if you buy a $250,000 house zero-down in a low 1%s property tax area, then principal/interest/tax/insurance should be right about that (PI $1,266.71), and you spent about the same.  However, you also paid transaction and closing costs in that time frame, usually about 3-6% each time, to the tune of $25,000 or so.
      • And that doesn’t even take into account maintenance or any improvement costs you’d undertake which you wouldn’t be on the hook for if you rented, plus if your family grew, you could obtain a more reasonable-sized residence as easy as saying “I’m out,” picking up your stuff, and moving…never mind dealing with preparing for sale, putting it on the market, and so forth.
      • Personally I get a headache just thinking about it, but practically with the numbers above, that’s a pretty fact-supported argument.  Here’s the usual rent-vs-buy calculator we give.
    • In residency should we be throwing all of her income toward the loans while living off my income?
      • No.  You should be mitigating student loan interest with RePAYE or PAYE while maximizing tax-advantage retirement accounts, especially Roth accounts.  RePAYE will have a non-zero payment since it uses spouse’s income, but it is a good “hedge” to reduce the effective interest rate thanks to the 50% unpaid interest subsidy and still pays off accruing interest.  Plus, it’s tax-deductible up to $2,500 if your AGI is < $150,000.
      • The tax advantage of contributing Roth accounts in a low income bracket is absolutely massive – compound open-ended growth PLUS bring tax-free for growth and withdrawal, and once you’re banking big-time, then compound open-ended growth plus a deduction when in a 35-37% bracket with tax-free growth and taxable on retirement, like traditional 401(k), is far more advantageous than eliminating time-limited, simple-interest finance charges, especially when RePAYE limits accrued interest and you can refinance to an advantageous rate when you can afford the payments.
    • Should we be doing anything else with our income instead of paying off the loans, renting/living expenses, and setting up life insurance/retirement accounts while in residency?
      • Um…what else is there?
      • What do you mean, setting up life insurance accounts?  You need term and only term, no “account” like cash-value, permanent, whole, universal, etc life insurance.
    • What can we do with her 50K in savings (she wants it as a down payment on a house, I want less debt)
      • Leave 3 months’ expenses as an emergency fund in savings.  She should have been contributing to a Roth IRA during this time; if she hasn’t, and she has at least $11,000 earned income for 2018 and you both have $12,000 combined for 2019, you can max out Roth IRAs for each of you.  If you absolutely have to, you can withdraw direct contributions (not backdoor conversions, mind you) to Roth IRA tax and penalty-free, hence making them essentially a de facto emergency fund.
    • Drive a toyota, own it, not buying a new car anytime soon.
      • Good enough!

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    SerrateAndDominate SerrateAndDominate 
    Participant
    Status: Physician
    Posts: 217
    Joined: 02/01/2018

     

    – Should we buy a home in residency if we are >75% likely to be living in same area after?

     

    Take it from someone who planned on doing 2 years of fellowship after 4 years of residency, there is a 100% chance that right now, you don’t know where you will be after residency.

    DO. NOT. BUY.

    #171685 Reply
     Anne 
    Participant
    Status: Physician
    Posts: 542
    Joined: 11/07/2017

    Hello all,

    Currently reading WCI, quick situational points:

    – Current M4 applying to ACGME Emergency Medicine programs, currently at 9 interviews

    – 380K total loan debt, average interest between 6-7% with one private loan of 30k at 11% (2008 loan), no assets no savings or investments

    – just married, renting apartment, wife makes 90k/year, she has 50k in a savings account earning little to no interest

    – she has no debt individually from school or anywhere else

     

    Questions:

    – Who should be paying rent and expenses for the next few months, my loans for the rest of my M4 year while she continues to save or her and I spend less loans/give them back?

    How are you guys handling money?  Have you discussed this?  I personally recommend combining finances, mentally if not physically, after marriage.  This means that neither you or her pays, you both pay.  All money is both of yours, and all debts are both of yours.  You can still pay out of one account or the other, but it doesn’t really matter, it’s all YOUR (i.e. both of yours) money.  With 90k annual income, you should not need any further loans.  You need to formulate a game plan of how you are going to pay them back.  How you approach this is going to depend on what you’ve already discussed–is your new wife already on board with this?

    – Should we buy a home in residency if we are >75% likely to be living in same area after?

    – What do we mean when saying that if you buy a house you won’t “break even for 2-5 years?” if you break even, thats no net loss, but if you rented for 2-5 years thats 20-50K loss. Please explain.

    Renting for 2-5 years is not a loss compared to buying.  Let’s say you want to buy a house, to make numbers easy let’s say you are borrowing 200k at a rate that would give you a $1000 monthly payment over a 30 year amortization schedule.  Go look up an amortization calculator with those parameters.  Lets say you can rent the same house for $1000 monthly.  You know your fixed costs for rent over 4 years–$48000.  Sounds like a lot, I know.  Now look at the amortization calculator and see how much principal you’ve paid off over that time period–about 15000.  So you’ve still paid about 33000 in interest, all gone.  On top of that you have the transaction costs of buying/selling the home (which will eat up most of that 15k).  And your taxes and maintenance cost of the home over that 4 year period.  You are in the hole unless the house has increased in value over the 4 years, which is NOT a sure thing.  And you really don’t know going into residency that you are going to want to stay in the area on the other end.

    – In residency should we be throwing all of her income toward the loans while living off my income?

    My opinion:  You have a combined income in residency (and for the rest of your lives together).  You throw as much as possible at the loans while living on the least you can be happy with.  If you are going to live like a resident in early attendinghood, you might as well live like a med student in residency.  (don’t be too stringent–this needs to be agreed upon between you and your wife).  Some people like to dichotomize “saving one income” vs “spending the other”, I prefer to just lump it all together.  Do whatever works for you though.

    Congrats on your new marriage and pending graduation from med school, and good luck!  Hopefully your wife will be able to find a new job that she enjoys with a comparable income if you have to move for residency.

     

    #171689 Reply
     Peds 
    Participant
    Status: Physician
    Posts: 2071
    Joined: 01/08/2016
    she has 50k in a savings account earning little to no interest

    Click to expand…

    why? ally will give you 2% with no work

    – Who should be paying rent and expenses for the next few months,

    Click to expand…

    since you dont have a job……not you. whats your efund size? if its <50K, spend some of that cash.

    – Should we buy a home in residency

    Click to expand…

    ha. go read the other threads. hint: no.

    Please explain.

    Click to expand…

    closing costs, furniture, drapes, maintenance, property tax….math.

    – In residency should we be throwing all of her income toward the loans while living off my income?

    Click to expand…

    are you not doing PSLF?

    Should we be doing anything else with our income instead of paying off the loans, renting/living expenses, and setting up life insurance/retirement accounts while in residency?

    Click to expand…

    that sounds like….. a lot. in the 22% bracket likely still 401k + 2x rIRA.

    What can we do with her 50K in savings

    Click to expand…

    keep it as that. use it wisely. efund.

     

    #171690 Reply
    Liked by childay
    Drop it into MD Drop it into MD 
    Participant
    Status: Physician
    Posts: 229
    Joined: 09/20/2018

    Great advice above.  I have some minor differences.

     

    Figure out if you are going for loan forgiveness.  If not refinance and start paying down.

     

    I bought a house and did fine in residency.  However it totally depends on the area and the market.  I was in a place with a ton of natural gas drilling so the rent market was ridiculous but you could get a very nice house for 100K.  There is no hard and fast rule.

     

    Make sure you get your match and roth accounts are a great idea!

     

    Read through the getting started posts and get the book if you have not yet.  This is the most high yield financial learning.  If you want/have time for more pick up bogleheads and millionaire next door.  And sign up to get the posts from WCI and any other site you find useful for Continuing Financial Education.

     

    Probably the most important one is make sure you work hard in residency and learn as much as you can.  Take advantage of your mentors and become a great doc.

     

    Good luck.

     

     

    #171693 Reply
    Liked by jfoxcpacfp, DMFA
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2010
    Joined: 06/24/2016
    I bought a house and did fine in residency.  However it totally depends on the area and the market.  I was in a place with a ton of natural gas drilling so the rent market was ridiculous but you could get a very nice house for 100K.  There is no hard and fast rule.

    Click to expand…

    Personally, I was very lucky.  I bought with a terrible loan – when 30-years could be had in mid-3%s, I had a 7/1 ARM at 4%.  Literally *everything* went right for me – high property value appreciation (about 8%/year), minimal-cost refi to just under 3% on a 15-year fixed thanks to having <80% LTV from the appreciation, mortgage interest still being easily tax-deductible back then, ZERO structural/repair issues over six years, and only improvements that relatively increased the home’s value (patio) led to me essentially spending about $900/month over the 6 years I lived in my house for residency and fellowship.  RESULTS NOT TYPICAL.

    Not to mention when selling, getting an at-market offer on the first day on the market plus a no-cost lease-back for the 3 weeks between closing and when we could leave, and having the house staged/shown while we were out of town on vacation for minimal disruption of normal activities, and passing inspection.

    Basically, anything being less-than-perfect with any of the above situations would have worsened the financial situation, especially had I not gotten fellowship at the halfway point.  None of that would have been a concern at all with renting.  And I could have even probably saved more, too, since we bought a 2800 sf house for just my wife and me thinking we’d have more children in it (had one at 3 years in and the other at 5.5 years in), and we didn’t need that much house for just the two of us.

    So if you have the crystal ball and will be completely certain that everything will go perfectly for residency, job, family, and the house, sure, buying would be the right choice.  While you’re at it, please tell me what the stock market’s going to do.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #171699 Reply
     wa2106 
    Participant
    Status: Physician
    Posts: 89
    Joined: 11/29/2017

    Good advice above.  My only addition is that private loans (at 11%?!) should be refinanced immediately or, better yet, use some of your saved $50K to get rid of it.  There are significant expenses during residency interviews and moving for residency so I would keep a buffer for that and emergency fund.  Put the rest in high-yield savings account.

    #171701 Reply
     jz 
    Participant
    Status: Physician
    Posts: 578
    Joined: 01/09/2016

    – What do we mean when saying that if you buy a house you won’t “break even for 2-5 years?” if you break even, thats no net loss, but if you rented for 2-5 years thats 20-50K loss. Please explain

    Paying for maintenance, repairs, property insurance, utilities, property taxes, and real estate transaction fees is throwing your money away. Hence, homes are money pits.

    one private loan of 30k at 11% (2008 loan).

    This is a toxic loan. Destroy it now.

     

    #171704 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2010
    Joined: 06/24/2016
    one private loan of 30k at 11% (2008 loan)

    Click to expand…

    Somehow I missed that.  That should be refinanced ASAP.  Several lenders now refinance residents to high-5s, 5.75% last I checked.  That’s an exception to what I said above.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #171706 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 3694
    Joined: 05/13/2011

    Hello all,

    Currently reading WCI, quick situational points:

    – Current M4 applying to ACGME Emergency Medicine programs, currently at 9 interviews

    – 380K total loan debt, average interest between 6-7% with one private loan of 30k at 11% (2008 loan), no assets no savings or investments

    – just married, renting apartment, wife makes 90k/year, she has 50k in a savings account earning little to no interest

    – she has no debt individually from school or anywhere else

     

    Questions:

    – Who should be paying rent and expenses for the next few months, my loans for the rest of my M4 year while she continues to save or her and I spend less loans/give them back?

    – Should we buy a home in residency if we are >75% likely to be living in same area after?

    – What do we mean when saying that if you buy a house you won’t “break even for 2-5 years?” if you break even, thats no net loss, but if you rented for 2-5 years thats 20-50K loss. Please explain.

    – In residency should we be throwing all of her income toward the loans while living off my income?

    – Should we be doing anything else with our income instead of paying off the loans, renting/living expenses, and setting up life insurance/retirement accounts while in residency?

    – What can we do with her 50K in savings (she wants it as a down payment on a house, I want less debt)

    – Drive a toyota, own it, not buying a new car anytime soon.

     

    Any other tips much appreciated. Thank you to all and I hope to continue to contribute as I progress through my training.

    Click to expand…

    You bring all the debt and she brings all the assets. Sounds like my marriage! You’re one now, at like it. Try not to take out any more debt. At most you have one more semester of tuition to pay. If so, use the $50K. Whatever isn’t spent on that, put toward the 11% loan. Then make paying off that loan a major priority. You should be able to cash flow interview and moving expenses with a $90K/year income. No more loans.

    1. It’s all combined. You’re one now. The two of you should pay your expenses, including rent, from your income. One income, one set of expenses.

    2. EM residency is 3 years. Coming out ahead for buying is a 50/50 proposition at 5 years. Yes, you may stay in the same area, but how long are you really going to want to live in a house you can afford as a resident? Probably not that long. You can buy if you want, it probably won’t be a disaster, but I’d rent for the next 5 years or so. Why the big desire to buy a house? If it’s because you assume it’s a really smart financial move you need to abolish that idea. It’s not. It might work out ahead, but it’s not some super smart wealth building idea.

    3. You need to do the math on this. Rent is no more a “total loss” than mortgage interest, property taxes, insurance, maintenance, upgrading, furnishing, realtor fees, mortgage fees, inspections etc. Need I go on? 5 years is 50/50 when you add everything in. If you’re not getting to that figure, you’re

    4. It’s okay to invest too. I’d find a good balance between the two. Maybe max out Roth IRAs, get employer matches and the rest toward loans.

    5. You can invest, you can save up a down payment, you can build a real emergency fund. Those are the usual things.

    6. Both are good things. Maybe split the difference if you can’t agree. No right answer here.

    7. Me too. 222K miles on a 13 year old Sequoia so far. It’s going to Cabo later this month.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #171875 Reply
     hightower 
    Participant
    Status: Physician
    Posts: 1208
    Joined: 12/07/2016

    I think WCI is right in that the key thing you can do from this point forward is to not take out any more debt AND learn to live somewhat frugally.  Get into the habit now of living well below your means.  Behavior is the hardest thing to change later on. It’s way easier to learn good habits early then to unlearn bad habits later.  It’s hard to throw all your hard earned cash at debt and it only gets harder the older you get.  The earlier you start, the better IMO.

    I like the suggestion of not even taking out any more student loan debt for your last semester (if that’s an option).  Use that 50k to avoid anymore debt and to get rid of that ridiculous 11% loan.  Keep enough on hand for a proper emergency fund of 3 months expenses.  I wouldn’t kill yourself to max out ROTH IRAs at this stage.  With student loans at such high interest rates with such a high balance, the interest you’re paying on those loans far exceeds any benefits you’d see from putting 11k in a ROTH this year.  You’ll have plenty of income to invest later assuming you’ve gotten rid of your debt and learned to be a frugal spender/good saver.

    Also fully agree not to buy a home in residency.  You won’t be home much anyway, lol.  Been there, done that, wouldn’t do it again.  If I were in your shoes, I’d be laser focused on eliminating debt and think of nothing else until that goal is accomplished.  I’m 7 years out of residency and still carrying a student loan balance.  Had I tackled loans and saved more money early on, I’d have a much higher net worth now.  This is your future self talking!  Listen to me:)

    #171887 Reply
    Liked by osteoson56, Tim
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2010
    Joined: 06/24/2016

    With student loans at such high interest rates with such a high balance, the interest you’re paying on those loans far exceeds any benefits you’d see from putting 11k in a ROTH this year.  You’ll have plenty of income to invest later assuming you’ve gotten rid of your debt and learned to be a frugal spender/good saver.

    Click to expand…

    With respect, I don’t think this is conceptually accurate.  I mean, there’s only $11,000 in question here that can go into 2018 Roth IRA or toward loans.  Putting that toward a loan may only reduce accrued interest since most lenders always apply payments to accrued interest before allowing it to curtail principal; it might not even affect the principal, meaning there’s not really any “gain” to it at all (until it capitalizes on refinance).  Paying that accrued interest essentially just puts that $11,000 into limbo, untouchable and not earning, until it would start “earning” you money in the form of decreased accruing finance charges on what would be.  In the meantime, that $11,000 is not only earning open-ended compound gains, but it still maintains liquidity if it were a direct (not Backdoor) Roth IRA contribution in that it can be withdrawn tax- and penalty-free should it need to be used elsewhere.  So that recommendation goes against all of “total return,” liquidity, and the time value of money.

    If what you’re saying is that having paid the loan will teach proper financial behavior to avoid debt insensitivity, I don’t refute that, but to do so also discounts the importance of financial decision-making since it ignores the mechanics.  It’s also a very good habit to prioritize one’s retirement.  I know it feels good to have low/no debt, but it also feels good to be building toward retirement at the same time.  I know you say you’d have a much higher net worth now if you’d tackled loans and saved more money early on; those are *both* true, and I know we’re back-testing and what-iffing based on a specific market period with historically high gains, but your tax-advantaged retirement investments have almost certainly done more for your net worth than finance charges on your student debt.

    …and why do people always shout “Roth?”  I mean, I like it too, but no need to yell the guy’s name.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #171897 Reply
    Liked by Hank
     hightower 
    Participant
    Status: Physician
    Posts: 1208
    Joined: 12/07/2016

    With student loans at such high interest rates with such a high balance, the interest you’re paying on those loans far exceeds any benefits you’d see from putting 11k in a ROTH this year.  You’ll have plenty of income to invest later assuming you’ve gotten rid of your debt and learned to be a frugal spender/good saver.

    Click to expand…

    With respect, I don’t think this is conceptually accurate.  I mean, there’s only $11,000 in question here that can go into 2018 Roth IRA or toward loans.  Putting that toward a loan may only reduce accrued interest since most lenders always apply payments to accrued interest before allowing it to curtail principal; it might not even affect the principal, meaning there’s not really any “gain” to it at all (until it capitalizes on refinance).  Paying that accrued interest essentially just puts that $11,000 into limbo, untouchable and not earning, until it would start “earning” you money in the form of decreased accruing finance charges on what would be.  In the meantime, that $11,000 is not only earning open-ended compound gains, but it still maintains liquidity if it were a direct (not Backdoor) Roth IRA contribution in that it can be withdrawn tax- and penalty-free should it need to be used elsewhere.  So that recommendation goes against all of “total return,” liquidity, and the time value of money.

    If what you’re saying is that having paid the loan will teach proper financial behavior to avoid debt insensitivity, I don’t refute that, but to do so also discounts the importance of financial decision-making since it ignores the mechanics.  It’s also a very good habit to prioritize one’s retirement.  I know it feels good to have low/no debt, but it also feels good to be building toward retirement at the same time.  I know you say you’d have a much higher net worth now if you’d tackled loans and saved more money early on; those are *both* true, and I know we’re back-testing and what-iffing based on a specific market period with historically high gains, but your tax-advantaged retirement investments have almost certainly done more for your net worth than finance charges on your student debt.

    …and why do people always shout “Roth?”  I mean, I like it too, but no need to yell the guy’s name.

    Click to expand…

    Smarty pants.  It’s too early in the morning for me to debate anything.  You win.  I would still put money towards the loans though, lol, but I do agree I would only do it if I could eliminate the principle on that loan.  If you can’t get rid of the actual loan, then it wouldn’t be as much of a win in my mind.

    #171980 Reply
     osteoson56 
    Participant
    Status: Student
    Posts: 2
    Joined: 12/04/2018

    Thank you all for your responses! On the matter of the 30K loan at 11% interest. Would it make any sense to max out my loans this last semester (Stafford and Grad PLUS) which will have nearly half the interest rate of the 11% loan, and use that money plus some of our 50K savings to eliminate the 11% loan entirely?..essentially switching out the interest?

    #171993 Reply

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