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Student Loan interest rate lower than inflation

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  • Avatar crsine 
    Participant
    Status: Physician
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    Joined: 10/04/2018

    I’m wondering who would put more money than required to pay down this loan. My wife and I are both physicians. I was military so no loans. Wife had loans that we payed down on the high interest rates aggressively previously. For several years now we’ve paid the minimum on her current remaining loans of about $49,000 at 1.625% (we consolidated 11 years ago shortly after residency). We are out of the military now and have a healthy combined income, but are maximizing tax deferred, backdoor roth and taxable savings to 20% of gross. By my calculation I could cut our duration of loan from 15 to 8-9 years by increasing payments from 300 to $500. We probably wouldn’t miss the money, but seems almost like a free loan. What do you think?

    Thank!

    #220214 Reply
    Avatar BCBiker 
    Participant
    Status: Physician
    Posts: 235
    Joined: 01/10/2016

    If you are doing something worthwhile with the money you are not paying down the loan with, then no reason to pay it off in my opinion. No right answer. If you value not having debt pay it off. If it doesn’t bother you and you like the returns you are getting on that money invested, pay the required payments only. If you do want to pay it off though, pay it in one lump sum. I don’t see any difference between paying over 9 years instead of 15.

    #220217 Reply
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 3505
    Joined: 01/14/2017

    As long as you are investing what would have been put to the loan then don’t touch the loan.

    #220221 Reply
    Liked by Peds
    Avatar nephron 
    Participant
    Status: Physician
    Posts: 219
    Joined: 05/09/2019

    I’m in the same boat with the same interest rate.   I’ve been making the minimum payments with the assumption that inflation will degrade the loan to the point where I come out ahead by keeping the just making the minimum payments.

    #220234 Reply
    Avatar ZZZ 
    Participant
    Status: Spouse
    Posts: 700
    Joined: 06/18/2018

    “Both physicians…we have a healthy combined income, but are maximizing tax deferred, backdoor roth and taxable savings to 20% of gross.”

    A dual physician couple with ‘healthy’ incomes (whatever that means) at least 11 years out of training…saving only 20% of gross certainly isn’t ‘maximizing’ savings. I’d say let the loans ride if you were actually saving the delta, but your spending a ton of money.

    I’d be more worried about where all my $ was going than that loan.

    #220288 Reply
    Avatar crsine 
    Participant
    Status: Physician
    Posts: 4
    Joined: 10/04/2018

    I “misspoke” 11 years ago after medschool. I’ve been out of fellowship for almost 6 years now. Less than a year out of the military and my wife is a pediatrician working part time. She could only volunteer while we were stationed oversees for the previous 5 years. Didn’t mean “maximizing”, sorry, but don’t think 20% is wrong. We’ve had a lot of good things to do with money in our first year out in the civilian world.

    The question was really not about my finances anyway.

    I’ll restate.

    When is an interest rate too low to pay back quickly?

    I would think people would uniformly agree that if an interest rate was 0 or negative that there would be no reason to pay it back faster than you have to. Would rate of inflation be a break point?

    #220375 Reply
    CordMcNally CordMcNally 
    Participant
    Status: Physician
    Posts: 2829
    Joined: 01/03/2017

    This is one of the times that I wouldn’t recommend the “smart” move. A physician shouldn’t have student loans, car loans, etc. regardless of interest rate. You need to be maxing out all tax-advantaged space, though.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #220377 Reply
    Liked by MPMD
    Avatar ZZZ 
    Participant
    Status: Spouse
    Posts: 700
    Joined: 06/18/2018

    Yeah, definitely don’t pay it off any faster than the minimum. That’s free $.

    #220389 Reply
    Lordosis Lordosis 
    Participant
    Status: Physician
    Posts: 1832
    Joined: 02/11/2019

    The math favors keeping the loan. Human nature favors paying it down. Only you know if you are keeping the loan to increase your wealth or your lifestyle.

    Also a little dinky loan like that is not going to have much impact either way. You should be able to meet your financial goals without leverage.

    “Never let your sense of morals prevent you from doing what is right.”

    #220395 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4531
    Joined: 05/13/2011
    Splash Refinancing Bonus

    I’m wondering who would put more money than required to pay down this loan. My wife and I are both physicians. I was military so no loans. Wife had loans that we payed down on the high interest rates aggressively previously. For several years now we’ve paid the minimum on her current remaining loans of about $49,000 at 1.625% (we consolidated 11 years ago shortly after residency). We are out of the military now and have a healthy combined income, but are maximizing tax deferred, backdoor roth and taxable savings to 20% of gross. By my calculation I could cut our duration of loan from 15 to 8-9 years by increasing payments from 300 to $500. We probably wouldn’t miss the money, but seems almost like a free loan. What do you think?

    Thank!

    Click to expand…

    How rich are you? When I wasn’t very rich, I carried debt like that and invested. After I became rich, and especially when interest rates were super low (cash paying 1% or worse) I paid debt like that off.

    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

    #220900 Reply
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 3505
    Joined: 01/14/2017

    All that matters in the financial equation here is the best alternative use of the money. Inflation is only significant to the degree that you are measuring returns in real terms. Your loans are in nominal, after-tax terms. So analyze your alternative in the same manner. Can you beat the loan on an after-tax return basis with the money placed in an alternative investment (your present asset allocation)?

    Yes? Don’t pay it off.

    No? You’re not looking hard enough.

    #220911 Reply
    Molar Mechanic Molar Mechanic 
    Participant
    Status: Dentist, Small Business Owner
    Posts: 397
    Joined: 10/29/2017

    I have a rate like that from 2005.  I’ll pay that sucker off in 2035 and not likely much before.  Some months I could pay the balance with free cash flow…I still don’t care to pay it off.  The $360 a month disappears from my bank account and I don’t think about it.

    #220917 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3043
    Joined: 09/18/2018

    “By my calculation I could cut our duration of loan from 15 to 8-9 years by increasing payments from 300 to $500. We probably wouldn’t miss the money”.

    As a two physician family, I would think you need to reconsider another approach. Something along the lines of “right vs wrong” or “want vs need”.

    I understand the “rationalization” of the interest rate and your “benefit “ which would be minuscule, as you say, wouldn’t even miss it. Carrying a student loan doesn’t really add much to your life. It’s a possession you don’t really “want or need” and doesn’t have any “right vs wrong” issues. I doubt you have an emotional attachment. Consider doing your housekeeping and getting rid of it.

    #220929 Reply
    xraygoggles xraygoggles 
    Participant
    Status: Physician
    Posts: 93
    Joined: 10/26/2018

    I’m in a similar position (200k student loans @ 1.95% fixed 5 year payoff).

    My issue is the cash flow (Minimum payments are 4.2k/month). As much as I like having such a low interest rate on my loans, losing that much in cash every month is painful. I’m considering paying it down in 2 years opposed to 5, just to free up cash flow.

    Any opinions on this?

    “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

    #223655 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8114
    Joined: 01/09/2016

    Paying off the loans at 1.625 and 1.95 is almost painful to think about. This is an emotional decision. If it makes you sick or even woozy to have them, you are in the fortunate situation of being about to vanquish that feeling. If you want to make a rational decision, then decide on a logical plan for what you want to do with your free cash flow from now until death and commit it to paper or the software of your choice (of course, you can always hire a financial planner if this is overwhelming or too time-consuming).

    Seeing the projections and discussing them together will help ground you and give purpose to your spending and saving. What are your goals, what are your opportunities, how best can you optimize your wealth and cash flow, and so forth? This is a big step beyond “We have this in the bank account each month, what do we do next?” You’re looking beyond today and planning together for the future in a structured process, which can be very difficult without focus.

    The result will almost certainly not favor early payoff, but you’ll be forcing yourself to consider goals and put a name and value on them to make long-range decisions rather than in the bubble of what’s in the bank. If you go for early payoff after you put your plan in place, you’ve made an informed decision. This is a very healthy exercise whether you’re married or single.

    For folks who want to DIY, I’ve recommended The One Page Financial Plan by Carl Richards for years. It is a simple, inexpensive way to start looking at your finances in the context of a plan. Even if you decide to hire a planner, it’s a great way to understand the questions to ask and how to frame what you’re trying to accomplish.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #223690 Reply
    Liked by Zaphod

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