Q. Where Do I Start? I Have Huge Student Loan Debt and Don't Think I'll Ever Be Able To Pay it Off
I am a physician assistant and my partner is a physical therapist. We're about two years out of school. I have only recently started to try and figure out how to be smart with my money. I owe $167K in student loans and my partner owes $200K. Our combined income is $200K. We have been living in a town with a very cheap cost of living for the past two years and trying to put all of our extra money on our loans. I even had a night at home where I freaked out about the loans and on impulse, spent thousands of dollars toward my Grad Plus because I just kept thinking my savings were pointless when I was in such massive debt. It seems like, despite all our large payments to these loans, they are hardly different from when we started. Very discouraging. I’ve recently started putting money into an investment account using Betterment and feel like it’s doing pretty well, but I’m overwhelmed by all of the advice and podcasts and books available. I’ve been stressing myself out reading your site again tonight just because of the massive amount of information. I guess my question is, where do I start? I know this whole message must sound stupid, but I’m sending it anyway in case you have something wise to respond with.
A. You're Not Alone
Your message doesn't sound stupid because I get several of them a day. You are not alone. You are not alone. You are not alone. In fact, you might be typical, but probably just a little worse due to your high debt to income ratio. You're right to start looking at this now rather than ignoring it because it seems overwhelming. If you don't get a handle on this now, you're going to end up nearly retired and still broke. Does that make you anxious? It should. But just anxious enough to put the time and energy into putting together a plan and following it, not anxious enough to lie awake at night. The plan will help prevent that.
You might not be physicians, but you're basically the equivalent of a single physician with a $200K income and $367K in student loans. That's a higher ratio of loans to income than I recommend (I try to get people to keep it to 1X and you're at almost 2X) but it's still within the realm of doable without anything too extreme, unlike 3-4X, which is really monstrous debt.
The way doctors take care of a debt like that is by living like a resident for 2-5 years (probably closer to 5 years in your case) and directing a massive percentage of your income toward the loans. For example, if you are making $200K, and paying $50K in taxes, and living on $50K (a typical resident salary), that allows you to put $100K toward the loans. In 4 years, the loans are gone and you can redirect part of that $100K that was going toward them toward retirement savings and part of toward a boost in your lifestyle.
You need to stop thinking you're rich. Rich isn't an income, it's a net worth. Just because you make $200K doesn't mean you have money to spend. You don't have money to spend because you are $367K worse than broke. That bum on the corner is richer than you are. You are some of the poorest people in the world, and you need to spend like it at least until you can get back to broke. You're right to “freak out” about that, because it's a lot of money. It's basically the equivalent of two years of your lives that you've already spent but haven't yet earned.
So rather than concentrating on the little tiny stuff like a Betterment investing account and your savings account, you need to head on address the elephant in the room- the student loans – and develop a written plan for tackling that. Once you have that plan, all you have to do is follow it. Don't make it so extreme that you can't follow it, but do make it extreme enough that it is gone within 5 years. Some suggestions:
# 1 Boost Income
Do all you can to boost income. It's a lot easier to pay off $367K when you make $250K than when you make $200K. That might be over time, switching jobs, getting a raise, working at the hospital on weekends etc.
# 2 Get On The Same Page
The two of you need to meet together and get on the same page. You need to be united. Just one of you doing this isn't going to work. You might consider reading Dave Ramsey's Total Money Makeover or attending Financial Peace University or Fire Your Financial Advisor together. If nothing else, start downloading the podcasts from the Dave Ramsey show and listen to them while you drive to and from work for a month or two.
# 3 Can't Go Halfway
# 4 Refinance
Consider refinancing the loan if at all possible. Even knocking 1% off the interest rate is $4K that goes toward principal instead of interest each year. If you're really committed to getting rid of it in 5 years, you can take a 5-year variable loan and maybe knock 2-3% off of the interest, allowing you to put an extra $8-12K a year toward principle. That will make a big difference, but bear in mind you can't feel like you did something just because you refinanced. Refinancing doesn't get rid of any debt. You actually have to throw money at it — a lot of money at it — to get rid of it.
# 5 Downgrade Your Lifestyle
If you have already upgraded your lifestyle too much to be able to put $100K a year toward those loans and some hardcore budgeting can't solve the problem, you may need to sell your cars and drive beaters or even sell your house and find a cheaper rental house for a few years.
# 6 Use Your Cash
Take any cash you have (other than a very small emergency fund) and put it toward the debt. Any assets that you have that you can sell would also help- rental properties, expensive cars, boats, strollers you don't need, whatever. “Sell so much stuff on eBay that the kids think they're next” as Ramsey would say. It doesn't make much sense to hold much cash making 1% or 0.01% while paying 6% on student loans. You already had the emergency, use the emergency fund to pay for it.
# 7 Paying Off Debt Isn't Impulse Spending
“Impulse spending” on your loans isn't spending at all. It's probably exactly what you should be doing. In fact, I might even liquidate the Betterment account and put that toward the loans too. The only saving/investing you should be doing at this point is enough to get the maximum match your employers are offering in the 401(k)s. Everything else should be going toward that debt. Maybe as your debt to income ratio improves you can justify slowing down a little in order to take advantage of the tax breaks available with retirement accounts, but not when you're at nearly 2X already.
You can do this. The entire White Coat Investor community is rooting for you. We hope to see you back here in a few years with a huge success story.
What do you think? What advice would you give to this couple? How can they get some sleep at night, avoid freaking out, and get back to broke as soon as possible? Have you been in a similar situation? Share your story below!
I was starting to worry where you were going with this one until you mentioned the last point (to at least put enough money into your retirement accounts to get the full employer match).
The point at the top (you are more broke than the bum on the street who has a net worth of zero) is really the most important point because so much of the financial aspect of paying down debt is behavioral finance. You have to hate, loath, and abhor your debt. Only then can you really have the passion required to really attack it. All the while, no one around you will understand why you haven’t bought the new house, the new car, or put your kids in private school. This stage of life is not about keeping up with the Joneses.
The corollary to the bum on the corner net worth statement in spending is Jonathan Clement’s thoughts on the spending side. When people have a lot of things (The house, the cars, the private school education, etc) this does not mean that they are wealthy. In fact, it likely means the opposite because all it really means is that they are good at spending money. This, of course, is more likely to make you not wealthy.
Make a good plan: Max out retirement matching, and then throw every extra dollar at your debt. If you are still in training and your debt to income is 1X or greater, then consider seeing if you qualify for PSLF and run the numbers to see if its worth it. If it won’t be worth it, then you need to refinance with one of the private companies. Every percentage point off is going to make a big big difference.
Good post. And good timing. Similar post topics for the day. It can be complicated stuff, but it doesn’t need to be! Make a plan; Stick to it. That’s the most important part.
Fantastic topic and all too common an occurrence. I agree with all of the suggestions. One thing I did was lecture for a couple of drug companies on a topic I was passionate about, psoriasis. I made extra money and lectured like a savage for 3 years putting every extra penny towards my loans. I paid off my loans at 48 years old! You can do better! Dave Ramsey is great. I listen to him daily and while I don’t do all of his suggestions, the 7 baby steps are great! Live like no one else now by sacrificing so you can live like no one else later! Super post and love the comments! Hang in there, having a plan and being angry is the first step to paying those damn loans off!
Agree that Ramsey is good to motivate you and help you get a mindset to abhor debt and attack it. Otherwise, he’s too much for me with his demeanor and inflated investment stuff.
Good idea on talking about psoriasis. As a patient with that and future dermatopathologist, that could be something cool t do down the line. If willing to share, would love your thoughts on how to get involved in such things.
Lecturing for the most part is through drug companies. If you are doing dermpath only, then I am not sure you would get opportunities like this. I did lecture at various conferences and they pay an honoraria, but it’s a lot of work for the small amount of money. I was lecturing for Abbvie (Humira) and would get like 1500-2000 per lecture, so I did 15-20 lectures per year and had those loans paid off. It was a lot of nights away from the family, but I was afraid I would be 60 with loans! Sadly, I did a lot of stupid things like buying a beach condo (I since sold it) and expensive cars, etc. Now, I have scaled it way back and have paid off my loans and home, so no stress financially now that I did that. I also made sure I had:
-disability insurance
-life insurance (term, it’s cheap)
-umbrella policy (5 million, it’s cheap)
-a will
-EPLI insurance (protecte you from staff suing you)
-max out your 401K, pout 15% of income to retirement (once loans paid off)
-all our joint accounts titled “Joint Tenants by The Entirety”
-a monthly budget
-529 for kids school
Dermpath can do very well depending on your contract, so I think if you do a budget and attack debt, you will be in a great place very soon.
Thanks for the insight! I’m actually on Humira, and it’s been one of the best therapies.
I am about to submerge myself in the GI path world, but should be back on the dermpath radar in July 2019. If you’re ever at ASDP, hit me up.
Beware of income based repayment plans (unless you qualify for a PSLF). My wife and I are both veterinarians, make ~175k between us, and have about 360k in student loans. A huge number of our classmates have picked IBR plans, aren’t even touching the interest with monthly payments, and are planning on forgiveness at 25 years with a massive income tax hit.
Live as cheap as possible and seek out any loan forgiveness programs available for PT’s or PA’s.
Consider relocating to an area with a similar cost of living but higher salaries (we increased our income by 40k doing this and the vast majority is going to loans).
Look in your monthly spending for continual drags. We are dropping a whole life insurance policy my in laws “gifted” us for $50/month with a 74k death benefit. We didn’t even need $50/month to get adequate term life coverage for both of us.
Good luck, you got this!
Why would they avoid income based plans? This is a situation where they’re both likely in the private sector and their debt to income ratio is above 1.5.
On PAYE assuming they have 0 credit towards the 20 years of forgiveness, they’d pay about $321,000 over 20 years if they 1) max their 401k and 2) max their HSA and get inflation level increases. That’s highly likely as PAs and PTs don’t get monster raises like a surgeon might.
At the end of the 20 years, they’d have a $559,000 tax bomb to pay. Assuming a 40% tax rate, that’s $223,000, or about $600 a month in Betterment for the next 20 years. They’d need to pay over $3,800 to pay the loans off in 10 years. Or they could pay their student loans on PAYE, the tax bomb savings acct, and still have enough to put max contributions towards retirement.
It’s easy to say “live like the bum on the street corner” but that’s probably not going to happen. Thus, the borrowers will likely pay just enough to feel good about the situation, say 2000 a month. Then they stretch the repayment term over 20 years ANYWAY.
They could go either way with it, but PAYE is much cheaper from a net present value perspective unless your discount rate is Treasury bills.
I know you’re a fan of stretching things out 20-25 years in situations like this. I am not. That is very much a “last resort” plan. The reason is that you are then in debt for 20-25 years. A secondary reason is the tax bomb. I don’t think it’s good advice for people. Not only could the program change (lots of legislative risk in a 20-25 year plan), but the tax bomb reduces the forgiven amount substantially. Plus your plan relies on a certain market return that may or may not materialize in order to come out ahead. You know what your return will be paying down the debt. So you have to risk-adjust the returns for that fact. Plus there is a lot of career risk. Physicians have burnout rates of 30-50%. If you hate your career and are on a 25 year plan, you’re going to have some miserable DECADES in your life. Getting out of debt early in your career provides options that you are likely to value far more 5-10 years from now than you do right now.
When you’re in the 1X DTI range, you can make lots of arguments for investing over debt paydown especially in retirement accounts. When you’re closing in on the 2X range like this couple, the problem is the debt. Fixing the problem requires fixing the debt. The fastest way out of debt is using your greatest wealth building tool- your income, to build wealth. That means creating as large a difference between your income and your spending as possible and putting that money toward building wealth.
My wife and I ALMOST switched both of our sets of loans to this tax bomb approach 2 years ago when our DTI was 3x. Thankfully we didn’t, as I now was accepted for a 75k loan forgiveness, and my wife has a new job that came with a raise.
We are getting match from her employer, I’m maxing out the “employer” side of an individual 401k.
Someone smarter than I am could probably do the math, but I almost see income based as a disincentive to advance and increase your salary. Whereas, when aggressively attacking loans, every raise, dividend (if clinic/business ownership is in the future), and windfall has a purpose.
We will be out of student debt in a minimum of 5-7 years (9-13 total years after graduation) and will suddenly have over >$5,000 per month to invest.
Each person has to make their own decision as to what they’re comfortable with. But there are 2 approaches to paying back debt. One is the 5 year aggressive path that WCI suggests. If you’re going to pay it back, then by all means don’t mess around. The discussions going on about getting better returns w a 1x dti I think are more from a 10 year old bull market given human nature. So we’re in agreement there.
As to the forgiveness, the interest accrues at a simple rate instead of compound on the income driven plans, hence a 6% loan grows at a linear rate. When the debt is forgiven, will a physician assistant and a physical therapist be in the top marginal rate? If not then 40% is a reasonable guess as to what they’d owe in taxes. Is there legislative risk? Sure there is, but student debt has quintupled in the past decade and the debt is only this large to begin with because of federal rules. Paying it back especially when your dti is over 2x and your income growth projections are modest is taking yourself out of the discussion of future political actions that could make forgiveness even more appealing.
Unlike PSLF, 20-25 forgiveness options do not require you to stick with your career, or any job in particular. You could hit your FI number plus the tax bomb and walk away from work early if you so chose.
The question I like to ask is what’s realistic and what puts the person in the best chance for wealth accumulation. If they put a ton of money towards their loans the retirement accounts will remain small. Also, the borrower mentioned they are having trouble making the payments they’d need to in order to drop the principal.
Could they sell their home, sell their cars, drastically cut their spending, and then maintain this path? Perhaps many could, but most will not. Hard to know the right path before speaking with the person to gauge their thoughts on debt and their budget.
Can you imagine carrying student loans throughout your entire working career? That sounds terrible. This case isn’t about a physician, but imagine a physician comes out of training at 35 and goes into IBR hoping for IBR forgiveness after 25 years of payments. That’s 60 years old. No way would I do that or recommend that approach. Too much changes between 35 and 60.
Great, actionable advice. You essentially gave a roadmap, with actionable steps for the couple to follow.
The couple is likely about the age of a typical resident, so “living like a resident” (without the taxing long shifts and exhausting overnights in the hospital) should hardly be a stretch. In fact, I look back fondly at my residency years as among the happiest of my life, so living like a resident does not have to sound like a punishment.
I’d get into the weeds and argue a bit with this piece: “The only saving/investing you should be doing at this point is enough to get the maximum match your employers are offering in the 401(k)s.”
After setting aside a small emergency fund, I would suggest maxing out tax-advantaged HSAs and all the deductible space available in the 401ks before fire-hosing the loans. But I agree with Dr. Dahle that it is not worth piddling around with after-tax brokerages at the moment.
The rule of thumb I was brought up with is to pay off all debt with interest 5% above the prevailing 10 year Treasury rate before maxing out non-matched tax-advantaged retirement account space. That Treasury rate is now about 2.85%, meaning the breakpoint is loans charging interest of 7.85% or more. Most student loans are already below this rate (say around 6%), and it should be possible to refinance into a variable rate that is even lower. So the rule of thumb dictates maxing out tax advantaged space first. At $200,000+ of yearly income, the tax savings will be non-trivial.
Student loans will follow you through bankruptcy, and 401k accounts are also usually well-protected in bankruptcy, so it’s mostly a wash in terms of asset protection. However, student loan discharges can be had in you become permanently disabled, in which case you’d be happier having extra in a 401k if that were to take place. So, beyond expected long-term return, that’s another reason I lean a bit more towards 401k contributions.
But I wholly agree that the big thing is behavioral: Have an appropriately aggressive plan to help you sleep at night, adjust your lifestyle so that you can throw at least $100,000 per year at improving your net worth (401k contributions + student loan paydown), look for ways to boost income and lower interest costs, even by $5,000 or $10,000 here and there, and grind it out for 4-5 years. Things will look a lot brighter on the other side.
As noted in my reply to Tabaxus (below I believe) I don’t have a problem with someone prioritizing 401(k) or Roth IRA contributions above paying down their student loans, as long as they’re paying enough toward the loans to be out of debt in 5 years. When you’re getting up to a 2X DTI, you often can’t do that. And you certainly can’t do it at 3-4X. You have to choose between getting out in 5 years or investing more into retirement accounts. I think you should choose the first. You’re free to choose the second if you like, it’s your money. But having talked to many, many people in this situation, I can tell you that the successful chose the first. The really successful people did both by cutting their lifestyle to the bone.
I won’t argue too strongly with experience, but I do wonder the extent to which a propensity to cut debt like a maniac correlates with a propensity to live like a resident and really get the income/spending balance as strong as possible, and it is the latter factor which really drives success among those people who exhibit signs of cutting debt like a maniac.
Put another way: All things being equal on the income spending side, the best course of action from an expected investments/net worth perspective is to max out the 401k before paying down student debt at 6% interest or less, rather than the other way around. At least that’s what all the long-term calculators and investment models tell me. But things are never equal on the income spending side, so the patients (doctors) with better outcomes are actually — consistently — those who pay down debt as a higher priority.
There is still a moderately interesting question of causality here: Does sticking to a plan that calls for faster debt paydown get you into the right mental framework and instill the right habits to get help the subject get the income/spending side right? Or does an already-existing mental attitude that positively chafes at debt also predispose someone to living like a resident? Put another way: does advising someone first to pay down debt serve as a useful behavioral intervention that will also push the person to achieve more success on the income/spending side than he might have otherwise achieved? Or will the subject’s underlying spending habits assert themselves anyway, meaning that this intervention will not lead to gains on the income/spending side, and might lead to a slightly lower outcome on the investments/net worth side?
I’ll out myself here as a “preponderantly nature” guy, on the nature-vs-nurture debates, which in part informs my quibble with your investment order.
Still not sure how we’d double-blind this thing, though.
Absolutely you are right about the income/spending balance mattering more than where the money is actually going. It’s not so much a mathematical thing as a behavioral one. Ideally, one maxes out retirement accounts AND pays off student loans in < 5 years by living like a resident. But if you have to choose, I'd choose being out of student loan debt in less than 5 years, especially given that we're basically 9 years into a bull market here. The best way to motivate people to get that balance right? Not sure. Still working on that. I'll let you know when I have figured it out.
Absolutely agree with every single suggestion made on this post. I recently paid off masssive student debt ~340k in 1.5 yrs out of residency. Can’t stress enough the importance of living like a resident and avoiding lifestyle inflation right out of residency until debt is paid off. While being single and choosing to live in a very LCOL area played a huge role, I also abhorred being in debt and spent half of my annual vacation wks working to maximize my income. Frankly it wasn’t easy but overall one of the most gratifying things I have done for my mental health. Of course, listening to Dave Ramsey rant was definitely uplifting especially on days I felt like crap or wasn’t moving the needle much.
Way to go! I look forward to that day when the hard work pays off and the debt is gone. You did it!! Awesome
Agree with everything except the apparent recommendation to forego tax-advantaged space. That’s mathematically the wrong move, particularly assuming you refinance the loans. I failed to max all tax advantages space while paying off my loans and deeply regret it.
One thing I did do was maxed my 401(k) and then took a401(k) loan to pay the debt. That way I didn’t lose the space, got the deduction, paid interest to myself, and still reduced the loan principal. Was worth the small fee. In hindsight my timing on this was awful—the money would have grown much faster in the market—but the same was true of all of my loan payoff (I repaid ~$200k from 2012-end of 2014).
At some debt to income ratio, that’s the right move. The only argument to have is what that ratio is. Sure you don’t think you should contribute to retirement accounts at a 10X debt to income ratio with 6.8% student loans do you? Of course not. At around 4X, the debt basically eats your entire income. At 1X, I think that’s probably fine to max out retirement accounts first. At nearly 2X, I don’t think so. I think you’ve got to get your cash flow better and the only way to do that is to focus on the debt.
With only $200K paid off in 2 years, I’ll bet your DTI was way better than that of these folks.
Agree with this also. When I graduated residency I was roughly 1X dti and even that felt heavy. I cant imagine what 2x would feel like so I totally agree with focusing 100% on debt except for contributing enough to get the full employer match.
Getting the dti down changes everything. Now that I’m down to around 0.25x, my remaining low interest debt doesnt worry me much. I’m fully maxing all tax advantaged space while getting rid of the rest. The only thing I’m not doing yet is contributing to a taxable which I think should come only after all student loans are gone.
“Sure you don’t think you should contribute to retirement accounts at a 10X debt to income ratio with 6.8% student loans do you?”
I’m going to disagree with you on that one, Dr. Dahle. Someone in that situation should max out retirement accounts ahead of non-mandatory loan payments, all else being equal on the income/spending side.
The math and investment models have your long term net worth coming out ahead if you max out your 401k before chipping away at that monster debt, though at 6.8% interest the difference is not big. And that’s before throwing in curve balls like loan forgiveness programs and the like, which make the comparison unfair.
The behavioral aspects, of course, are another story — all else might not be equal on the income/spending side depending on one’s views regarding debt and investment, and that may be a big part of the story here.
I don’t think you’ve actually run the numbers here. I made the example non-sensical so my point would be obvious. Let me try again.
If you have an income of $200K and you owe $2 Million at 6.8%, what % of your gross income is going toward the debt? On the 10 year standard plan, your payments on a 6.8%, $2M loan are:
=PMT(6.8%,10,-2000000,0) = $282,128
or approximately 140% of your gross income. Obviously, you can’t make those payments. And this is a 10 year plan.
So let’s go from non-sensical to extreme, a 4X DTI. So $200K of income and $800K of loans.
=PMT(6.8%,10,-800000,0) = $112,851, or approximately 56% of gross income.
If we assume this doc is living like a resident ($50K) and paying 20% of gross toward taxes ($40K), she is still spending MORE than 100% of her disposable income on student loan payments. On a 10 year plan.
Okay, let’s go down to something more like this couple is experiencing. 2X DTI, but on a 5 year plan like I recommend.
=PMT(6.8%,5,-400000,0) = $97,034, or about 49% of gross income and about 88% of disposable income of living like a resident.
Now you’re advocating they max out retirement accounts instead of paying off this debt. What does that look like? Well, let’s assume they do Backdoor Roth IRAs and just regular old employee 401(k)s, so $5500 x 2 + $18,500 x 2 = $48K. It knocks a little money off the tax bill, so perhaps it only costs them $37K to max those out. Where does that $37k come from? It comes from the $97K that was going toward the student loans in order to pay them off in 5 years. It can’t come from the taxes. It is unlikely they’ll live on much less than $50K. So it has to come from the student loan payments. So now you’re only putting $60K toward the student loans. How long will it take to pay them off at $60K a year? A little over 9 years.
So their choice is to either drag out their loans for 4 extra years or invest less.
Try repeating the example for 4X and 10X and see what you get? I’ll give you a hint. At 4X, prioritizing retirement accounts over paying off debt causes you to drag the loans out for an extra 32 years. At a certain point, you simply CANNOT invest AND pay off the loans in any reasonable period of time.
“At a certain point, you simply CANNOT invest AND pay off the loans in any reasonable period of time.”
Yes, but not strictly relevant. Loan balance of zero by a certain arbitrary date is not how I’m measuring success here. On the expected investment returns/net worth front, you’d expect to have a higher net worth (much higher assets, partially offset by higher liabilities) at the end of 30 years by maxing out the 401k from the get-go and investing long term, instead of paying off a ~6% interest loan faster before ramping up investments. And “higher net worth by age 60” is far from an unreasonable yardstick to use!
But I think we’re verging on angels dancing on the head of a pin here.
I’m arguing that being out of debt by some “certain arbitrary date” has value, and the value is far higher than most think at the time they leave residency. If you look at the 30 year horizon, you have to make a few assumptions, one of which is that you’ll actually like your job for that long, that you’ll keep earning what you earn for that long, that market returns are similar to what they are in the past etc.
If you’re looking for the highest expected return, maximize your leverage throughout your entire life. Why stop at age 60?
https://www.whitecoatinvestor.com/the-value-of-debt-in-retirement-a-review/
“If you’re looking for the highest expected return, maximize your leverage throughout your entire life. Why stop at age 60?”
Because maturity transformation is a job best left to the banks. Once you have “enough” and are living off of assets instead of a steady paycheck, you are far better off — both in terms of sequence of returns risk as well as psychologically — minimizing your fixed unavoidable recurring cash outflows.
Both of us know that, and I cite you regularly as an example of a public figure who has personally attested to the joys of not having fixed payments!
Agreed — it is far better off to be financially free well before age 60, especially if you come to dislike your job. But anyone who has run up student debt of 4x annual income — and I mean 4x a generous annual income which will be hard to increase by a huge amount — is kind of stuck in indentured servitude for the long haul anyway.
If your idea of “retirement” is to be a professional real estate investor, actively managing a portfolio of investment properties which you bought on leverage — fine, you can do well for yourself, and holding debt past age 60 makes sense. But that’s not a path for most or even many. Which is the point you make in your post to which you link!
Right. Now you know why I recommend you live like a resident, pay off your loans less than 5 years out of training, and invest the rest.
My DTI was about 1.3x, compared to their 1.835x; I don’t think that’s a big enough difference to justify permanently losing the retirement space, personally, especially given their tax bracket. To each their own, though; I understand the behavioral aspect of it.
At what ratio would you think it was a big enough difference? I mean, there’s room for reasonable people to disagree on this point.
I’m more aggressive than you are here–I would say that as long a person’s cash flow supports it, they’re always better off maxing the tax-advantaged space, even if that means the loans take longer to pay off. So I’m not sure that I have a threshold within the framework you’re laying out here.
The huge caveat to this, though, is comfort level re job security: nightmare scenario is that you defer repayment of loans in order to fund retirement accounts, and then lose your job and can’t service the loans. I lump that into “cash flow supporting it,” though. This is of course very industry-specific on how long someone feels “safe.”
I readily admit this ignores the behavioral aspect of things though and I think you have the better part of that aspect of the argument. I don’t have too much sympathy for the behavioral stuff, but I fully acknowledge it’s important to a lot of people. I can definitely see your point that once you get to 2x DTI, and especially 3x or 4x, that becomes such an emotionally burdensome thing to bear.
I will also admit that I don’t apply this PoV consistently, because I don’t invest on margin and I have made more than necessary principal payments on my mortgage (I had access to a 10% down no PMI mortgage; I still put 20% down and did a significant extra principal payment at the beginning of 2017–whoops).
Don’t want to lose the forest for the trees though. If everyone followed the advice you’ve laid out here, people would be a lot better off. Retirement accounts vs. paying off loans more quickly is kind of nibbling around the edges. The big picture? Use that shovel and live like the broke person you are until you’re not actually broke anymore.
Exactly. You and I can afford to sit back with a cold drink and debate the theoretical merits of debt vs investing now that we’re wealthy and out of debt. That’s not what someone with a negative net worth should be doing. And encouraging them to do so is probably not doing them a service. It is more likely to paralyze them so they do nothing, which makes them even worse off.
Cheers to that (though, alas, I’m more in the “no longer broke” category, rather than the wealthy category, but I’m working on it)!
I can’t for the life of me figure out why your comments are being held for moderation by the software.
At any rate, congrats on getting back to broke. That’s actually a pretty significant achievement for most docs and should be celebrated.
Sure, it might be okay to push the DTI where you prioritize retirement accounts over debt pay off out to 2 or 2.5X, especially if you refinance to a lower rate or if you can live on even less than a resident. Reasonable people can disagree.
But at 3-4X it isn’t even the emotions that are a big deal. It’s the friggin’ math. Can you imagine living like a resident for 10-15 years after training? I can’t. I was pretty much FI at 11. The likelihood of someone being FI at 11 while still having student loans seems awfully low to me. I don’t even want a mortgage at 11 years, much less student loans.
At 1X you have a strong argument. At 4X you have no argument at all.
Good advice in Jim’s article and comments thus far. Bigger shovel and faster shovelling will knock that debt out in a handful of years. Plus as the principle gets smaller, the snowfall tapers off and the shovelling feels easier.
I’ll add that many people including myself have used those action items to succeed, it’s not just theory.
Agree, moonlighting shifts can be a huge help. Many PAs can get $100/hr or more for a weekend/holiday or overnight shift that no one else wants to do.
Physicians tell me that it’s hard to figure out their best repayment plan option. It’s time consuming and anxiety producing.
My suggestion: take advantage of the free advice offered by WCI’s Recommended Student Loan Advisors https://www.whitecoatinvestor.com/student-loan-advice/.
Navigate offers a free initial consult. I bet the others do, too.
The plan is important. Even more important, is the motivation to follow the plan. I’m continually amazed to meet readers who pay massive student loans off in 1 year, 18 months, 2 years, 3 years etc. This is completely doable. There are several who have posted in this thread who have done it.
I recommend people get serious about their debt. Learn to hate it. Develop a plan to get rid of it within a few years after training. For a physician, ~5 years after residency should be all it takes. 7 at most if going for PSLF (and only doing a 3 year residency). Refinancing helps. Government programs can help. But most it takes a lot of hard work and discipline, just like med school and residency.
I think part of the key here, from a behavioral perspective, is to set some goals each year to give yourself a sense of progress. I have 9 separate loans from 4 years of medical school (unsubsidized + subsidized for each year of med school, plus 1 private loan; my rates were low enough that it didn’t make sense to refinance) and it worked best for me to snowball the small loans (read about this in Dave Ramsey) one at a time. It gave me a sense of progress and I’m certain that it led to me paying more payments faster. If you don’t have this situation, consider setting some numerical goals (getting to $350k, then $300k, then $250k, etc) and pairing them up with some sort of affordable reward for you and your husband, like a weekend vacation somewhere within driving distance. It seems like actually have plenty of money to pay these loans if you live affordably, but that it’s the sense of no progress that is the impediment. I agree with those who say they would make use of some tax-protected space to save for retirement. I would not do Betterment and would shuttle all that money into loans. Also consider getting a job at an urgent care a few weekends a month and putting all that money into loans. Good luck–this sounds daunting but manageable.
I agree- goals are good and seeing yourself making progress is good. I had separate loans for each 1/2 year of med school- 8 total. Turns out I could choose to direct my payments however I wanted, so I would throw a ton of money each month at 1 of them (with the minimum on the rest) and every time I paid one off it really felt like I had paid off another 6 months of med school. I also kept a spreadsheet of how long I would be making payments if I paid the minimum- it was great to see my payoff date get closer and closer as I made excess payments.
Absolutely right Lizob. I did the same thing with a spreadsheet. I looked at the progress I was making constantly and really looked forward to pay day so I could get on there and update the spreadsheet. Everytime it got smaller I got happier. It really kept me going.
I did almost exactly this. Before this I was throwing random extra amounts of money at all the payments, and my payoff went into overdrive once I started paying off one by one. Dave Ramsey gets it right with the big emphasis on the behavioral aspects of personal finance. I also used Mint.com and put every extra dollar that I earned for the month towards the debt, rather than picking a set amount. Mint also motivated me to do things like switch grocery stores as I could quickly see the difference in my spending.
Excellent response to the original email WCI! This is exactly what all professionals who graduate with large loans need to hear. I didnt hear this message until probably 4 or 5 years out of residency and once it sank in it changed my life for good. I will be linking to this post every time I come across someone feeling this way about their large loans.
My wife and I felt pretty similar to this couple when we looked at our finances 5 years ago. We followed some advice from this website and I read a few books. I made a spreadsheet that lumped all our loans into 1 amount with the overall average interest rate. I did the amortization table and crossed off each month as it happened. That way I knew where we were and how far we had come. I also had a lot of smaller loans and paid them off initially- always nice to get rid of payments and feel the accomplishment of paying one off. Overall, we paid off 525k+ in just under 4.5 years. We increased our retirement contributions annually to eventually max them out. We are now debt free, except the mortgage, and it is extremely liberating.
I have to say that doing the budget, putting everything on autopilot with automatic transfers and deposits is key to being successful. We paid off the loans, have put away a very reasonable amount for 3 young children in 529’s and also have a respectable retirement portfolio. In such a short amount of time to go from a significantly negative net worth to where we are now is pretty impressive when I look at the numbers. Thanks to this website and adjusting a few of our behaviors we were able to see things a little more clearly. So there is a light at the end of the tunnel, just make a plan and stick to it. Definitely reward yourself along the way- just keep it reasonable. Don’t try to keep up with the other high income professionals as it will not provide any lasting gratification.
Boom!
It works people. It really does. Don’t get paralyzed trying to decide how much to put toward debt and how much to invest. Just set up a plan to get rid of the loans soon (2-5 years), keep your lifestyle down, and invest the rest. This isn’t complicated. Simple, but not easy.
Awesome job!
Mind sharing what your income was like those 4.5 years?
Combined 2 doc income was approx. 400k the first year and incrementally went up to over 500k. We took several vacations per year- spent money on experiences with family. No new cars, current vehicles have been paid for the entire time. All vacations, home improvements, gifts to family, etc. has been paid for in cash since we changed our outlook.Obviously a common theme was no new debt for any reason. We are lucky to have a very good income but I think we have done a good job of not squandering it. We watch several others around us buy fancy cars and bigger houses but we’ve done our best to keep it in check.
Excellent work!
It certainly helps to have a high income like you have enjoyed, but plenty others would have grown into that income much more quickly and been happy to pay interest on their loans.
You guys have it figured out. Bravo!
-DoD
No shame in winning on both sides of the ball.
Way to go! It’s great to hear the success stories.
I am completely in agreement that these are the people who should be listening to Dave Ramsey.
His podcasts give you a constant and entertaining drumbeat that “debt is bad, debt is bad, debt is bad.” While there are all kinds of problems with his message, if you can stomach the delivery I think it would help a couple like this stay on course.
I think he’s full of hot air but he has definitely made me much less comfortable with debt. I probably would have financed my recent vehicle purchase (toy, not needed) if I didn’t listen to him.
Agree 100%. I really don’t even feel like I learn much from him anymore… Ever. But I definitely stay motivated when listening to him regularly.
re: All those arguments above about paying off debt vs. filling up tax-advantaged space.
Personally, I’d feel chronically ill every single day carrying that amount of non-secured, personal debt for decades on end. No amount of spreadsheet wizardry would change that feeling for me. My breaking point was planning a 3 year debt payoff with increasing unhappiness as it drifted towards 4 years before getting seriously motivated to deal with it and pay everything off.
Some of Dave Ramsey’s advice has problem, but the stress that comes with a heavy debt load is real.
I have great empathy for this couple, as I am in a very similar situation. So I agree completely with WCI on this: you’re not alone.
I’m halfway through my Orthopedic Surgery residency. I refinanced my intern year (huge thanks to WCI for teaching me about DRB at the time). I had $400k of loans with interest rates varying from 7% to 11%, and at least $100k were private loans from undergrad, not eligible for PSLF. Took the plunge, and now I’m saving about $8-10k a year in interest, and paying $100/month to the loan. It doesn’t even put a dent in the interest, and it will have accrued to nearly $600k (I get angina just thinking about that haha) by the time I finish fellowship. But the small payments in residency have allowed me to contribute to my 403b up to the employer match max, as well as max out a roth IRA each year. It’s not much, but it’s about the best I can do at this point in the middle of a grueling residency.
My plan is to pay off my loans within 5 years of attending-hood, and try like stink to get to $1 million net worth by 40. It might not be possible, but I have a plan at least, and the WCI community on my side. Stick with it guys! I’m excited to read about your success story on this blog in a few years!
As someone who could barely stand owing a mortgage- I feel for the writer! I only had a 50K loan when I graduated but that was 25 years ago. I would work practically all day and spent the evenings doing in house calls. And please heed the advice to live like a student until you pay it all off. It will develop good financial habits and that alone will be priceless. Do not get used to carrying debt for long. It is NOT a good habit to have.
Just want to say. You can do this. I loved the comment to start listening to Dave Ramsey on your commutes. It will help you get a midset with constant exposure.
Live like a resident and GIVE EVERY DOLLAR A JOB. Forecast your plan of attack and execute. I actually put all our debts on a piece of paper with a clipart of a stick figure carrying a heavy load labeled “debt” and I wrote on the paper the prediction for each debt being paid off. I hit most of the goals a few months early.
I had quite a bit of debt with the student loans and business loan and I also was able to expand my income over the years. It took 7 years, but we tackled it – how do you eat an elephant? One bite at a time. Now bust out Excel and make a plan! Report back in a year in the forums!
So my scenario is similar whereas, i’ve had a late start in life. I’ll be 44 this year and a dentist that’s been out about a year and a half. I work as an associate, so i don’t make as much as someone who owns their own practice. I’ve refinanced my student loans to 3.85% with 207k left (was initially 230k) and my income is about $125k/y. My wife and I have Vanguard Target date 2040 IRAs with a total of 87k (49k and 38k). We’re also renting a townhouse. We have no consumer debt. Driving 4 year old cars, almost paid off – Toyota Camry and Sienna. Two kids in private grade school, public schools in our area aren’t that great.
I just, recently, purchased a start up practice with a partner for 175k (each) but have not been taking any income from it, maybe not for another 6 months to a year, to build up some practice funds. The practice is paying for itself. So DTI ratio is about 1.6x.
So with retirement age in the next 20 years, what should we be doing? I’ve read some financial books including WCI and a host of internet sites Dave Ramsey, POF, I was thinking:
Continue funding my IRA and spousal IRA: 11k
Open up an ind 401K and contribute as much as possible (55k max for 2018) – doubt i can contribute max
Pay student loans (i’m currently on the 10 year plan and ave about $2500 or so a month, at one point was paying bare minimum until i refinanced).
I know my salary will increase within the next 5 years and I do plan on working full time (5 days a week) until 62 where i plan on working 3 days a week and enjoy life. I don’t think we can be multimillionaires in the time left. We live below our means as much as we can and want just want to be comfortable for retirement.
So should we be trying to pay off the student loan faster or put more towards retirement? I’m thinking retirement, but i could be wrong.
If I read your comment right that you are a partner-owner in a dental practice, I’m assuming you have full-time employees. That would disqualify you from an individual 401(k), unfortunately. That also disqualifies you from a SEP. Could you open a 401(k) plan for the office?
I’ll be interested to see what WCI thinks you should do moving forward.
-DoD
I can’t quite tell what is going on. As an associate, you’re an employee. So you’re dependent on your employer to provide a retirement plan. If they don’t provide one and you don’t have one elsewhere, you can deduct a traditional IRA contribution. But I’d probably make a Roth IRA contribution and a spousal Roth IRA contribution if I were you instead. Not sure if your spouse is working, but that may be another option for retirement accounts and may affect deductibility/Roth contributions.
Since you have no earned income from the side business (right?) then you can’t use any money there to contribute to a retirement account. That may not be the case if it isn’t a C corp since it sounds like you may be earning income and then plowing it back into the business if it is a partnership or S corp for tax purposes. If you want a retirement plan there, you’ll need to get a study of the plan- partners and employees, to figure out which one is best. If you don’t want a retirement plan there, you can invest in taxable.
You also need a plan for your debt. And in fact, paying that off could potentially be a good investment for you. Probably won’t be rid of it until your income goes up from the new practice. Then hopefully you can smash it out quickly before finally upgrading your lifestyle a bit.
As far as your question, there’s likely no right/wrong answer. The key is how much of your income is going toward building wealth (paying debt/investing) not the exact thing that you do with that money. Both build wealth. Don’t let choosing between them paralyze you. Split the difference if you’re not sure.
If I read your comment right that you are a partner-owner in a dental practice, I’m assuming you have full-time employees. That would disqualify you from an individual 401(k), unfortunately. That also disqualifies you from a SEP. Could you open a 401(k) plan for the office?
I’ll be interested to see what WCI thinks you should do moving forward.
-DoD
Thank you, DoD and WCI for your input. I work as a 1099 independent contractor at the other office with no benefits. We made an S Corp for the new practice.
I think i just have to keep chugging along and continue paying off debt and putting money away to the best of my ability. Maybe in 5 years i can give a more positive update and success story.
You’re 1099? Then you can open an individual 401(k).
As outrageous as it seems, this IS the current financial predicament for many professionals these days.
My wife and I are both dentists trying to tackle a “monster debt” in the tune of $524K at an average rate of 7.153%. We live in California (which we understand puts us at a disadvantage), but we have otherwise taken the appropriate steps to making meaningful strides towards paying off our debt. We each work 5-6 days a week, we have a firm budget, we make no unnecessary purchases and we have explored refinancing. The loan debt is a burden every. single. day.
When WCI mentions, “That bum on the corner is richer than you are.” I literally thought that today on my drive to Costco for lunch (true story). But my biggest take away from this post is that there are many, many, many people in the same financial ditch. We’re not alone. We’ve recognized what we need to do. Now all that’s left is to keep on keepin’ on.
I agree that the debt first seems best, from motivational point of view.
My wife and I were stuck in this debate for a while, since we had DTI of ~1.4 (including second job) and I am sole earner – academic/primary care – so beyond matching contributions, there was a substantial impact of maxing retirement contributions in terms of time to payoff debt…made a difference of about 2 years longer paying on debt.
We ultimately came down on the side of “guaranteed return”…I felt like I would lose my mind if we made the long-term mathematically “better” choice to tax defer, and then “lost” invested money, and was stuck in debt longer. Plus when we have (hopefully) reached our retirement goals in 15 years, it will really not be a huge difference…something like 80k over that time better off – with theoretical returns, et cet. which won’t impact our long term goals at all.
We are only coming up on 2 years out, so admittedly small experience, but I think that having a specific time-frame attached to our monthly and annual debt and other goals…as per IPS…has really helped a lot…especially when we get some unexpected money or I pick up more extra work…my first thought is to spend it…but then I look at the goal statements, and current debt load, and that has helped keep me on track…
I feel pretty strongly that if we were doing more of our money to tax deferral, and were not very strongly focused on debt payment, that I would have lost momentum.
only 2 (hopefully less) years left to go –
This site/book has been really a life-changer for our family.
Glad it has been helpful. I agree a “goal date” is a really good idea with debt.
Hi all, in terms of PSLF, I was under the impression that 2017 was the first year those who were eligible may have gotten some of their loans forgiven. Is there any anectodal experience that has shown a loan forgiven? Thanks!
Yes. People are getting PSLF.
One’s experience with this would make for an excellent guest post!
Sorry, meant to reply only to PSLF response
As soon as I can get one willing to write one, you’ll see it. Big Law Investor found one (the same one who announced it on Reddit.) But that’s the only person I know of willing to go even anonymously public about it.