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I received this question by email a few months back. I sent a very nice reply, some of which is included in the “answer” to this question. However, the more I got to thinking about this, the more I thought it was worthy of addressing as a blog post, because I want what I see to be obvious to any one whose situation is even remotely similar to that of this doc.
I am at a point where I feel I should commit to either starting to pay down my student loans or going the direction of IBR and planning for forgiveness in 23 years (I have been on it for 2 yrs already). For the last two years I have been paying my dues and making peanuts so I have been on IBR. I have recently bought into my practice with my partners and now am starting to see a bump in my income. I am now at a point where I have the money to put towards my loans OR to put towards investing and retirement. I am married with 5 kids and have $510,000 of student loans at an average of 6.8% interest (interest during school is what killed me- 140k accumulated in interest). I am fairly confident that I should make 325-350 this year after paying my practice loan.
I budgeted $4000/month for student loans. IBR sounds too good to be true and having to only pay $2000-2500/month on IBR would leave me $2000 to invest each month. If I pay 4000 a month to my loans I should be able to pay them off in about 19 years and then can direct the money to retirement. If I commit to pay them off I can work with SoFi and other places to get the interest down but if I go the route of IBR then I want to keep the loans with the government.
Do you have any words of wisdom that could help me with my decision? What would you do if you were in my shoes?
The question is a very reasonable one that many docs struggle with. It’s the classic “Go for forgiveness vs refinance and pay off” student loan question. When the forgiveness is via the PSLF program (10 years of payments, tax-free forgiveness, 501(c)3 employers only), and you’ve already made 36-84 (out of 120) qualifying payments during your training, the math will show that it is pretty much a no-brainer to go for forgiveness, which at that point is only 3-7 years away. As a general rule, if you are not going for forgiveness, you should refinance, live like a resident, and pay off the loans ASAP.
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In the event that you have a very large loan burden, especially when combined with a very low income, going for PAYE forgiveness (20 years of payments, fully taxable forgiveness, any employer) may be reasonable. However, there are two issues here that makes this a less attractive option for this doc:
- He isn’t enrolled in PAYE. For some bizarre reason he’s enrolled in IBR. IBR not only requires you to make larger payments, but it also requires 25 years of payments instead of just 20. I can’t think of a reason to be enrolled in IBR when PAYE is available.
- He wasn’t even enrolled in IBR during his training. (2 years out of training and he has only been making IBR payments for 2 years.) The real bang for your buck in the forgiveness programs is getting the amount you “should have paid” (had you been on a full repayment plan while in training) but didn’t because of the lower payments, forgiven. A doc with 5 kids would have made 3-7 years of $0 payments, all of which counted had he enrolled earlier. That’s water under the bridge now, but it cost this doc tens of thousands (maybe hundreds) of dollars. [Update prior to publication, he wasn’t able to enroll in IBR during training as an orthodontist as he was still considered a student.]
The Main Issue
So at this point the doc can look at his options. He can enroll in PAYE, make 18 more years of payments, and get the rest forgiven (I’d have to use a calculator to see how much would be left to be forgiven, probably not much) or he can refinance and pay them off. But that’s all ignoring what I see as the main issue-
WAY TOO MUCH COMFORT WITH DEBT!
Let’s look at the evidence.
Exhibit A: $510K in student loan debt
Don’t get me wrong, raising kids is expensive, especially 5 of them. But this is the classic situation of lots of kids, a stay at home partner, many years in the medical pipeline, and all of it paid with debt. By the time you get to the end of it, you have an expensive mortgage and no house to go with it. What no one tells medical and dental students is that everything you’re buying using those handy student loans really costs three times as much as you think it does. Choosing the cheapest school you can get into in the lowest cost of living area possible, delaying family a few years, living more frugally, not taking out the loans until you absolutely need them (rather than at the beginning of the year,) having a working spouse, getting a side job can all assist in keeping the total loan burden low.
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Exhibit B: Not enrolled in PAYE
If I owed a half million bucks in student loans, I’d be the world’s foremost expert in student loan programs. I would probably be working at a 501(c)3, but I would certainly know the difference between IBR and PAYE (and would have enrolled in PAYE the first month possible during intern year.)
Exhibit C: Debating between $2000 and $4000 per month payments
The interest alone on that debt is $35,000 per year, or nearly $3000 per month. Yet this doc is debating between making $2000 per month payments (which don’t even cover the interest) and $4000 per month payments (which barely does.) The discussion shouldn’t be $2K or $4K, it should be $12K or $15K. There is simply no sense of urgency here. No concept that his debt is an emergency. As Mr. Money Mustache correctly points out,
Your debt is not something you work on. It is a huge flaming emergency!
Nowadays I receive emails from people who are working on developing their own Money Mustaches. They often detail income, spending, and debt situations. Often, there is a category for credit card debt. Yet these budget sketches also include amounts for entertainment, cable TV, and multiple cars….
Do you see the glaring problems in these stories? If not, you have not yet developed the appropriate hatred for unnecessary debt. So let me spell it out for you.
The correct response to this sort of debt is, “AAAAAUUUUUUGGGHHHH!!!! THERE IS A CLOUD OF KILLER BEES COVERING EVERY SQUARE INCH OF MY BODY AND STINGING ME CONSTANTLY!!!! I NEED TO STOP IT BEFORE I AM KILLED!!!”
If you borrow even one dollar for anything other than your primary house or a profitable investment, the very next dollar you can get your hands on should go to paying that back. You don’t space it out all nice and casual with “monthly payments”, and you don’t have a “budget”, “entertainment allowance”, or any other such nonsense. You don’t start a family or get yourself a dog, and you don’t go out for drinks and dinner with your friends. There will be plenty of time for these things later….
I mean, consider this situation. The doc makes $350K. How much can a family of 7 reasonably live on? Well, there are millions of these families in America living just fine on $50K a year. But you’re a doc, and you’ve deferred gratification for a long time. So let’s be super generous, and give you an extra 50% raise after residency! Now you’re up to $75K a year. Subtract out 25% for taxes (no Tax Nazi comments please, I know some of you pay more than 25% in taxes because you are a single employee in California at some job with a lousy retirement plan) and $75K for living expenses, and that leaves this family $187,500 with which to build wealth. The only question he should be struggling with is how much of that $187,500 should be going toward paying off the debt and how much should be going into retirement accounts. I think $37,500 into retirement accounts and $150K toward debt is about right, but reasonable people could have a different opinion. The question he should NOT be struggling with is whether to pay $24K or $48K a year toward the debt.
My daughter Whitney rappelling off a climb at Red Rock- She says $500K in debt is “Crazy! Did he go to Harvard or something?” No, just dental school.
What I Would Do
My advice to this doc was to do the following:
- Set a date to be out of debt, a maximum of 5 years from today. Eventually that day will come, but if you never set the goal, you’ll never reach it.
- Boost income in any way possible. Now, I work 15 shifts a month and have a profitable website on the side. But if I owed a half million in student loans? I’d be working 20 shifts a month and you would be getting emails from me every week trying to sell you something so I could boost my income. My wife wouldn’t be spending all her time volunteering- she’d have a paid job. I wouldn’t need a new mountain bike because I wouldn’t have time to ride the old one. An extra $50K in net income goes straight toward the principle and gets you out of debt that much sooner.
- Cut expenses like crazy. It’s not like this doc has a small shovel with which to fill in this hole. That’s a heck of a good income. We lived on much less than $350K last year and that figure included a lot of unnecessary spending. If I had a half million dollar debt emergency there wouldn’t be any vacations (other than driving to stay with family.) There would be no new mountain bike, table, boat etc. Gazelle intensity is a Dave Ramseyism that illustrates the power of focus. Until getting rid of that debt is the most important thing (at least financially) in your life, it isn’t going to go away. It might involve selling stuff you really like. It might involve moving into a smaller house. It might involve selling that Suburban and buying one ten years older with cash. It might turn date night into a trip to the dollar movie rather than the symphony with your partners. But look at the alternative (23 years of $500K hanging over your heard) How is that better?
- Start saving for retirement. I think it’s insane to put off saving for retirement for 23 years. Heck, I want to BE retired (or certainly eligible to do so-i.e.financially independent) in less than 23 years.
- Refinance the loans, and I’d do it into a variable rate. 18-23 years is obviously a long time to run interest rate risk, but 5 years isn’t. The difference between 3% loans and 7% loans on $500K is $20K a year that can go toward principle.
I’m not writing any of this to be critical of this doc, his family, his past choices, or his financial knowledge. His debt isn’t even my record for student loan debt for a single doc family. Only he and I know who he actually is. I just want to help. But most importantly, I want to help the tens of thousands of docs out there who are heading down this same pathway to avoid getting to this same place.
What do you think? What would you do if you had $510K in student loan debt? Would you stretch it out for 18-23 years to try to get some taxable forgiveness? Or would you follow my advice? Comment below!
I graduated 2 years ago, 2 years in IBR. Owe 450k. I thought I could go 25 years and seek IBR forgiveness but I have switched gears completely and now plan to pay it all of by the end of 2016. It feels so much more liberating to plan to be debt free asap instead of having a financial guillotine hanging over my head for half of the rest of my life. It certainly helped that I have multiplied my income by several times recently, it would not have been an option without that. But still. Once the debt is paid, all the money I make is just cash flow. I can only imagine what that kind of freedom that entails. I’ll certainly max out tax shelters and I have to pay taxes… but there’s a lot of fun to be had from the ~200k or so I will have “left over”
With a 6.8% interest rate, I think that this person definitely meets the threshold to live frugally and throw as much money at his debt as possible. However, what if you had a 3.5% fixed interest rate on your student loans? or 4%? or 5%? I would think that would change things, right? What is a reasonable “rule of thumb”? I would think that anything close to 3% is reasonable to “pay off over the long term” bracket and everything close to 7% lands squarely in the “pay me off now” bracket. What do you guys think?
-moredebtthansmallcountries
Even low interest debt should probably be payed down more aggressively than the minimum payment. When I think of ‘low interest debt’ (that 2-4 percent range) I find that what makes the most sense for me is to look at my asset allocation between equities and “fixed income” (most people talk about bond funds here, but CDs are also appropriate for this allocation) and as I save for retirement I can just move the money that was slated to go into my fixed income portion of my AA to my low interest debt, giving me a guaranteed rate of return of 2-4%, which is what I am looking for from that aspect of my AA.
I find that this lets me continue saving aggressively for retirement because it doesn’t take away from my equities allocation in the crucial early years of retirement saving (the magic of compound interest!) while hammering away at that debt. Just remember, this is for lower interest debt. The case of the orthodontist with 7% loans needs to pay that off as fast as possible; if you could invest in a product that gave you a guaranteed 7% return you would run to it as rapidly as possible!
If I offered you $5M dollars at 5% would you take it? How about 4%? Sure, at some point, I guess I’d take it (1-2% fixed, noncallable, MAYBE), but not at anywhere close to 5%. Discussed more here:
https://www.whitecoatinvestor.com/student-loans-vs-investing/
Huge “fan” here. I’ve been following your blog for years and even have the book. One caveat that I do not think you give enough attention to is the value of networking and having had your nest built in a certain location. I understand the philosophy of moving to a low cost of living state, living like a resident until debts are paid and investing in passive funds. However, being a resident in NY and having spent all my life in NY, the networks that I have built and the knowledge of back door opportunities are priceless, especially for my children. Staying in NY would give my children significant opportunities that moving out to the Midwest wouldn’t afford me. I have knowledge of the special back door MD programs and most of the decision makers at my medical school will be people I WENT to medical school with. Hopefully this post is not too much off topic, but I am interested to know what value you would put in that, and perhaps, maybe, you could do a future post about it.
Sounds like you know a lot more about it than I do. Why not do a guest post on it? 🙂
Having grown up a child of affluence and privilege in New York, I couldn’t disagree with you more. My practice in the rural South affords far greater opportunities and much more realistic expectations to my family. Networks are not that exclusive or hard to build elswehere. I suppose it depends on what your priorities are, but there is no way we could enjoy our current lifestyle in New York.
A colleague once said, “our parents abhorred debt, we got out of debt, our kids will manage debt” in regards to our children’s pursuit of medical/dental school. From my perspective this is the wrong attitude. Only those who abhor and get out of debt, will one day have financial independence. Your advice is correct. There is a price to be paid. Twenty years from now, you will wake up with nothing or well on your way to a prosperous financial future. Listen to the WCI.
I don’t feel lucky to have the med school debt burden I have, but I do feel lucky that I will one day be able to pass on to my children what I’ve learned from my mistakes. Just yesterday my sis-in-law was talking about the interest-only loan they just took out. I wonder how differently my kids and her kids will perceive debt.
Another concern for Dr. Ortho is will he continue to demonstrate a partial financial hardship (PFH)to remain in IBR for the 25 year repayment period? If his AGI exceeds ~$520K, he might not demonstrate a PHF resulting in all negative amortization capitalizing and reverting to a 10-year standard repayment until the balance is paid in full. Assuming a 3% annual income inflation rate, he might reach $520K at year 15. Consider refinancing with a private lender.
I plugged in some data at the studentloans.gov calculator. It won’t even take a loan balance of $510k to start with–maxes out at $500k! That’s a good sign one has too much debt…
Anyway, with $500k at 6.8%, family size 7, assuming Utah, married filing jointly, AGI $325k:
PAYE: $2249/mo to start, with future increases via future projected AGI bumps.
Standard IBR: $3374/mo to start, which reflects the 10 vs 15% difference, as expected.
Trivially, assuming no income growth, $2249 * 240 == $539,760. $3374 * 240 == $809,760. Neither of these is any kind of deal, however, since I believe the forgiven amount would be the difference between these figures (which are understated due to income growth anyway) and the standard repayment total, which would have been 360 months due to this enormous loan burden. That standard total is $1,173,465.
So PAYE at a 33% bracket would truly cost $539,760 + 33% * ($1,173,465 – $539,760) == $748,882. IBR at that same bracket would cost $809,760 + 33% * ($1,173,465 – $809,760) == $929,782. Those total figures work out to rates of 4.3% and 7.0% over the 20 year effective term, and that’s assuming our dentist has the bolus of cash at the end of 20 years to pay that tax bill in one fell swoop without financing that as well.
Therefore, once we add in the factors that his income is apt to grow over the years (and thus the IBR/PAYE payments) and that these calculations weren’t even on the full loan balance of $510k then even the best case scenario of an effective 4.3% rate isn’t that good at all.
Refinance down to 10 years variable, rein in the lifestyle, and get them out of the way.
It might not be a bizarre reason that he is in IBR, because he might not be eligible for PAYE. To qualify for the Pay As You Earn Plan you must have been a new borrower as of Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011.
Having received my first medical student loan August 2007, I missed this cut off. I have called multiple people to be sure this is the case and I am out of luck for PAYE but am on IBR. Currently the federal government is considering a PAYE for the other student loan borrowers, called RePAYE:
http://www.nytimes.com/2015/08/15/your-money/revised-program-will-reduce-student-loan-repayments.html?_r=0
I wasn’t PAYE eligible initially but as of this most recent income-verification cycle I am. I believe the RePAYE rollout is throughout this year–mine certainly let me pick it back in June or so.
You should check your account at studentloans.gov–it should show you what you’re eligible for after logging in.
Great post, I think I am the type who would prefer to pay all of my debts off ASAP, but the whole IBR schemes are confusing to me. I was wondering at what point is going for IBR not worth it, if you started the payments a little late? I’ll have about 1.5 years of payment on 215K when I graduate fellowship and will be talking a job at a 501c starting at 300K. I’m tempted to just refinance and pay it off in 5 years. Would it be better to go with PSLF or is it a wash if I started this late?
There’s no generic answer. You need to fire up Excel, figure out what your payments will be (recall that each year’s payments are based on your previous year’s taxes, so you’ll get one half-residency, half-fellowship year plus one half-fellowship, half-attending year before paying likely the full 10 year rate), and make a fair assumption at what rate you’d get from a private 5 year refinance.
Remember PSLF is very different from IBR. If you qualify for it, it almost always makes sense to get it, even with just 1.5 years of low payments. But run your numbers and make the call. You’ll need a refinancing quote to really run them right.
Great, thanks for the input. I actually mis-spoke as I would be going for PSLF since the job is at a 501c. I have a boards exam to to take in a week, but after that I’ll be looking into this in greater detail… Really appreciative of this website!
Joe D,
Keep in mind that you must be in a qualified repayment program (i.e. IBR, PAYE or 10-year standard) to eligible for Public Service Loan Forgiveness (PSLF). You income of $300K likely doesn’t allow IBR, as you don’t demonstrate a partial financial hardship, and the PAYE AGI threshold for you is approximately $325K. And, 10-year standard is irrelevant because you’re balance should be paid in full in 10 years.
Another trick is you may be able to get a loan repayment program to help cover IBR or PAYE payments while you are working under the 10 year PSLF program (Indian Health Service, National Health Service Corps). For my girlfriend, her loan forgiveness working with a public health clinic pays almost all of her monthly payments and she makes industry average as a regular salary. Almost like being “debt free,” though less flexibility with set contracts of 2 years a stretch. The real catch will come if the PSLF program goes away after it comes into full effect in 2017. We are saving aggressively just in case.
This is the type of story that first brought me here. It has changed our life and is great to have the debt gone rather than try to play games with the extra money. Your advice is correct. Debt is a real burden.
I never get tired of these debt conversations and the best way to approach these. I have read and reread all of these posts trying to apply it to my particular situation. I have even contemplated emailing whitecoatinvestor about it but have always stopped short. I am in my first year after residency with 320k of med school debt. Our only only debt is our house at 3.4% and a car at 1.8%. I have a 5 year contract with a $550,000 guarentee and $3500 for loan repayment. I would love to pay off my med loans quickly but for my particular hospital there is no max on the amount of loans they repay and the loan repayment does not stop unless you quit. Multiple partners have resigned contracts and they always keep loan repayment going. Also they pay you the loan repayment after tax and they are okay with you paying your loans with aftertax money. So I am trying to figure out what is best for me. I am refinacing waiting to hear from DRB (5+ weeks waiting now) also waiting on Sofi. I am planning to do a 20 year since I will only have to pay minimally out of pocket and pay off my home loan more aggresively. Wondering what you guys think.
They give you $3500 a month indefinitely for loan repayment? That sounds like a pretty good reason to drag them out. If you can refinance them to a lower rate, even better.
I find it interesting, however, that you have a $550K+ income and finance cars though. 🙂
Yes $3500 a month until you no longer have any loans. I think I am that one elusive reason to not pay off my loans quickly. As I stated several doctors at various stages in their careers have renegotiated their contracts and the loan reimbursement always stays. I hate to keep the loans that long but if I refinance to a 20 year loan it makes my payment about what my hospital pays after tax.
I plan to pay off the house loan aggressively as a form of investing like I would be doing with my student loans if the hospital didn’t pay for them.
Also we financed the car when I was a resident and did not have much money, I have only been out of residency a few months now.
Thanks for the site I can’t tell you how much it has helped me and continues to help me in career as a young physician. I have talked about you and your side to many colleagues at various meeting and board courses. Some have heard of you and others have not. I would recommend this site for all medical students and doctors even if you do use financial advisors it can save you from a lot of headaches.
Thanks again for the site.
I think what I would do is refinance them to whatever time period makes the monthly payments $3500 a month. If you ever leave that job, pay them off ASAP. However, and especially with contract renegotiations, I would make sure you don’t have the option to be paid more instead of getting that $3500 a month. I mean, that’s the equivalent of a $42K raise.
I am thinking I want to know where you work and your field (and if theyre hiring!). Agree that you should refinance and get the monthly payment as close to 3500/month as possible and make sure that rolls over to salary as soon as its paid off.
Best decision I EVER made was to pay off all debts as absolutely fast as possible. Paid off $115,000 student loans the first 1.5 yrs out of residency, just paid off mortgage, pay off credit cards in full each month, bought cars with cash, no other debt of any kind- 43yrs old.
We live well below our means and invest above our 401k and IRAs into a taxable account each month. Net worth $2.2M. I make a very average ED MD salary.
The feeling of freedom to choose to continue to work shifts in the ED knowing I could walk away tomorrow if I wanted to is PRICELESS. Most of my partners just invest in the 401k and spend every other dime they have. They all live in homes that are between $600,000-$1M. My husband (who stays at home) and I enjoy our time just as much in our $300,000 paid off home and have no financial stress whatsoever. It’s funny, after we paid off all our debts it seems like the money keeps accumulating faster and faster (we definitely feel “the rich get richer” phenomenon). I highly recommend eliminating your debt for peace of mind and peace of life.
This website continues to inspire!
#winning
Nice work.
guest post! guest post!
6 years ago I started with $340K in school debt. I am now left with $110K at 1.5%. Monthly payments are about $600/month. At this rate I will have it paid off in 18 years. I really hate having the debt as I can easily pay it off in 1-2 years but I am having a hard time doing it when the rate is so low. I almost wish the rate was higher so I had some incentive paying it off and be done with it all.
I can relate. My after-tax rate on my mortgage is similar.
how did you get such a low rate?
Back when I graduated med school, everyone was getting offers to consolidate their Stafford loans to a lower rate. My offer was for 2.5% plus discounts.
I get a 0.5% discount if I direct debit, and another 0.5% discount after 12 consecutive payments. Now I am down to 1.5% My payments haven’t changed, but the duration before payoff ended up being cut by a few years.
I have the same issue with my mortgage of 2.75% and I am at the 39.6% federal tax bracket. My effective mortgage rate is 1.69%. How do I pay that off any quicker?
Don’t get me wrong, I am fortunate to have such low rates. I just hate debt so much it is an internal struggle on what to do.
Seems like you are realizing your answer is behavioral not mathematical. If you really struggle with the concept of debt, choose a time frame for each loan that feels reasonable to have it paid off and do the math backwards to get you there. We started by simply doubling our student loan payments and adding an extra house payment annually to our principal.
Dr. Mom, you just helped me formalize my plan.
I believe I want to semi retire when I hit $2 million. At current rate I should get there within the next 4-8 years depending on recessions and market returns. Currently I am teatering around $1.2 million (recent market volatility.) When I hit $2million or start getting close to it, I will very aggressively begin paying off that debt. Semi retirement will be much easier with no debt. Thereafter I will start increasing my lifestyle based on 4% of my wealth. At 2.5 million I will live on $100K/yr, at $3million I will live on 120K and so forth. Currently I live on $115K/yr that includes having to pay $35K/yr to service my remaining school loan and home mortgage. When I say increasing my lifestyle that means more extravagant vacations, and maybe nicer cars or a boat depending on how my free time is spent. My wife will semi retire with me as well.
I am 40 years old and really enjoy being a physician. I just enjoy it much more when I have to do less of it. I hope that by working less I will never burn out and can practice well into my 60s or even 70s.
Glad to be of service. For me, I realized trying to use math to make the “best” life decision first is just a way to avoid making the decison. Make the choice and then use the mathematical analysis to get you there. As your choices change so does your math. Good luck and enjoy the ride!
If I had 500k in debt, I’d probably pack everything I own into a spaceship and go live on the moon. You’d have to be insane to accrue 500k in student loan debt!
No one usually takes out 500k of debt. What happens is they take out a decent amount I think mine was around 260-300 and do a long residency+fellowship that ends up nearly doubling your overall debt load. Most of my private loans doubled during my 7 years training.
The failure is in exactly what WCI describes, no one make basic finance very obvious or seem at all important and tell you the cost is around 3 times what think its going to be, wrong or right. Now we know, nor do they tell you you should add your marginal tax bracket to purchases and consider the opportunity costs, etc..while its a great way to gauge real costs.
The first thing that struck me about this was, wow! 510k in the hole from student debt? I thought I had it bad. Toshi, excellent post above breaking down the true costs of each option. It would seem the obvious smart choice for this person is to refinance into as low a variable rate as possible and then start swinging away with large chunks of cash monthly as WC suggested. Unfortunately, I think this will be very hard to do. Once you start living a lifestyle that only affords an extra 4k a month for repayment, it is extremely hard to reverse course and cut expenses down in a meaningful way. Certainly, it is significantly harder than not having a family that has grown into such a lifestyle in the first place. In this case the bed may already be made so to speak and perhaps PAYE is the solution that makes the most sense for this person.
When my wife finished residency in 2012 I weighed options with how to best deal with our loans. We elected to refinance our 350k in loans and start paying them down aggressively. We will be completely done with student debt this upcoming spring. We did not take the MMM extreme view of becoming shut ins. We have taken numerous trips and enjoyed many nice dinners out along the way. A physician income allows for aggressive debt repayment as well as a comfortable lifestyle. It puzzles me how people with such high incomes can find a way to burn through it while ignoring debt.
Our friends with student debt have hooked up with financial advisors. The advisors are against aggressively repaying refinanced student debt and think my way is wrong. Their reasoning is that inflation averages 3% and my friends can do significantly better in the market and outgain their current interest rates (~3% variable, 5% fixed). While that argument can be made, I still feel my way was a smarter approach. It will be a tremendous feeling to have that debt out of our lives forever.
I paid off my student loans 3 weeks ago, which was 2 years 1.5 months after residency, and 10 years after taking out my first loan in medical school. I also paid off my wife’s loans, which were significantly less than mine. Both of us were debt free through undergraduate, but took out loans for post graduate training.
I took out a total of $211,164 in loans (private med school in low cost of living midwest). My wife’s were $29,965 for allied health course. Combined $241,129. Total payments were $330,731.69. That means we paid $89,602.69 in interest.
We did IBR in residency, it being the latest and greatest at the time. We also refinanced with SoFi a year ago.
We took a moderately aggressive approach, which was facilitated by maintaining a low daily cost of living lifestyle. We looked for a high paying job in a moderately sized midwest city. We found a small, old, but recently renovated house 2 blocks from the hospital, only owned 1 car, 2 bicycles, a motorcycle, and we built a trailer. This was well before I knew of Mr. Money Mustache.
We were in no way deprived. By having a low daily cost of living lifestyle we could still enjoy otherwise luxurious perks, like vacations, shopping splurges, retirement saving and paying down debt. We are well over one hundred thousand dollars richer in just 2 years than I otherwise would have been had I bought a big house. If I had not enjoyed those perks, I could have saved even more, but my mom always taught me that money was not meant to be hoarded for money’s sake, but it was simply a tool and could be enjoyed responsibly.
Our path was similar to Jonathan and Impromptu above. My “moderate” path for this example would be the following:
1. Very modest house, not forever house. Fits your needs not wants. Could become a rental perhaps later on.
2. Refinance student loans. Start with 100K towards debt annually. Live on the rest with as much to retirement as you see fit, hopefully 15-20% of remainder at least.
3. Extra money as you increase salary goes to debt.
4. When debt gone: 50K/year into 529’s for your kids, 25K more to savings/retirement, 25K plus extras however you see fit.
Above plan is what worked for us. We have 3 kids and with fostering have been up to five. In 10-15 years you will look back and be thankful. Best wishes!
Interesting that you put twice as much into 529s as retirement, or perhaps you mean $25K in addition to 15-20% of income.
Yes, in addition. Worked for us:) We increased lifestyle a little after residency, and a little more after loans paid off, and a little more now as we approach retirement. We’ve never wanted for anything that we truly cared about. Refusing to grow into the income in the initial years helped us define for ourselves what we care most about and where spending our money is worthwhile to us. We never considered the debt as an emergency that required us to live on a scorched earth budget. We just slowly and happily increased lifestyle enough to enjoy ourselves after we designated reasonable savings and loan repayment goals. Knowing we had a little lifestyle burst coming at the end of loan repayment helped motivate us.
I too am going with a moderate approach. Borrowed 250k to get through med school but it is now at 330k and climbing in my last year of residency. Planning on moving back home to a medium sized southern city and living in a house that costs less than my annual salary. I have a 40k/year lump sum loan repayment for 6 years through the Army National Guard and my plan is to make my last payment the same day they make theirs. I have very little contributed toward retirement as I had children and a stay at home spouse during medical school and residency. The plan is to max out 401/457, pension contribution and 529 while on this loan schedule and be completely debt free, including mortgage, 6 years from now. If I miss having a mortgage, we can shoot for the dream house on the lake or take expensive vacations then. Thanks for sharing these posts, it is an inspiration to read how other people are tackling their huge debt load
Just FYI the Guard Health Professional Loan Repayment Program (HPLRP) will only give you 30k each year. From what I have been told from everyone else in my unit that is how they are taking out the initial taxes. Automatically taking 25% off the top so that they only disperse 30,000 to your loan holders. On top of that remember that the HPLRP adds 40k to your income come tax season, so potentially you may owe more. One captain in our unit joined after already being in work as a hospitalist for several years and since it took so long to get her first year’s distribution she got 2 in one year adding 80,000 to her income. I served my first year of commitment and am currently waiting on my first distribution so will know for sure soon. Just help for planning purposes, and don’t forget it is a year by year program not a guaranteed 6 year deal.
Thanks for the reply. My experience with other docs in my unit is they are getting 30k/year direct to their lenders and owe very little additional tax, if any, at the end of the year – which is fine for me. My effective rate will be around 25%, so I don’t expect to get a refund or owe more money than that. My loans total over 300k but is made up of 9 separate loans. I will be attacking them one at a time with any additional payments going to highest interest rate first unless negligible difference in interest – then paying off smallest loan to decrease required monthly payments. I have been in 11 years so far, and know I will hit my 20, so it is a nice benefit to have.
Starting the road to financial independence after reading WCI and MMM has offered me a lot of opportunity which will be missing from the person mentioned in the example. He already alludes to it, but he will have to work a safe career path the rest of his life at his current pace. He will not be starting his own practice and will not be starting any sort of side business. He just won’t have the time or the money. He will take safe vacations and work until a safe age. To me that sounds terrible, but to some, it’s easier than taking the pain/medicine now and getting it over with.
Have you ever wondered about why the government would even be in the loan business and why they choose their timing? The 30 year mortgage fits with many people’s working career. The 20-25 year student loan repayment fits with those of us that gave up some early years to education and training. These programs can trap the user into a timeframe that best gives the government the income they really want which is from your income tax. So, the programs are the carrot to get the real prize of your income tax for as long as possible. If your timeframe fits with theirs fine. I prefer to control mine.
That’s terrifying to think about.
Debt is just a number, abstract and intangible. IBR/PAYE makes it so you don’t have to face the reality of standard monthly payments that will actually diminish your debt. Consequently, it grows and grows, and you don’t notice anything, unless you train yourself to feel the pain when it does.
The totality of your debt seems (at times) overwhelming, insurmountable, unfathomable – two hundred thousand dollars! Does such a thing exist in this world? It’s several times over any amount of wealth you’ve ever gained and lost.
You can’t possibly wrap your mind around such a concept, that you will have owned this much money, and that it will then belong to someone else. You’re just going to rely on some sort of forgiveness program, whether PSLF or IBR or PAYE to resolve everything, deus ex machina style, some time in the distant future. So why suffer through any short term changes now, when it won’t make any difference in the long term outcome? (I suspect this is somewhat akin to the way many patients feel about their chronic problems).
Sadly, this was the way I felt about debt until a few months ago.
When talking about a “debt emergency”, are you talking about what is typically called “bad debt” ex.) student loans >2%, cars >2%, credit cards, etc.?
Surely you are not talking about ALL debt, for example practice loan debt allows you to increase your income many times over, and the interest is a deduction and the goodwill/equipment/whatever is able to be depreciated. Additionally,taking out loans/mortgages in order to purchase real estate/properties that grant you additional income/tax benefits can’t be classified as an “emergency” can they? I mean even extremely wealthy people debt service in order to make more money.
Or are these things also emergencies that should be paid down as quickly as possible?
I’m not sure we all draw the line in the same place, but I think we can all agree that $510K in 6.8%+ student loans is a “debt emergency.”
+1
Debt is the American way. It is not about “can I afford this item?” It is now, “can I afford the payments on this item?”
You don’t buy a car, you lease it, you don’t buy a new TV, you put it on credit. Yesterday Apple announced it will be leasing their phones.
The other thing for the doctor to consider is that any remaining balance after IBR will be taxable. I did write to you with something similar to the doctor a while ago with my thoughts on this, with my wife’s student loan balance, as I am really struggling with what to do.
My email:
White Coat Investor,
I wanted to write to you to get your thoughts on something related to
using IBR to pay off my wife’s Medical School Debt. Could it make
financial since to make the minimum monthly payment for IBR for the
duration of the 25 years. Right now her Medical School debt totals
$312,840 at 6.5%, and we have one year of payments through IBR already
made (I wish we would have found your site earlier, as we would have
hopefully done a lot of things differently).
If we got approved at 5.5% for 15 years at SoFi or DRB it would result
in $2,556.16/month or $460,109.62 total paid over the life of the
loan.
Our current IBR monthly payment is $960.31/month. My wife’s income
has risen this year, and I am sure both of ours will continue to rise
over the next 24 years. So, our IBR monthly payment will grow as
well. For an example let’s assume the IBR monthly payment grows to
$1,500/month, and use that as our monthly payment for all 24 years.
That would be $432,000 paid back over the 24 years, but during that
time the loan balance would keep growing via the interest, and there
would actually be a balance of $447,127.21 at the end. This would be
forgiven, but taxes would be due.
Estimating those taxes at 35% would result in $156,494.52 being due.
So, that plus the $432,000 would result in $588,494 being paid back,
which is approximately $128,000 more than if we refinanced to the 5.5%
over 15 years.
If we invested $1,056/month (the difference between the monthly amount
of 5.5% over 15 years and IBR of 24 years at $1,500), every month for
those 24 years, and earned 5%, we would have $563,932.55 (of which
$288,000 was money we put in), and a before taxes profit of
$275,932.55. So, we would make more money than the $128,000 we
overpaid. We would also have a lot more money saved up.
I realize that there are a lot of assumptions in here, tax rates not
going up, IBR forgiveness not being capped, actually earning 5%, etc.
Also, we would need to be very financially disciplined. But, does this
mathematically make sense?
Thank you,
Dan
Your response:
Hard to make any decision based on how things will be two decades from now. It is possible that IBR will work out better in the long run, but I hate to tell someone to drag out their debt for 25 years. If nothing else, try to swap into the PAYE program. That is apparently becoming possible now I understand. Payments are lower and forgiveness comes 5 years sooner.
Whatever you do, I think the key is to actually save and invest the difference, so if you change your mind, you can take the “side fund” and pay off the loans.
Jim
While you’re getting out of debt, you can have an entertainment category in your budget, and you can budget 0 (zero) dollars for it. In med school, my room mate and I had no cable/satellite, no internet in our apartment. When we wanted to watch the World Cup, we went to the student center and watched it with dozens of other people and had a blast. We had library cards, and when we wanted to watch a movie we checked one out of the library for free.
One concern I have with refinancing is the worry that doing so is going to break the “momentum” I have right now with paying them off. We have ~375k @ 6.5% interest rate, and are on track to get rid of them in about 5 years making payments of between 7000 and 7500k/month. The SOFI quote I got gave me a new interest rate of 4.75%. I know I’d save several thousand dollars, but is it worth the headache? Another concern someone mentioned above – if I get a new quote and it’s even lower, am I going to be tempted to invest instead of pay off my 3.5% or 4% loan? If you can refi down to 2%, how do you justify paying off the loans?
It’s all a mental game for me, and right now I feel like I have a fire behind me that’s screaming “PAY THOSE THINGS OFF!” I don’t want that psychology to change with a lower interest rate.
I should clarify – we are NOT capping our student loan payments at 7500k/month. We paid 11k in July when we had a particularly good month, and we try to pay as much as possible. 7500k is probably what we average though.
We just completed this year paying off $200k+ at 2%.
I would suggest paying off your debt as fast as you can.
You can rationalize it lots of different ways; but it is best just to go full-throttle elimination.
There is great power in focus.
Interesting, but very real, issue. I agree that ~2% it’s hard to get motivated to aggressively pay stuff off.
I am a third year pediatric resident with about $310,000 in debt at 6.8%. My husband is military and also a physician and chose to serve his country rather than take on this never ending hole of debt. But luckily he married me so we have both commitments! We are trying to decide the best course of action to take on my loans for the next few years. Currently payments are low on IBR as we both finish our last years in residency (after reading this, I guess I need to switch to PAYE). We will likely pull in around $250,000 our first year out and we need to decide whether to refinance and get aggressive or stay the course with PAYE with the goal of 10 yr PSLF. His income will be limited for the first 7 years out of work since he will be paying back his time to the military and only making about 1/3 of what he could as a civilian ER physician. My biggest concern is PSLF not existing and all of the interest adding up since we will have made such low payments for 10 years. Is this a realistic concern? We also would like to purchase a house when we move after residency, nothing crazy but just a place to call home.
Veronica,
To answer these questions, you must first realize what your future might look like. Since you are a 3rd year resident, what are your options for work? What is the likelihood you will find work in a qualified non for profit location and stay there for another 7 years? If the odds are very high, then you should probably stay the coarse and stick with PAYE.
$310K in debt is a massive amount on a $250K dual income therefor the decision above is very important.
My other word of advice is to not buy a house right out of residency. It is a horrible decision. Wait at least 1 year to make sure that you actually like your job and your job likes you. Also, you will need to make sure you have 20% down. With your debt, the last thing you need is higher interest rates and PMI insurance.
To answer another of your questions, I highly doubt PSLF will not exist for you in the future. Generally the government doesn’t pull the carpet from under your feet once it has placed it there. Any changes are more likely to go in effect for future debtors and not go retroactive.
You’re a pretty typical doc. You two have the equivalent of $1M+ in debt (don’t believe me?- Check the difference between the average military EP paycheck and the average civilian EP paycheck-it’s probably $150K per year pretax) and yet want to go take on more debt and buy a house. As a general rule, I recommend against military personnel buying a house anyway. You can rent a place that can be called home just fine.
But your question of what to do with your loans comes down to whether or not you’ll work for a 501(c)3. If you will, then go for PSLF. If not, try to refinance (you may not qualify due to relatively low future income and relatively high debt) and pay it off ASAP. The likelihood of you, already two years into payments into IBR, not being grandfathered into any possible changes to PSLF seems low to me.
WCI, I wanted to thank you for this blog and for all the great advice and motivation. I completed residency in June of 2014 with 280K of student loans. Refinanced first to 2.75% variable then again to 1.9% variable when rates dropped. Lived like a resident and just paid off the last of my loan today, 15 months after residency graduation. Net worth just barely north of zero, but still feels pretty good. Thank you for your great work.
Great work!