If you were me, what would you do?

[goldsummer]

I have a tentative plan, but would like to see what others would do.

Student loan debt: 240k
Other debt: None

Salary: 210k
Employer pays 20k student loans each year for 4 years (80k)
Employer pays 4% 401k match. I'm putting in 6% (10% total) ...after 1 year I have 17k.
Bank savings: ~250k
Investment account: 17k (robinhood)


My plan:
Before the loan interest rates kick back in in January 2022, I'll pay 100,000 towards my student loans in one lump sum. The thought makes me sick. But, it is what is. Then I'll pay the monthly payment on top of that.
I'll get my investment portfolio up to about 40-50k.
I'll keep about 100k in the bank.

Would you change anything? etc More aggressive towards the loan/Less cash??

Thanks.

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[bravotwozero]

Are you single? If yes, I would keep 50k in the bank instead of 100k, and put another 50k towards your student loans. Also, make sure you re-finance your loans to get the lowest interest rate possible.

 

[goldsummer]

Are you single? If yes, I would keep 50k in the bank instead of 100k, and put another 50k towards your student loans. Also, make sure you re-finance your loans to get the lowest interest rate possible.

Hi, thanks.

Yes, I'm single. Keeping only 50k makes sense.

What's the process to refinance the loan? Are there any penalties to doing so?
I did consolidate all my med school loans into one. Dont know if that would affect my ability to refinance or not.

 

[Splenda88]

I would pay off the student loan.

Since you are single, you can quickly save 50k in less than a year.

 

[thesauce]

Student loans suck and the companies are sick. Pay them off and get them out of your life regardless of the interest rate.

 

[VA Hopeful Dr]

Definitely refinance. Interest rates are still very low and that can make a big difference.

 

[mvenus929]

I would contribute more to my 401K. You should be maxing that out at that salary (19.5K in 2021 and 20.5K in 2022). And don't consider the employer match at all in your math for how much you should be saving.

If your student loans are still federal and it wouldn't disrupt your employer paying the 80K, I would also refinance those to a lower interest rate before the interest accumulation resumes.

 

[airplanes]

Agree, max out your 401k, refinance to a lower rate (make sure your employer's 20k/year will still apply), knock out the rest of the loans with your savings and start saving/investing/building wealth from there. Figure out 6 months of expenses and keep that as an emergency fund, invest the rest unless you are saving up for something else (house down payment, car fund, etc.).

 

[Monocles]

What's the interest rate on your student loans? If you can refinance the rate to under 3% I almost wonder if it would be better making minimal payments and then putting as much spare cash as you can towards safer investments like index funds (ex: max out all your 401ks, then the rest in a taxable brokerage).

Also why so much in your bank savings?? (250k) In this market that money is losing 6% purchasing power on a YoY basis. Are you trying to save up a down payment for a house? Personally I keep $1500-2000 in my bank at any given time and the rest are all in a taxable vanguard, but I am pretty "lean" in terms of leanFIRE.

 

[cincincyreds]

What's the interest rate on your student loans? If you can refinance the rate to under 3% I almost wonder if it would be better making minimal payments and then putting as much spare cash as you can towards safer investments like index funds (ex: max out all your 401ks, then the rest in a taxable brokerage).

Also why so much in your bank savings?? (250k) In this market that money is losing 6% purchasing power on a YoY basis. Are you trying to save up a down payment for a house? Personally I keep $1500-2000 in my bank at any given time and the rest are all in a taxable vanguard, but I am pretty "lean" in terms of leanFIRE.

Index funds aren't safe investments. The best bang for the buck is to pay off the student loans first since loan rates can be up to 7%.

 

[Monocles]

Index funds aren't safe investments. The best bang for the buck is to pay off the student loans first since loan rates can be up to 7%.

I said "safer" not safe haha... certainly if OP's student loans are at 7% interest them they should throw everything they can at it since it's a guaranteed return. But if it's something ridiculously nice like 2% then might as well invest on margin.

 

[FutureInternist]

3 month savings in bank.
Minimal loan payments.
Short term disability.
Long term disability.
Life insurance.
Max 401k.
Max 457/NQDC.
Roth IRA.

Once above is done and if you have extra then you pay rest towards loans.

But I agree that it does depend on your rate.
Market returns are usually 7%, so if you pay loans down (that are 3%) then you’re losing $$.

Also… waaaayyyyyy too much saved in bank.
Use that to buy something “investmenty” - rental property, ?gold, ? Strip club or just more index funds

 

[Andrew StudentLoanAdvice]

I have a tentative plan, but would like to see what others would do.

Student loan debt: 240k
Other debt: None

Salary: 210k
Employer pays 20k student loans each year for 4 years (80k)
Employer pays 4% 401k match. I'm putting in 6% (10% total) ...after 1 year I have 17k.
Bank savings: ~250k
Investment account: 17k (robinhood)


My plan:
Before the loan interest rates kick back in in January 2022, I'll pay 100,000 towards my student loans in one lump sum. The thought makes me sick. But, it is what is. Then I'll pay the monthly payment on top of that.
I'll get my investment portfolio up to about 40-50k.
I'll keep about 100k in the bank.

Would you change anything? etc More aggressive towards the loan/Less cash??

Thanks.

Refinance your federal student loans prior to the high federal interest rate resume in February.

Do think the lump sum payment would be a good idea.

Go on an aggressive repayment plan and you'll be done with these in 2-5 years.

Best of luck.

 

[dpmd]

I am struggling to understand why someone with 250k in the bank wouldn't max their 401k (and why they would have taken 240k of loans too but maybe the loans came before the savings). If the loan repayment will still be done if you refinance I would recommend refinancing and instead of paying down your loans investing that money instead. Reason being student loan interest is simple interest (aside from the capitalization that happens when you change repayment plans) while investment gains are compound so it doesn't take much rate of return to beat most student loan interest rates (even if you are stuck with the 6.8% rate for a 20 yr repayment term without any extra payments the interest would be under 200k, while the expected investment return on 100k if you use a conservative 6% rate would gain 220k over the same time frame)

 

[goldsummer]

What's the interest rate on your student loans? If you can refinance the rate to under 3% I almost wonder if it would be better making minimal payments and then putting as much spare cash as you can towards safer investments like index funds (ex: max out all your 401ks, then the rest in a taxable brokerage).

Also why so much in your bank savings?? (250k) In this market that money is losing 6% purchasing power on a YoY basis. Are you trying to save up a down payment for a house? Personally I keep $1500-2000 in my bank at any given time and the rest are all in a taxable vanguard, but I am pretty "lean" in terms of leanFIRE.

My interest rate is 5.8%. Federal loan.

I have that much cause I was initially saving up for a house right out of residency, but the market went way up, is still up, and now I'm realizing I probably dont need a house being single, and probably better off using it to take out a big chunk of my loan.

 

[goldsummer]

I am struggling to understand why someone with 250k in the bank wouldn't max their 401k (and why they would have taken 240k of loans too but maybe the loans came before the savings). If the loan repayment will still be done if you refinance I would recommend refinancing and instead of paying down your loans investing that money instead. Reason being student loan interest is simple interest (aside from the capitalization that happens when you change repayment plans) while investment gains are compound so it doesn't take much rate of return to beat most student loan interest rates (even if you are stuck with the 6.8% rate for a 20 yr repayment term without any extra payments the interest would be under 200k, while the expected investment return on 100k if you use a conservative 6% rate would gain 220k over the same time frame)

The 250k is from residency (60k a year x3 years) and from a year of being an attending for a year (200+k) and still living like a resident. Had about 30k in savings before taking out med school loans.

All this money/investment jazz is new to me. My parents do not know any of this (and are not in the best position now because of it) and therefore I never had exposure to talk about 401k/investments/etc. I had this in the back of my mind when I started med school, but it was so demanding that I postponed everything until I finished residency. Then started as an attending and took some time to get my feet under me...and now after a year under my belt trying to really put effort into learning the ins and outs of this money game.

Thanks for your input. It makes sense, though I'm a bit uncomfortable leaving my loans sit long term. Even if I'd be earning more off investments than interest would be accruing on my loans, if the market goes down or crashes, wouldn't that leave me in a bad spot? Is paying the loan off more of a "sure" route? Not sure if those thoughts are just me being naïve or if they're justified.

 

[goldsummer]

3 month savings in bank.
Minimal loan payments.
Short term disability.
Long term disability.
Life insurance.
Max 401k.
Max 457/NQDC.
Roth IRA.

Once above is done and if you have extra then you pay rest towards loans.

But I agree that it does depend on your rate.
Market returns are usually 7%, so if you pay loans down (that are 3%) then you’re losing $$.

Also… waaaayyyyyy too much saved in bank.
Use that to buy something “investmenty” - rental property, ?gold, ? Strip club or just more index funds

lol... I can see it now... "Goldsummer's Little person strip joint"... Should be a big hit around here.

What index funds do you all recommend? If I was going to dump, say, 20k into each one??

 

[Monocles]

My interest rate is 5.8%. Federal loan.

I have that much cause I was initially saving up for a house right out of residency, but the market went way up, is still up, and now I'm realizing I probably dont need a house being single, and probably better off using it to take out a big chunk of my loan.

**** man pay that off! That's nearly a 6% guaranteed investment.

 

[Chemist0157]

3-6 months of expenses (emergency fund)
Roth IRA
401k to at least the employer’s contribution (free money) unless you are happy with whatever investment options they offer in that plan then just max it out.
All the insurance stuff

In terms of loans vs investing, I go back and forth with this. It depends on some knowable factors like your loan interest rate and your loan time horizon (max per your loan agreement and min depends on aggressive repayment). It also depends on unknowable factors like the stock market.

If someone told me they wanted to pay off their low fixed rate 30 year mortgage as fast he could, I would call that unwise. Even accounting for crashes, the market will be higher in 30 years. But someone who has loans that could be paid off within 2-3 years? Much more fuzzy. Who knows what the next 2-3 years of market will be? Likely not as hot as this last year.

You can assume a market growth rate and calculate the “cost” of paying off loans faster. If it’s not an unreasonable number, just go ahead and do it. I did this and was comfortable with the number.

For ETFs, common ones are

VTI - total US market
VOO - s&p 500, top 500 US companies
VXUS - international fund
QQQ - Nasdaq/tech

I like VTI personally. I have some small % in VXUS.

 

[dpmd]

The 250k is from residency (60k a year x3 years) and from a year of being an attending for a year (200+k) and still living like a resident. Had about 30k in savings before taking out med school loans.

All this money/investment jazz is new to me. My parents do not know any of this (and are not in the best position now because of it) and therefore I never had exposure to talk about 401k/investments/etc. I had this in the back of my mind when I started med school, but it was so demanding that I postponed everything until I finished residency. Then started as an attending and took some time to get my feet under me...and now after a year under my belt trying to really put effort into learning the ins and outs of this money game.

Thanks for your input. It makes sense, though I'm a bit uncomfortable leaving my loans sit long term. Even if I'd be earning more off investments than interest would be accruing on my loans, if the market goes down or crashes, wouldn't that leave me in a bad spot? Is paying the loan off more of a "sure" route? Not sure if those thoughts are just me being naïve or if they're justified.

It is a more sure route just like leaving your savings on the bank is a sure route. But you know the bank interest rate is low and that is why people don't just leave money in the bank.

Your 240k student loan interest will be about 77k if you have a 10 year repayment schedule but you could get it down to 38k if you refinanced to 3% for 10yrs. If you chose to burn the whole 240 to pay it off those dollar amounts are the most that you save. But if you kept that 240 in a savings account earning 1% at 10 years you would have earned 12k in interest and still have it earning interest meaning in 20 years it would be 53k and at 30 yrs it wound be 84k (assuming the interest rate stayed the same and ignoring taxes). So even the worst type of savings beats out early loan payoff over a long enough time horizon.

Meanwhile investing in index funds is less sure but will gain you a ton more. Yes a crash is a concern but it would need to be a big crash with little recovery at the time you need to pull the money out so the odds of that are pretty low overall. I get it, I paid off a mortgage early because i hadn't done the math before. It feels good to pay something off. I just want to make sure you realize the tradeoff you are making because I wish someone had laid it out for me before I decided to go for loan pay downs.

 

[goldsummer]

It is a more sure route just like leaving your savings on the bank is a sure route. But you know the bank interest rate is low and that is why people don't just leave money in the bank.

Your 240k student loan interest will be about 77k if you have a 10 year repayment schedule but you could get it down to 38k if you refinanced to 3% for 10yrs. If you chose to burn the whole 240 to pay it off those dollar amounts are the most that you save. But if you kept that 240 in a savings account earning 1% at 10 years you would have earned 12k in interest and still have it earning interest meaning in 20 years it would be 53k and at 30 yrs it wound be 84k (assuming the interest rate stayed the same and ignoring taxes). So even the worst type of savings beats out early loan payoff over a long enough time horizon.

Meanwhile investing in index funds is less sure but will gain you a ton more. Yes a crash is a concern but it would need to be a big crash with little recovery at the time you need to pull the money out so the odds of that are pretty low overall. I get it, I paid off a mortgage early because i hadn't done the math before. It feels good to pay something off. I just want to make sure you realize the tradeoff you are making because I wish someone had laid it out for me before I decided to go for loan pay downs.

Thanks for that explanation, much appreciated. I see what you mean now. Very interesting how that works... It does feel good to pay something off, but yeah I suppose its more of an emotional thing. Mathematically, it seems its not the best route...

Since my loans are still federal currently and I now have until May 1 with 0% interest, I'll think hard about this til about March/April. I guess I'll do one of 2 things:
1) Refinance to a lower rate ~3% before May 1, pay the minimum. and use the 200+k to invest. (this makes me nervous, but maybe by April I'll be less nervous lol)
2) Pay down the loan to something like 100-140k in April, then refinance at 3%, and invest the 100+k I otherwise would have spent paying off the loan. At this point I feel better about this option.

By April I also will have generated another 30k of savings...but I'll start funneling that into investments rather than in the bank.

 

[goldsummer]

3-6 months of expenses (emergency fund)
Roth IRA
401k to at least the employer’s contribution (free money) unless you are happy with whatever investment options they offer in that plan then just max it out.
All the insurance stuff

In terms of loans vs investing, I go back and forth with this. It depends on some knowable factors like your loan interest rate and your loan time horizon (max per your loan agreement and min depends on aggressive repayment). It also depends on unknowable factors like the stock market.

If someone told me they wanted to pay off their low fixed rate 30 year mortgage as fast he could, I would call that unwise. Even accounting for crashes, the market will be higher in 30 years. But someone who has loans that could be paid off within 2-3 years? Much more fuzzy. Who knows what the next 2-3 years of market will be? Likely not as hot as this last year.

You can assume a market growth rate and calculate the “cost” of paying off loans faster. If it’s not an unreasonable number, just go ahead and do it. I did this and was comfortable with the number.

For ETFs, common ones are

VTI - total US market
VOO - s&p 500, top 500 US companies
VXUS - international fund
QQQ - Nasdaq/tech

I like VTI personally. I have some small % in VXUS.

Thanks for your input.
I will look into those ETFs. Currently, in my brokerage (robinhood) I have QYLD, NUSI, and RYLD ETF's. I like them since they are monthly paying dividend ETFs, however I probably need to include more like QQQ and VTI for better long term growth.



Do you recommend doing these investments in a brokerage like robinhood, or in the 401k? Or both?

I did bump up my 401k contribution to 9% (plus 4% employer match).

 

[Chemist0157]

Thanks for your input.
I will look into those ETFs. Currently, in my brokerage (robinhood) I have QYLD, NUSI, and RYLD ETF's. I like them since they are monthly paying dividend ETFs, however I probably need to include more like QQQ and VTI for better long term growth.



Do you recommend doing these investments in a brokerage like robinhood, or in the 401k? Or both?

I did bump up my 401k contribution to 9% (plus 4% employer match).

I don’t see why you cannot do both. I can tell you my Roth IRA and 401k are all mutual funds or etfs as those are “set it and forget it” products. I do stock picking in a brokerage account (Fidelity). I do it that way as I am just starting out and suspect the passive investing will do better than my picking so I want to maximize the tax benefits of the products that will probably do the best. That makes sense to me. If you have more to invest after maxing out the tax deferred accounts, you could throw that in the taxable brokerage account too.

 

[TravelingMedicine]

Like what others have said, it might be worth while to just invest the money rather than putting a lump sum towards student debt. Let your money work for you rather than work for money. The worse rolling 15 years of the SPY has returned close to 3.7%/year and 20 years has been 6.4%/year.

Be careful of the income limit for the Roth Ira contributions and the year you contribute. You can accidentally take on an unnecessary tax burden for over contributing or because you are over the income limit.

However that being said do not buy stocks/etfs/mutual funds as a lump sum. have a set budget each month and dollar cost average into long term holds. Another brokerage if you are interested in a set and forget it method you can check out M1finance. The brokerage is also nice because it will automatically rebalance the portfolio. I would move away from robinhood if you do not plan on trading often. the gamification and ease of access on a phone will cause you to check it more often and trade with emotions if you are just starting out.

If you want to pay off your loans quicker than paying the minimum payment you can try setting your payments to semi-monthly (every 2 weeks instead of each month) you will be paying off your principle faster as you are paying 1 extra-months payments. you end up paying 13 months of payments a year rather than 12 paying each month. (this link could help with visualizing it. it a mortgage calculator but the loan payments situation will translate over to pretty much any loan) Biweekly mortgage calculator: Calculate savings, amortization table for biweekly mortgages.

**not a financial adviser. This is my opinion and should not be taken as financial advice.**

 

[FlowRate]

I don't get everyone telling you to pay off the federal loans. Refinance to a 5 year payoff with a rate slightly above 2%. (Although wait until they actually end the 0% deferral period and like someone else said, verify employer will still pay toward that.)

You don't necessarily need that much money in the bank to buy a home. I'd look at keeping 10% of whatever future purchase price will be needed although at the moment plenty of companies doing 0% down or 5% down for physician loans.

See if your employer plan allows mega backdoor roth (401k). Max that every year. Also make sure you're doing a regular backdoor roth IRA.