Loans loans loans...

[no31always]

Hello all. I was just posting to see if anyone could describe what their process was like as far as graduating with loans and what options/scholarships/ or other programs help to reduce these amounts. We all love PT and have a passion for it or else we wouldn't be here but it is so hard to sit back and watch as our profession demands rigorous education and so much debt for a not so great salary in return. What can we do to help improve this? Money should never deter anyone from chasing their dreams but at the point where life happens and we might not be able to control what happens when we graduate? I know the whole "well live within your means and they should be paid off within 5-7 years" but realistically, stuff comes up where that might not happen. Thank you guys for any input that you have!

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[noyceguy]

Hello all. I was just posting to see if anyone could describe what their process was like as far as graduating with loans and what options/scholarships/ or other programs help to reduce these amounts. We all love PT and have a passion for it or else we wouldn't be here but it is so hard to sit back and watch as our profession demands rigorous education and so much debt for a not so great salary in return. What can we do to help improve this? Money should never deter anyone from chasing their dreams but at the point where life happens and we might not be able to control what happens when we graduate? I know the whole "well live within your means and they should be paid off within 5-7 years" but realistically, stuff comes up where that might not happen. Thank you guys for any input that you have!

Most people just take out federal Stafford loans for tuition/room and board. Occasionally you may find some small GA stipend or a state-sponsored forgivable loan. I wouldn't count on any grants or anything like that significantly reducing the amount of money you have to borrow. By far the best way to manage this debt is to choose the cheapest education possible. Financially speaking, PT is not worth $90,000+ in loans.

 

[wrennywren]

There is always pay as your earn or income based repayment plans, which will significantly lower your monthly payments. If you work for non profit, your loans are forgiven in 10 years. even if you don't, some pay as you earn plans forgive your loans after 20-25 years as well.

Loans suck.

 

[SBanks]

no31always, if you have a large debt load ( student loans, Credit cards, auto loan) and you want to pay it off it's not about living within your means- it's about having a plan, and the discipline to follow that plan. It will probably require enough Discipline to follow that plan for a few years. As this realization sets in you have an opportunity to make 2 choices: 1) You live off the bare minimum you need to survive until you pay it off. You don't see the inside of a restaurant unless you work there. You live in a super cheap apartment (that's safe). Work extra job(s). Don't buy a car. Don't buy a house, and begin to use a VERY powerful, and useful word that most kids in college have no idea how to use- it's the word NO!! Will this suck? Yes. Will it suck so bad that when you don't have any debt you will regret that you did it- NO.

The 2nd choice is you spend most of your career sending a large portion of your paycheck to your bank, or whoever owns your debt. You will be a slave to the lender.

If you choose the 1st choice, congratulations you are ready to be an adult. People are going to think you are weird, but that's ok because most people are broke.

Ask yourself "how much" Not how much per month. Please, please, please don't follow the advice of a person who recommends a 20 year payoff. Children do what feels good. Adults make a plan and follow through.

 

[no31always]

no31always, if you have a large debt load ( student loans, Credit cards, auto loan) and you want to pay it off it's not about living within your means- it's about having a plan, and the discipline to follow that plan. It will probably require enough Discipline to follow that plan for a few years. As this realization sets in you have an opportunity to make 2 choices: 1) You live off the bare minimum you need to survive until you pay it off. You don't see the inside of a restaurant unless you work there. You live in a super cheap apartment (that's safe). Work extra job(s). Don't buy a car. Don't buy a house, and begin to use a VERY powerful, and useful word that most kids in college have no idea how to use- it's the word NO!! Will this suck? Yes. Will it suck so bad that when you don't have any debt you will regret that you did it- NO.

The 2nd choice is you spend most of your career sending a large portion of your paycheck to your bank, or whoever owns your debt. You will be a slave to the lender.

If you choose the 1st choice, congratulations you are ready to be an adult. People are going to think you are weird, but that's ok because most people are broke.

Ask yourself "how much" Not how much per month. Please, please, please don't follow the advice of a person who recommends a 20 year payoff. Children do what feels good. Adults make a plan and follow through.

Thank you for the input. I'm definitely trying to get it paid off within 5 to 7 years. 10 at the ABSOLUTE max. I have researched a bunch of jobs and I know the SNF and prn make the most and picking up those extra hours on the weekend would be my best option. While I still am a few years out of graduating and don't know what will happen to the PT profession upon graduation, it is a risk I am willing to take. It is definitely a rewarding career and I can't wait to experience it. I plan to live on a just above the poverty line salary for several years because once I get them paid off, it could mean a 45000 or 50000 raise per se. I guess we will see what happens!

 

[noyceguy]

Thank you for the input. I'm definitely trying to get it paid off within 5 to 7 years. 10 at the ABSOLUTE max. I have researched a bunch of jobs and I know the SNF and prn make the most and picking up those extra hours on the weekend would be my best option. While I still am a few years out of graduating and don't know what will happen to the PT profession upon graduation, it is a risk I am willing to take. It is definitely a rewarding career and I can't wait to experience it. I plan to live on a just above the poverty line salary for several years because once I get them paid off, it could mean a 45000 or 50000 raise per se. I guess we will see what happens!

If you go through with this plan, your life will be miserable.

 

[jdaniels360]

noyceguy, eveyrone is different. Some of us have been poor our entire life and don't know what the inside of a restaurant looks like anyway. I have friends that all they know is eating out and spending $$$. You sound like you haven't lived a poor lifestyle, or can't take it on the chin and do whats necessary to be successful later. You can't put out a blanket statement like that and not elaborate in a discussion like this. If you care to edit your post and provide your logic then your opinion may be of a higher value. If you truly land in a setting that you LOVE, and its the reason you got into therapy, then this so called nightmare becomes more like a dream. The SNF population are why i'm in this field. I'm well aware this is not the case for everyone. Again however, you need to take things like this into account before throwing out there that life "life will be miserable" if you live within your means and try to pay off big loans in less than 10 years.

 

[SBanks]

Unfortunately some people think it's perfectly normal to have lots of debt, and take the "cheapest" option of the lowest possible monthly payment. People fail to see the big picture, and continue to live in the "here and now". I may make some people angry by saying this, but that type of thinking is for children. You are allowed to say "NO". If you sacrifice like crazy for a few years you will have 20 or 30 years of living debt free except possibly a house. That's how you create a legacy. Credit cards and "paycheck to paycheck" are the norm though.

 

[jdaniels360]

SBanks, bingo. Gracias.

 

[no31always]

Unfortunately some people think it's perfectly normal to have lots of debt, and take the "cheapest" option of the lowest possible monthly payment. People fail to see the big picture, and continue to live in the "here and now". I may make some people angry by saying this, but that type of thinking is for children. You are allowed to say "NO". If you sacrifice like crazy for a few years you will have 20 or 30 years of living debt free except possibly a house. That's how you create a legacy. Credit cards and "paycheck to paycheck" are the norm though.

It's all about that legacy. Thanks again. I definitely don't mind living like I am broke for a few years if it means I'll have 25-30 years of being debt free.

 

[SoFloDPT2016]

While it is important to live within your means and pay off debt as soon as possible, forgetting to save for retirement can have some unwanted consequences down the road. By all means if your student loans are over 8% and/or are private, you need to pay those off ASAP. If your loans are at 6% or less and federal, you should look into paying the minimum that you can afford while putting aside money into retirement accounts (401k, IRA, 403b, etc). Throwing money at student loans like water at an angry fire may seem like the most logical thing to do, but when you are getting ready to retire you may and up with less money than if you had started investing earlier. On the reverse side of the situation, just paying the minimum payment so that you can afford your over sized house's mortgage, or your new car loan payments is a bad idea. The best thing to do is to educate yourself. Finances tend to scare us PT students, because we probably have not been exposed in our undergraduate and graduate experiences.

 

[no31always]

good stuff SpFloDPT2016. I definitely just need to educate myself more and weigh all of the options.

 

[Bluecase]

I completely agree with soflo - you don't want to be 65 cheering the fact you paid your loans off as quick as possible when youre 401k and IRAs look like crap when it matters

 

[Schland]

This is what I have decided to do as a new grad from this summer who started working in September after reading different financial websites and books. Not saying my decision is 100% correct and I get that many people are at different points in their lives when they graduate. I am thankful I am only 24 and not planning a wedding or kids for at least a few years. I also have no other debts (car, credit cards, etc) and have all federal loans.

#1 I put 10-15% of my paycheck into my savings account as soon as I get paid
#2 Sign up for direct debit. You cut your interest by 0.25%. May not seem like a lot but it is better than nothing and adds up over the years. Other benefit is you will never miss a payment. Just make sure you have enough money in your account.
#3 Start making payments as soon as you reasonably can and don't wait for the grace period to end. When those 6 months are up all unpaid interest will be capitalized to your balance and will begin collecting its own interest. I would be best to cut down as much of that unpaid interest as you can. Many people don't seem to know this **
#4 I selected the 25 yr payment plan; however, I have NO intention on taking 25 yrs. I got this advice from a financial book. With federal student loans you have no penalty making early/extra payments. So basically if you are someone who will be able to make extra payments each month this works to your advantage. The reason being if something happens down the road (you lose your job, get in a car accident, can't work, house caught on fire, etc etc , life happens) you will only owe the smallest amount on your loans for the time being while you have to figure out your unfortunate circumstance. But when all goes well be sure to make extra payments each month. So far for December I paid $950 extra on top of my monthly required payment and I may make another payment this week (I have been working insane amounts of overtime and that time and a half is really adding up ).
#5 All but two of my loans are the same interest since my last year in school the law changed and lowered interest rates (yay). So I will make all my extra payments to the loans with the higher interest and not spread the payments out equally over the loans.


I also plan on starting a 403b in the coming months. I work for a not for profit hospital and I may end up changing my whole plan and do the public service loan forgiveness. Just not sure how much I trust this deal to still exist in 10 years. I'm still debating.

 

[SBanks]

SoFloDPT2016, The whole reason you would want to pay off your Debt as fast as possible is to 1) protect yourself if an emergency came about, and 2) It would allow you to put a lot more into retirement for the majority of your career. After putting money away each month for 20 or 30 years, I'm not sure how you would possibly come out with less just because you started a few years earlier. Investing with no debt allows you to invest much more each month. Investing while you have debt is kinda Like the saying " If everything is a priority then nothing is a priority" You should eventually invest well beyond your company plan 401k. 15% minimum and up. Dave Ramsey is who I recommend personally. His philosophy is basically common sense. His radio show on his website isn't only about money. I highly recommend it for money knowledge, leadership knowledge, business advice, and for entertainment.

 

[SoFloDPT2016]

SBanks, I agree that student loan debt should be paid off as soon as reasonably possible, especially loans with high interest rates and private loans. Delaying payment leaves you open to a lot of risk like you say. Lets say you get a back injury after 10 years, or you decide to become a stay at home parent after 5 years, the return on your investment has significantly gone down while your monthly loan payments still need to be made. That risk can be attenuated by having an emergency fund, proper insurance and a working budget, but the risk is still there. I am not an expert, but from the little that I understand the best path for most recent graduates is to pay off their higher interest loans first as soon as possible, that should be the priority, after that is done, then use their extra savings to simultaneously pay off loans with lower interest rates, invest in retirement accounts, and save for future purchases (the 2000 Toyota Camry with 200,000 miles and peeling paint isn't going to last forever). What constitutes a high or low interest rate is relative to how much risk the person is willing to take and how much they expect to get in return in retirement investment. Everyone's financial situation is different, your advice is good and safe as it eliminates a lot of risk, but if you were to run some numbers you may find out that investing sooner rather than later will leave you with more money when you decide to stop working. Is that extra money worth the risk? It really depends on the individual and their future goals and level of discipline. PT students should become informal students of finance. I like Dave Ramsey, I listened to his ebook "Total Money Makeover." His advice is great, but I would also recommend looking at different sources of information (online, books in the library, podcasts, etc), to get more of a rounded view of what will work best for each person's situation. Again, I am not an expert, I've just read a little and become over zealous about sharing my 2 cents. There is nothing wrong with paying off all your student loans as soon as mathematically possible and living a frugal lifestyle until then. But we should all look at the outcomes and options after educating ourselves.

 

[jdaniels360]

This is great stuff people, much appreciated! Quick question though, is it possible to compile all your loans into one pile that you can actually see going down each time you make a payment? I just have one 5k loan from undergrad plus all my stafford and grad PLUS from PT school. Its all government owned. However i'm under the impression that when i'm done i'll have to pay into multiple accounts rather than just one large one. Thoughts?

 

[SoFloDPT2016]

I believe you can consolidate your loans. There is more information here if you want to read it:

https://studentaid.ed.gov/repay-loans/consolidation

 

[SBanks]

SoFloDPT2016, Many roads lead to Rome. I'm not saying the way I propose it is how everyone should do it, but beginning to invest while you have debt is not a smart move. Would you go take out a loan from a bank just so you could invest it? That's essentially what you are doing when you invest your money while you still have any kind of debt other than a house.

The best way in my opinion to pay off debt is to use the debt snowball method. You should start with the smallest loan first regardless of interest rate. This is because once you see some traction, and get something paid off you have some small victories along the way which are encouraging instead of starting with a huge loan first and never sensing any progress. So Interest rate doesn't matter when paying everything off. The 3,4,or 5 years it took to pay off that debt will be completely irrelevant when it comes time to retire if you've been consistent. An investment calculator proves that. Certainly, you will need a plan in place if your spouse wants to eventually stay at home.

Everyone's situation is different, but when it comes to money it's doing to the simple things consistently that allows you to succeed. It's not credit card points, no fancy rewards, there's not a secret code when you invest, and it's certainly not trying to do everything at once. Dave's 7 Baby Steps are about as simple and effective as it gets.

jdaniels360, Only consolidate if you will net a lower interest rate overall. Don't do it just for convenience. You may be able to put them on autodraft?

 

[DesertPT]

This is what I have decided to do as a new grad from this summer who started working in September after reading different financial websites and books. Not saying my decision is 100% correct and I get that many people are at different points in their lives when they graduate. I am thankful I am only 24 and not planning a wedding or kids for at least a few years. I also have no other debts (car, credit cards, etc) and have all federal loans.

#1 I put 10-15% of my paycheck into my savings account as soon as I get paid
#2 Sign up for direct debit. You cut your interest by 0.25%. May not seem like a lot but it is better than nothing and adds up over the years. Other benefit is you will never miss a payment. Just make sure you have enough money in your account.
#3 Start making payments as soon as you reasonably can and don't wait for the grace period to end. When those 6 months are up all unpaid interest will be capitalized to your balance and will begin collecting its own interest. I would be best to cut down as much of that unpaid interest as you can. Many people don't seem to know this **
#4 I selected the 25 yr payment plan; however, I have NO intention on taking 25 yrs. I got this advice from a financial book. With federal student loans you have no penalty making early/extra payments. So basically if you are someone who will be able to make extra payments each month this works to your advantage. The reason being if something happens down the road (you lose your job, get in a car accident, can't work, house caught on fire, etc etc , life happens) you will only owe the smallest amount on your loans for the time being while you have to figure out your unfortunate circumstance. But when all goes well be sure to make extra payments each month. So far for December I paid $950 extra on top of my monthly required payment and I may make another payment this week (I have been working insane amounts of overtime and that time and a half is really adding up ).
#5 All but two of my loans are the same interest since my last year in school the law changed and lowered interest rates (yay). So I will make all my extra payments to the loans with the higher interest and not spread the payments out equally over the loans.


I also plan on starting a 403b in the coming months. I work for a not for profit hospital and I may end up changing my whole plan and do the public service loan forgiveness. Just not sure how much I trust this deal to still exist in 10 years. I'm still debating.

This sounds like great advice to me. Certainly everyone's situation is a little different, but I think you've got a pretty smart plan going.

It takes a lot of effort to do the math and figure out all the ins and outs of the loan repayment process, but it's well worth it.

 

[DesertPT]

The best way in my opinion to pay off debt is to use the debt snowball method. You should start with the smallest loan first regardless of interest rate. This is because once you see some traction, and get something paid off you have some small victories along the way which are encouraging instead of starting with a huge loan first and never sensing any progress. So Interest rate doesn't matter when paying everything off. The 3,4,or 5 years it took to pay off that debt will be completely irrelevant when it comes time to retire if you've been consistent. An investment calculator proves that. Certainly, you will need a plan in place if your spouse wants to eventually stay at home.

This could be true if you did have loans of widely varying amounts. But if you have a couple of student loans that were both large or both equal in size, it would make sense to pay of the one with the higher interest rate first.

And I know everyone thinks Dave Ramsey is like a god or something, but he is really just charging you 30 bucks for a book full of common sense and information that is on the internet, compiled into an easy to digest format. Although it is common sense that a lot of Americans seem to have not been raised with (eg. don't use a credit card to spend money that isn't actually in your bank account)...

 

[SoFloDPT2016]

SBanks, well put. If any one is interested a student loan repayment estimator can be found here:

https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action

A chart with student loan interest amounts for different federal loan types can be found here:

http://www.direct.ed.gov/calc.html

And a calculator for estimating returns on investments can be found here:

http://www.investor.gov/tools/calculators/compound-interest-calculator#.VJhJ0sAOA

The current rate of return on retirement investments seems to be around 5%. Which is a lot lower than the 8-10% that is usually used. That may or may not change over the 20 to 30 years of our careers. If it stays at 5% then it definitely would be best to pay off student loans ASAP instead of investing. I encourage anyone who is interested to play around with some numbers and take a look. The earlier you start investing for retirement the better off you'll be, but consumer debt is like a cancer to your finances. While student loans aren't really consumer debt they don't have nearly as much of a tax benefit as a mortgage does. We need to educate ourselves, make a plan like SBanks has, that fits our financial situation, and have the discipline to follow through.

 

[jblil]

I'd encourage all of you to take a class in Personal Finance at a community college after you get your DPT. The info you learn will serve you well in your career and your personal life. Also do your taxes by hand at least once (i.e., don't use Turbo Tax or another software package), so you understand how the numbers flow.

Last but not least, take a holistic approach to your financial situation. Lots of folks think of a "retirement bucket", a "life insurance bucket", a "mortgage bucket", an "investment bucket", etc. They are really all interconnected, and decisions you make for one item will have repercussions on others.

 

[DesertPT]

I'd encourage all of you to take a class in Personal Finance at a community college

This is great advice. I have definitely got to suck it up and do this one day. Probably well worth the couple hundred bucks it will cost if you can find class that is reasonably in depth (ie. not Dave Ramsey in lecture format lol).

 

[SBanks]

knj27, Most people do have loans of widely varying amount such as a credit card, and/or auto loans. Obviously use common sense with this method.

You have made a gross oversimplification of what Dave Ramsey's company does. I've never spent any money on his stuff. You don't really need to. He tells you everything you need to know on his radio show. I have read his book because it was given to me as a gift. What his book "Total Money Makeover" -which is only $10 at the moment- does is it gives you the truth about money. Most is common sense, some is mathematically driven, and a major purpose of it is motivation, and a clear mind. That's often overlooked, but once people can see a road to financial success it seems to get people in gear! The people that come on his radio show to do their "Debt Free Scream" is proof of that. I'm not a spokesperson for Dave; I simply believe wholeheartedly in what his company does just like I believe in physical therapy as a life passion. I also don't want anyone reading this to reduce a great company down to "but he is really just charging you 30 bucks for a book full of common sense and information that is on the internet, compiled into an easy to digest format." That would simply be untrue. His company also deals heavily with business, entrepreneurship, counseling and leadership. Go explore.

 

[DesertPT]

knj27, Most people do have loans of widely varying amount such as a credit card, and/or auto loans. Obviously use common sense with this method.

No doubt. And probably the best thing you can do to keep your finances in order is to live within your means and never incur credit card debt. You think 6-8% PT loans are bad (which it is)...man how about these people with thousands of dollars of credit card debt at 15-20% variable rate interest...

You have made a gross oversimplification of what Dave Ramsey's company does. I've never spent any money on his stuff. You don't really need to. He tells you everything you need to know on his radio show. I have read his book because it was given to me as a gift. What his book "Total Money Makeover" -which is only $10 at the moment- does is it gives you the truth about money. Most is common sense, some is mathematically driven, and a major purpose of it is motivation, and a clear mind. That's often overlooked, but once people can see a road to financial success it seems to get people in gear! The people that come on his radio show to do their "Debt Free Scream" is proof of that. I'm not a spokesperson for Dave; I simply believe wholeheartedly in what his company does just like I believe in physical therapy as a life passion. I also don't want anyone reading this to reduce a great company down to "but he is really just charging you 30 bucks for a book full of common sense and information that is on the internet, compiled into an easy to digest format." That would simply be untrue. His company also deals heavily with business, entrepreneurship, counseling and leadership. Go explore.

I totally agree with what he preaches. My point was that he is making a crap ton of money teaching everyone what their parents should have taught them when they were teenagers and young adults (as well as some stuff that grown people should be able to figure out on their own). Obviously that is not the reality of the world we live it, but that doesn't mean it shouldn't be.

And you are definitely right that the radio show is free to listen to, and I think that's great and I'm glad people are bettering their lives with it. I don't have any problem with people learning from Dave Ramsey's stuff. What I have a problem with is that adults shouldn't have to be taught some of this stuff in the first place.

More advanced principles of investment and saving? Methods of entrepreneurship? Yes I absolutely need to learn more about those and if Ramsey or anyone else can teach me about it then great. The fact that you should avoid credit card debt and get out of the credit card debt you have as fast as possible, and you should do it by living within your means and making a logical plan for how you are going to pay off the debt? No, you nor I nor any other adult should have to have that taught to them.

 

[jblil]

More advanced principles of investment and saving?
- Stick with index funds for your investments since they have relatively low fees
- Diversify; the easiest way is to go with a "total stock market" index fund
- Think carefully about "asset allocation", i.e., how much $ you should divvy up between stocks, bonds and cash (or cash equivalents)

Methods of entrepreneurship?
- Make sure you have a solid understanding of taxes first. Otherwise you can easily be taken advantage of by unscrupulous partners, customers, suppliers or even by your own CPA.

 

[DesertPT]

More advanced principles of investment and saving?
- Stick with index funds for your investments since they have relatively low fees
- Diversify; the easiest way is to go with a "total stock market" index fund
- Think carefully about "asset allocation", i.e., how much $ you should divvy up between stocks, bonds and cash (or cash equivalents)

Methods of entrepreneurship?
- Make sure you have a solid understanding of taxes first. Otherwise you can easily be taken advantage of by unscrupulous partners, customers, suppliers or even by your own CPA.

You are absolutely right. Thanks for your advice.

These are the types of things I was saying that I wouldn't expect the average American to have learned growing up. How to manage credit cards and other basic concepts of living within your means are what I would expect people to know, but sadly often times they don't.

So the things you are listing are what I would classify as "advanced" for the purposes of this discussion, insomuch as a large proportion of the populous doesn't know what those things are.

 

[SBanks]

Investing:
http://www.daveramsey.com/elp/home?ictid=rt.nav

entrepreneurship:
http://www.daveramsey.com/store/boo...OKS-cDavesLibrary-cBusinessLeadership-p1.html

There are a lot of other good books out there, but here is a nice compilation of some excellent leadership/business books.

 

[AlanWattsBlues]

SoFloDPT2016, Many roads lead to Rome. I'm not saying the way I propose it is how everyone should do it, but beginning to invest while you have debt is not a smart move. Would you go take out a loan from a bank just so you could invest it? That's essentially what you are doing when you invest your money while you still have any kind of debt other than a house.

This is a complicated issue. You'd have to compare the interest rate of the debt with the yield of the investment. This is further complicated by tax issues. The effective rate of the student loan may be less than the nominal rate due to potential deductions to income. Also, there is the advantage of maxing out tax-deferred savings to be considered.

To really know the answer to the question "what is the best way to allocate these funds?", you would need to know the interest rate on your debt, the future yields of investment, your future earnings, inflation, tax rates currently, at retirement and every point in between.

It's complex. I wouldn't think someone was necessarily making a not-smart move if they put something into a 401k at the same time that they were paying off student loans. What if inflation skyrockets in 10 years? What if we hit some golden age of economic growth over the next 15 years? What if something horrible and unexpected happens and you need access to savings (and not just "less debt"). There's a certain value in diversifying your financial life.

 

[SBanks]

Diversifying at the expense of decreasing risk is simply not a move I would make. From what I understand, tax-deferred savings are beneficial for high income earners that make too much for a Roth IRA (Tax-exempt account). If you are in a lower tax bracket then Tax-deferred accounts (Traditional IRA) wouldn't help you especially if you plan to earn more money as your career progresses. I don't have a Securities license so please don't take what i'm saying as absolute fact

You talk about the nominal and effective rate for your student loans- It's such a small percent, and along with deductions to your income probably amount to pennies on the dollar. Just pay it off man. 3 or 4 years of paying
it off will have absolutely nothing to do with what your retirement looks like in 30 years.

To really know the answer to the question "what is the best way to allocate these funds?", you would need to know the interest rate on your debt, the future yields of investment, your future earnings, inflation, tax rates currently, at retirement and every point in between.

What you Invest for retirement shouldn't have anything to do with the interest rate on your debt. Everything else you said is true-people should be informed of their current, and future tax situation via a CPA.

Investing is not complex. Invest 15% minimum, or more into your retirement for 30+ years by a competent adviser, be debt free, and you'll be doing very well. You can come up with "what if" scenarios all day long. What if the sun blows up?? You always make 0% on money you don't invest. The stock market has averaged 10-12% since the 1920s. Follow Dave's 7 baby steps, and after 30 years of doing that you can e-mail me thanking me for the excellent advice! I think I've said all that I can say about student loans and financial strategies.

 

[AlanWattsBlues]

What you Invest for retirement shouldn't have anything to do with the interest rate on your debt. .

As time permits over the holidays I'll make a spreadsheet that illustrates the relationship.

 

[AlanWattsBlues]

Investing is not complex.

Everything should be as simple as possible....but no simpler than that. I've uploaded a spreadsheet that works through a simplified example that compares two scenarios:

Scenario 1: Someone graduates at the age of 25 with $100k in loans @ 6.25% who makes $65k. This person pays it off over 10 years, then takes all the money that had been going to loans and invests in a 401k, realizing 8% returns before retiring at age 65.

Scenario 2: Someone graduates at the age of 25 with $100k in loans @ 6.25% who makes $65k This person pays it off over 25 years. From the start, the debt paydown difference between person 1 and person 2 goes into a 401k on a pre-tax basis. Once the loan is paid off, person 2 jumps up to investing at the same rate as person 1.​

You'll note that person 1 and person 2 have the same disposable income and so enjoy the same standard of living. At retirement, person 2 has about $200k more in the 401k.

Follow Dave's 7 baby steps, and after 30 years of doing that you can e-mail me thanking me for the excellent advice!

I don't doubt that Dave's 7 baby steps are good rules of thumb. But nothing takes the place of critical thinking and a good spreadsheet. The math here is nothing more than a bunch of arithmetic, and yet it arrives at a conclusion that would be counter-intuitive to many.

I'd be interested in your thoughts on the above. As I said, it's a simplified example. I started making a more complicated one that would take into account increases in salary over time, monthly compounding of interest and investment yields, increases to the 401k contribution max and an income-based effective tax rate (don't even get me started on the 401k employer contribution). But then I started drinking vodka, and...well..here we are.

 

[noyceguy]

Everything should be as simple as possible....but no simpler than that. I've uploaded a spreadsheet that works through a simplified example that compares two scenarios:

Scenario 1: Someone graduates at the age of 25 with $100k in loans @ 6.25% who makes $65k. This person pays it off over 10 years, then takes all the money that had been going to loans and invests in a 401k, realizing 8% returns before retiring at age 65.

Scenario 2: Someone graduates at the age of 25 with $100k in loans @ 6.25% who makes $65k This person pays it off over 25 years. From the start, the debt paydown difference between person 1 and person 2 goes into a 401k on a pre-tax basis. Once the loan is paid off, person 2 jumps up to investing at the same rate as person 1.​

You'll note that person 1 and person 2 have the same disposable income and so enjoy the same standard of living. At retirement, person 2 has about $200k more in the 401k.



I don't doubt that Dave's 7 baby steps are good rules of thumb. But nothing takes the place of critical thinking and a good spreadsheet. The math here is nothing more than a bunch of arithmetic, and yet it arrives at a conclusion that would be counter-intuitive to many.

I'd be interested in your thoughts on the above. As I said, Tis a simplified example. I started making a more complicated one that would take into account increases in salary over time, monthly compounding of interest and investment yields, increases to the 401k contribution max and an income-based effective tax rate (don't even get me started on the 401k employer contribution). But then I started drinking vodka, and...well..here we are.

Thank you for this excellent post.

 

[jblil]

Alan - thanks for taking a stab at this. I do want to point out a couple of things though:
- The model is fairly sensitive to the investment yield. At 6%, there is no difference in the two scenarios. Below 6%, scenario 1 ends up with more money.
- The vast majority of investment models uses a deterministic approach, i.e., "the stock market will return 8%." However, things are not so simple in real life. The return may be -10% one year, +5% the next, then +7% the year after... So I think a stochastic model for the returns would be a better choice, but it comes with its own set of assumptions and complications. You can do it with Excel although it is a real pain in the tush.

Bottom line, I think there is no one-size-fits-all answer to paying student loans early or over "x" years. There are just too many moving parts: your own tolerance for living as a pennyless student after graduation, your tax situation, your spouse's income (if applicable), the market gyrations, etc. That's why I have always recommended that new grads take a Personal Finance class. Once you (generic "you") understand the basics of investing and taxation, you can build a model that reflects your own situation and assumptions for the future.

As an aside, to date the stock market is still the best place to put your money in for the long term. I have been in it since the mid-1980s and have lived through the crashes/bear markets of 1987, 1989, 2000 and 2007. I thank my lucky stars for being lazy and not doing anything to my portfolio throughout those years (i.e., no panic selling). Sometimes procrastination does pay off...

 

[AlanWattsBlues]

So I think a stochastic model for the returns would be a better choice, but it comes with its own set of assumptions and complications. You can do it with Excel although Tis a real pain in the tush.

Good point. It was a simplification that I didn't really make explicit. Choosing the variables that drive a stochastic simulation could become a can of worms. And I guess if I could really model future financial markets, I shouldn't be banging my head against the wall in PT school

Bottom line, I think there is no one-size-fits-all answer to paying student loans early or over "x" years. There are just too many moving parts...

This is the whole reason why I posted this drawn out example. I bristle at people judging other's financial decisions when they haven't thought through some of the complexities of it. Thanks for stating it plainly.

As an aside, to date the stock market is still the best place to put your money in for the long term. I have been in it since the mid-1980s and have lived through the crashes/bear markets of 1987, 1989, 2000 and 2007. I thank my lucky stars for being lazy and not doing anything to my portfolio throughout those years (i.e., no panic selling). Sometimes procrastination does pay off...

Glad to hear you made good choices. Lazy is the way to go. And it's amazing when I see the simple products that Vanguard has out. Broad diversification in an automatically rebalancing target date fund for a cost of 0.2%? Being lazy gets easier and easier. My stomach churns when I see people try to actively manage their money.

Now all I need is income...

 

[SBanks]

AlanWattsBlues, You have provided an excellent example of what may work in a vacuum; but as we all know Murphy and his 3 cousins (broke, desperate, and stupid) will come live in your spare bedroom at some point in time just like they do everyone. Rocket Scientists have things on paper that may work in theory, but most of the time there's a big difference in theory and reality.


What you fail to realize in your chart is risk. You also make some assumptions that are inaccurate to the way I would do things in this scenario. That's the only way I give advice- In the form of "what I would do" I don't judge anyone personally.

I wouldn't take 10 years to pay off 100k, nor would I suggest that route for anyone as their "Plan A". I also wouldn't settle for $65,000 salary. I'm assume 65K is gross income here. I'm working crazy overtime, or an extra job to bring home a net income of around 80k. If Person 1 took 8 years instead of 10 to pay off their loan, and began to invest the $18,330 every year for 32 years until they were 65 then their balance would be 2.6 million. If they invested the $18,330 for 35 years they would have a balance of 3.4 million. One or two intangible objectives renders your chart inaccurate.


There's nothing wrong with being very analytical, detail-oriented, and thinking critically-trust me I'm all of those- but don't do it to the point where the Good Idea Fairy comes in and somehow convinces you that taking a 100K loan and turning it into a 200K loan is a good financial strategy.

jbill said it exactly right: Investing is a long and boring process. Stay consistent and don't panic. There's no special "Code" to figure out.

Stay out of debt, greatly decrease your risk by working Dave's 7 baby steps, and enjoy your money.

I just read a book yesterday called the "Go Getter". Excellent short read. I would encourage anyone reading this to go read it.

 

[AlanWattsBlues]

Rocket Scientists have things on paper that may work in theory, but most of the time there's a big difference in theory and reality.

Rocket scientists also use math to launch rockets from Earth and knock them into Mars. They aren't putting anything into orbit based on rules of thumb.

In general I don't know how to reply to your comment. I used a spreadsheet to illustrate the tradeoff between paying down debt with after-tax money vs. investing in a tax-deferred account. It's a simplified example meant to capture a financial relationship that you previously claimed did not exist.

Your comments regarding what you specifically would do, or alternative ways of investing are meaningless when you don't show a side by side comparison where the only change in variable is how long the person takes to pay down their debt and move into full blown investing.

The rules of thumb you talk about aren't bad pieces of advice, but based on everything you wrote, I"m still not sure that you understand the point I'm trying to make.

 

[SBanks]

AlanWattsBlues, Do you by any chance have two dogs named Poundcake and Muffins?

 

[jblil]

I think we'll have to agree that there are different strategies to repay student loans after we graduate. Think carefully, run some numbers, and then pick the strategy that's best-suited for your own individual situation. The other side of the coin is good money management: by being careful with your hard-earned income, you'll have more discretionary funds to put against your loans or to fund your hobbies (or vices...). Here are a couple of things I have learned over the years, and let me tell you - considering the price of experience, there is no better teacher.

First, keep track of your monthly expenses. By knowing where your money goes, you will be much better prepared to manage it successfully. Also, if you/your spouse need to take some time off from work to raise a family or to take care of an ailing family member, you will have a financial dashboard to help you gauge your options. There are several apps you can use for tracking expenses such as Mint or Toshl. Personally, I use a credit card for just about every purchase. At the end of the month, I download the cc statement and analyze it with Excel's pivot-table function. The whole thing takes no more than 5 minutes. A side benefit of tracking your expenses is that you'll know your "monthly nut" in excruciating details; when the time comes to retire, you'll know exactly how much income you need to maintain your lifestyle. You won't have to rely on those over-simplified articles on Yahoo or CNN that say "in retirement, you need 80% of your working income" because you will have your own trove of customized data.

Second, if at all possible, avoid using a broker when you invest. There is a joke about brokers: they will make you even more broke than you already are. Educate yourself on financial matters and you can confidently buy/sell/trade most securities directly without having to go through a broker.

Third, keep an eye on fees when you invest. Even though the fees may seem low and inconsequential, they will take a huge bite off your investments when compounded over 30 or 40 years. If you go with mutual funds, stick with Vanguard or Fidelity; they have low fees and excellent customer service.

If I can think of other things, I'll post them. Feel free to ask questions - I am much older than most of you and wish that somebody had sat me down and told me those things when I graduated from college. Most of the stuff above I learned from the school of hard knocks, and a tiny bit of it when I got my MBA.

I almost forgot - merry Christmas to all!

 

[SBanks]

Don't forget real estate as an investment either. I hope everyone has a Merry Christmas!

 

[Romazicon]

This thread is gold! Figuratively of course

 

[NewTestament]

The other side of the coin is good money management: by being careful with your hard-earned income, you'll have more discretionary funds to put against your loans or to fund your hobbies (or vices...).

First, keep track of your monthly expenses...

Third, keep an eye on fees when you invest. Even though the fees may seem low and inconsequential, they will take a huge bite off your investments when compounded over 30 or 40 years. If you go with mutual funds, stick with Vanguard or Fidelity; they have low fees and excellent customer service.

I found that if I live frugally that I need to make at a minimum of $60k as a new graduate, but I won't accept any position that offers less than $65k just in case. I would avoid vacations and hobbies until those loans are paid off.

I agree. Keeping track of expenses helps. It shows you where you are spending your money and where you can cut expenses. A simple spreadsheet on Excel is all you need.

I used T. Rowe Price before I went back to school. I think they did a good job investing my money and the fees were minimal.

 

[jblil]

I found that if I live frugally that I need to make at a minimum of $60k as a new graduate

I assume you have a family? If I were single, I think I can get by with ~$30K/yr, living frugally. Of course, this wouldn't apply if the job is in San Francisco, Northern Va, NYC or some other high-COL locale.