Starting Loan Repayment

[fatpigeon2010]

My 6 month grace period is about to end for my loans. I have 140k borrowed plus 17k interest that accumulated during Med school. My wife has a total of 34k in loans (masters in social work). What do most people do in Ophtho for paying these off? I'm thinking PAYE (Pay as you earn) or IBR (Income based repayment) during my residency since we wouldn't be able to afford the huge payment required on about 190k total, then after residency just paying a lot more on the loan than required per month (like 2k or more/month, which is just over what the payment would be if it was on a standard 10 year repayment plan) to pay it off early.

Anyone else had experience with a similar plan as this? I'm thinking it would be the best option to just stay in PAYE and pay greater amounts, assuming there is no penalty for earlier or greater payments. I don't really want to hang on to these loans long enough to get the "loan forgiveness" and I don't think that is really an option based upon future salary anyway. Any thoughts?

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[ophthope]

I'm more in debt than you (>$180k at this point), and in forebearance. My wife stays home with our child and there's no way we can afford for her to stay home and do any sort of PAYE or IBR repayment. Even the estimated payments on those would slide us into an untenable financial situation. I know tons of other people in various residencies in this situation and this is what we all do. Interest keeps building and it feels horrible but you just don't think about it. Our plan is to live like I'm still in residency once we get out, don't take on any new debt as long as our cars keep running, and pay it off ASAP. I'm going to funnel as much of my money into loan repayment as possible.

This is only realistic if you are the kind of person that will actually do this. As for my family: We don't have much expensive stuff, we live modestly, and I fix everything of ours that breaks until it just can't go on any longer. I think I could count on one hand the number of pieces of clothing we have that weren't bought off the clearance rack, on a steep sale, or with some coupon my wife found. If my wife wasn't a vigorous deal shopper it wouldn't be possible, but you'd be surprised how cheap you can find those Banana Republic wrinkle free dress shirts when the time is right. We buy groceries on a credit card and pay it off immediately to get the bonus points to buy other stuff. If you just attack your finances from all angles you'd be surprised how great of a living you can have with a resident's salary, and we don't really want for anything so we aren't totally hurting to get to attending salary level so it shouldn't be much of a stretch to keep living this way until the debt is paid.

 

[MstaKing10]

During residency and fellowship I deferred loan repayments (on principal) but did pay off the interest on the loans. This was a tax write off for me and since I didn't have any other write off's such as a house or children, was one way I could get a nice tax return every year.

Some of your repayment plans may also depend on the interest of those loans. If they are low interest, you may want to consider investing your money and making the minimum payment on your loans. The extra money you make with wise investment should outweigh the benefits of paying those loans early, especially if you consider investing for retirement over the next 20-30 years. Some have such an aversion to debt that they rather pay back the loan early and that's fine. My loans are low interest (roughly 2%) and thus even though there is a significant amount of debt there, I am better off investing making 8-10% ROI (or maybe better). The market has been particularly bullish this year and investments have done even better than that, of course 5-6 years ago I was not doing as well. That is just the ups and downs of the market and is expected.

Personal finance is just that, personal. Everyone may see things a bit differently but consider your options and then follow through with your plan.

 

[fatpigeon2010]

Thanks for the help. Unfortunately my loans are 6.8% - the lowest percentage there was at the time for Graduate loans for professional school. Though I'm not too averse to being in debt, my wife is. I'm almost wondering about the idea of deferring on mine and paying hers down. I guess my decision will probably come down to paye vs forbearance

 

[ophthope]

Some have such an aversion to debt that they rather pay back the loan early and that's fine. My loans are low interest (roughly 2%) and thus even though there is a significant amount of debt there, I am better off investing making 8-10% ROI (or maybe better).

Holy crap how did you get 2% loans? Almost all federally backed graduate school loans are set at 6.8%. At that interest rate there is less room for considering the risk/benefit of putting more toward investments than putting it toward loan repayment. I've got ~$10,000 in a medium-risk sort of mixture of stocks in my IRA and if I averaged over the last few years it would at best be marginally better to add money to that IRA instead of repaying loans. I'm sure I'll max out my (and my wife's) yearly IRA contribution as an attending even if I have to pay less on the loans just because of the tax benefits and because well, two maxed out IRAs is still only $11,000/yr. After paying off the loans I'll look more towards investments.

Most of my co-residents have either:

1. Plans similar to the one I just described or
2. Plans to make smaller payments because they're tired of being 'poor' and want to buy a nicer car, a boat, a bigger house, etc... and then they'll pay off the loans

Nobody I know is really considering investing instead of loan repayment and it isn't because we don't know the logic behind it. It's because our interest rates are ~7% and on average higher, because private loans like Sallie Mae charge more than that.

If I was sitting at 2% I wouldn't feel as much of a rush to be free of the loans as quickly.

 

[MstaKing10]

I graduated at a time when interest rates were far more favorable. 6% or higher would definitely make me nervous enough to warrant paying down the loan as soon as possible and put off investments until they were paid down to a more reasonable level.

A note about your IRA. This is likely a Roth IRA. You will no longer be eligible for a roth once your yearly income level exceeds roughly $110k single or $180k married. Many physicians will find themselves exceeding these income limits and having to find more creative investment options such as sep IRA's that are equally or comparably tax efficient. These have much higher limits sometimes making it more difficult to decide whether or not to invest vs pay back loans. Still, at your interest rate level I agree with your plan.

 

[Dusn]

http://whitecoatinvestor.com Is a site that has a lot of great info.

 

[90 diopter]

I had all my loans on forbearance during residency. They were consolidated around 2% as well, but I didn't care; I wanted to get rid of them as fast as possible. Once I got out of training, I threw everything I had at my loans (minus max contributions to my tax deferred retirement accounts) and paid everything off in 2 years. That was one of the happiest days of my life.

A note about your IRA. This is likely a Roth IRA. You will no longer be eligible for a roth once your yearly income level exceeds roughly $110k single or $180k married.

You can still do a Backdoor Roth despite the high income. I've done one every year since I fired my financial advisor and found out on my own about the process. Lots of detailed instructions on bogleheads.org.

 

[ophthope]

Anyone know if consolidating in this day and age can get you comparable interest rates to what are being discussed here? I'd love to be closer to 2% than I am to 7% right now. Losing out on PAYE / IBR repayment options doesn't matter to me. I'll either be in forebearance or paying them down.

 

[90 diopter]

Anyone know if consolidating in this day and age can get you comparable interest rates to what are being discussed here? I'd love to be closer to 2% than I am to 7% right now. Losing out on PAYE / IBR repayment options doesn't matter to me. I'll either be in forebearance or paying them down.

I highly doubt it. I got lucky and consolidated in early 2005 right before student loan rates exploded.