How long does it *actually* take to pay off loans?

[humuhumu]

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I've heard residents talk about their grandiose plans to pay off their student loans about 1 or 2 years after they finish their residency, but I need a reality check. How long does it really take to pay off loans? Are you a physician who has paid off $100,000+ in loans? Have you talked to physicians who have finished paying off $100,000+ in loans? How long did it take them? I need hard data (or at least credible anecdotes), not speculation and pipe dreams!

Thanks!

 

[dry dre]

I've heard residents talk about their grandiose plans to pay off their student loans about 1 or 2 years after they finish their residency, but I need a reality check. How long does it really take to pay off loans? Are you a physician who has paid off $100,000+ in loans? Have you talked to physicians who have finished paying off $100,000+ in loans? How long did it take them? I need hard data (or at least credible anecdotes), not speculation and pipe dreams!

Thanks!

What I'm going to bring up has been beaten to death, but it's worth bringing up again.

For people consolidating their loans now or in the last couple years, it would be FOOLISH to pay off these loans in a rapid fashion. Who are these residents? I will certainly be taking as long as possible to pay off the debt.

It makes no sense to quickly pay back student loans with an interest rate of ~2%. Instead of making "large" payments to get the debt down quickly, it makes more sense to take the extra money (the difference in dollars between making the minimum payment and the 'large' payment you want to make to buy down the debt) and put it in a CD etc earning a rate higher than your loan consolidation rate.

I think it's time that an econ course be added to the typical premed requirements...

 

[fourthyear]

Standard student loan terms are usually 10 years. Consolidated loan terms are usually 30 years.

When you put $150,000+ into a 30 year loan at 2-3%, it's analogous to buying a house, but at a much better interest rate than you could ever get for a house (except, of course, when you're done paying it you don't have anything to sell like you do a house).

But the point is, who would pay off their house in 2 years, even if they could afford to? No body.

Say you have a house worth $200,000 - buys you a reasonably sized house in many smaller cities and suburbs in this country, coasts excluded of course. And say you make $200-300,000 per year - which, keep in mind only is about $120-180,000 due to taxes taking about 40%. You "could" live off $40,000, like you did during residency and knock out that loan in 2-4 years, but almost nobody does this.

That's because even at a good rate of 5-7%, it's not worth it to pay for the house when, as the above person says, you could put it in investments making more than that. Especially when most med students and residents haven't been able to invest much money prior to this point in life so they're behind on the retirment savings already. Or, you can use the money to buy a new car, pay off higher interest credit cards, furnish or make improvements to that house, take some vacations, whatever you want. It's not worth it to stick all your money into paying off a long term loan at a low interest rate when there are so many other ways to spend it.

You can do it however you want. But I'm taking my whole 30 years.

 

[k's mom]

One other issue to consider if you are older/have a family, etc... Check your promissory note, but under most conditions, if the "student" who took out the loan dies/becomes permanently disabled, the FEDERAL loan is forgiven in its entirety, although some private consolidation companies avoid this clause. (This is why you should NEVER consolidate loans with a spouse, because it always voids this provision) Personally, I would rather have a big chunk of our mortgage paid off/a large savings before accellerating payments on a low-interest student loan...if only for the "what if" factor.

 

[southerndoc]

What I'm going to bring up has been beaten to death, but it's worth bringing up again.

For people consolidating their loans now or in the last couple years, it would be FOOLISH to pay off these loans in a rapid fashion. Who are these residents? I will certainly be taking as long as possible to pay off the debt.

It makes no sense to quickly pay back student loans with an interest rate of ~2%. Instead of making "large" payments to get the debt down quickly, it makes more sense to take the extra money (the difference in dollars between making the minimum payment and the 'large' payment you want to make to buy down the debt) and put it in a CD etc earning a rate higher than your loan consolidation rate.

I think it's time that an econ course be added to the typical premed requirements...

I will also take as long as possible to pay off my loans. With an interest rate of only 2.875%, I can make more money just leaving my money in a savings account (my ING Direct Savings Account now gets 3% APY). This 2.875 rate is before I get my .25% discount for enrolling in an automated debit payment system and before a 1% reduction in interest for 36 consecutive ontime monthly payments. So my interest rate will be 1.655%!

This summer is the time to consolidate -- before the new interest rates go into effect. Even if you are currently enrolled in school, you should seriously consider consolidating what you have now. Since all federal student loans are variable rate when not consolidated, if you wait until after interest rates go up to consolidate, then you lose the ability to get a lower interest rate.

 

[phenobarbiedoll]

I'm still confused.

Let's say you take a long time to pay your loan. According to the arguments presented here, let's say your school loans are at a 2% interest rate and your savings account is paying a 4% interest rate. So you decide to put your money into the savings account instead. You subtract the 2% from the 4% to get a net positive of 2% per year (roughly).

So you take 30 years or more to pay off your loans... making a slight positive of 2% per year.

But let's say you pay off your loans quickly, ie 10 years. You won't be able to put any money away in savings for the first 10 years. So no net gain there. But after those first ten years, with all your loans paid off, you'll be making net gains for the next 20, 30, 40, 50 years. Ie, according to the simple numbers I mentioned, you'd be making 4% every year off your savings account (after the first ten years) instead of 2% for the next 30 years.

I haven't done a lot of thinking yet about my loans (still an MS III), and I haven't discussed it with anyone yet either, so I'm not sure if any of this makes sense. That is just how it appears intuitively to me.

 

[doc05]

I'm still confused.

Let's say you take a long time to pay your loan. According to the arguments presented here, let's say your school loans are at a 2% interest rate and your savings account is paying a 4% interest rate. So you decide to put your money into the savings account instead. You subtract the 2% from the 4% to get a net positive of 2% per year (roughly).

So you take 30 years or more to pay off your loans... making a slight positive of 2% per year.

But let's say you pay off your loans quickly, ie 10 years. You won't be able to put any money away in savings for the first 10 years. So no net gain there. But after those first ten years, with all your loans paid off, you'll be making net gains for the next 20, 30, 40, 50 years. Ie, according to the simple numbers I mentioned, you'd be making 4% every year off your savings account (after the first ten years) instead of 2% for the next 30 years.

I haven't done a lot of thinking yet about my loans (still an MS III), and I haven't discussed it with anyone yet either, so I'm not sure if any of this makes sense. That is just how it appears intuitively to me.

I'm not sure what you're getting at. first off, student loans are closer to 3%; and you're not getting 4% on most savings accounts. but...

the basic premise of paying off over 30 years is that your monthly payments are very low. while paying off over 10 years theoretically means your total repayment amount is less, guess what?? most people cannot do that given the ridiculous amount of debt combined with crappy income during residency.

with lower monthly payments, you will be able to afford things like food, a house, etc. this is particularly important during the early years when your income sucks, esp because you may not be able to defer loans through your entire residency. once you're done training and making 200k per year, there is still no reason to pay off everything at once. you'll have low monthly payments, thus enabling you to do more with your cash, like retirement savings, a fancy house, paying for your kids' college, etc.

 

[NinerNiner999]

I'm still confused.

Let's say you take a long time to pay your loan. According to the arguments presented here, let's say your school loans are at a 2% interest rate and your savings account is paying a 4% interest rate. So you decide to put your money into the savings account instead. You subtract the 2% from the 4% to get a net positive of 2% per year (roughly).

So you take 30 years or more to pay off your loans... making a slight positive of 2% per year.

But let's say you pay off your loans quickly, ie 10 years. You won't be able to put any money away in savings for the first 10 years. So no net gain there. But after those first ten years, with all your loans paid off, you'll be making net gains for the next 20, 30, 40, 50 years. Ie, according to the simple numbers I mentioned, you'd be making 4% every year off your savings account (after the first ten years) instead of 2% for the next 30 years.

I haven't done a lot of thinking yet about my loans (still an MS III), and I haven't discussed it with anyone yet either, so I'm not sure if any of this makes sense. That is just how it appears intuitively to me.

Go to Bankrate.com and play around with compound interest calculator for the plans you have presented - there shouldn't be anything confusing about it. Let's assume you can afford to pay $1200 per month towards your loans. Instead of paying $1000 per month each month for 10 years, you consolidate and reduce your monthly payment to $400 per month at 2%. But, since you could afford to pay $1000 per month, you wisely invest the other $600 per month into an account that makes 4% interest. In 10 years, a $400/month payment will be like a $150 per month payment in today's money. But by then you will also be making more money then when you started as an attending, and you would be able to afford $1200 per month to invest into the same account where you have made 10 years worth of compounded savings. All of a sudden $400 per month or loans becomes chump change and your investment/savings account is through the roof. Here's how this example works out:


30 years of consolidated loan payments at $400/month: $144,000.00 spent

10 years of paying $600/month into a 4% account: $89,901.73
PLUS 20 years of paying $1200/month into a 4% totals $642,942.27

OR Option #2 - pay your loan off in 10 years and then invest for another 20 years (again, assuming $1000 per month for ten years, then $1600 per month into investment):

10 years of loan payments at $1000/month: $120,000.00
10 years of savings: $0.00
20 years of investing $1600/month at 4%: $594,608.67

Difference between option 1 and option 2:

$642,942.27 - $594,608.67 = $48,333.60 you would save as profit if you spread your payments over 30 years.

Not to mention that these rates are based on a simple savings account. In actuality, your interest rate return would be between 8-12 % based on good investment choices, meaning your profit over 30 years is even more. Does this help clear things up?

Based on 10%:

$126,224.40 (10 years at $600) then 20 at $1200 per month:
$ 1,756,410.64

or

20 years at $1600/month:
$1,209,647.99

Based on expected investment rates over 30 years, paying $120,000 of student loans in 10 years would cost you over $430,000 in savings over 30...

 

[jazz79]

This summer is the time to consolidate -- before the new interest rates go into effect. Even if you are currently enrolled in school, you should seriously consider consolidating what you have now.

I was told by my school that you can't consolidate till you're done with school. Are they wrong? I have some loans from undergrad-can I consolidate them with my first three years of medschool loan before I'm done?

 

[dry dre]

But let's say you pay off your loans quickly, ie 10 years. You won't be able to put any money away in savings for the first 10 years. So no net gain there. But after those first ten years, with all your loans paid off, you'll be making net gains for the next 20, 30, 40, 50 years. Ie, according to the simple numbers I mentioned, you'd be making 4% every year off your savings account (after the first ten years) instead of 2% for the next 30 years.

If the above doesn't make sense, consider the following...

You also need to appreciate the concept of the purchasing power of money. Ran the following through a Forbes calculator (assuming average 3% annual inflation over the 30 year period):

Assume $200k in debt at 2.8% interest over 30 years = 360 payments of $827

$827 today is worth $827 in 2005 dollars (okay, didn't run this)
$827 in 2015 is worth $610 in 2005 dollars
$827 in 2025 is worth $450 in 2005 dollars
$827 in 2035 is worth $331 in 2005 dollars
*=worth means "buying power;" what your dollars will get you

Note that the current 2.8% interest rate is near the stable-historical inflation rate. This means that the loan is INTEREST FREE (so long as inflation averages at/above 2.8, a relatively safe bet). There is no reason to quickly pay back an interest free loan, unless you psychologically get off on giving away money that could easily be banked/invested.

Now again, think about what your 2005 dollars are worth compared to what your 2033 dollars will be worth....do you really want to give up your dollars now?

 

[PassinGas]

It is possible to consolidate while still in med school, but you will have to check your individual situation to see if it is something you want. One could consolidate with Direct (the federal government) while still in school, and as long as the last year of med school loans isn't consolidated with the Direct consolidation loan...then reconsolidation of the last year of loans and the Direct consolidation loan after graduation could be an option, which would provide the advantage of borrower benefits offered by various lending companies that are better than Direct's benefits.

 

[cardiologydude]

No you cannot consolidate your loans until you graduate.

 

[Mman]

No you cannot consolidate your loans until you graduate. Period.

Did somebody pass the gas?

at many schools, but not all, you can consolidate at any time.

The government will even tell you this

 

[southerndoc]

No you cannot consolidate your loans until you graduate. Period.

Did somebody pass the gas?

You can consolidate while in school.

 

[dry dre]

No you cannot consolidate your loans until you graduate. Period.

The above person is simply wrong and sadly forceful in the process. As Mman points out, there are no absolutes.

 

[cytoskelement]

A group of Harvard Business students formed a NPO called Graduate Leverage. This organization gives talks on how to best manage your student loans. Check out graduateleverage.com. Also, they presented at my school and the talk was captured via AVI... feel free to download the 1 hr talk at the following address. The link is on the right side under AMA/AMSA Student Debt Management. It is well worth the time and answers all mentioned questions.

http://medscope.umaryland.edu

**edit** Fixed link! Sorry for any problems.

 

[cardiologydude]

maybe

 

[doglover]

You are talking to somebody who already went throug the consolodation process last year. Yes I asked at least 10 companies if I could consolidate while in the school (well, it was May 2004 and I was a med student for another month). In every phone call I was told I can consolidate on the day of my official graduation. Not even 1 day before. Whoever is telling you differently is not telling you the truth. Yes, you can submit your application before you graduate but they will not process it until you graduate. The paperwork will sit in their office and collect dust. I am talking about federal subsidized and unsubsidized loans. I have no idea what a " direct loan" is.

Well you will discover the truth soon.

That's because you were wanting to include your med school fourth year loans. Consolodation is an option for those not graduating this year but who still want to lock in these current low rates for the bulk of their loans (all those accumulated up until now, wherever they may be in their education).

 

[PassinGas]

cardiologydude...nicely done. You continue to ignore the "truth."

If you can't consolidate while in school period, then I'd love to hear your explanation of how I did it myself last year. Why don't you read my previous post and check it out before making an unfounded statement...and to be rude as well...

I consolidated a portion of my loans with Direct so that I could shop for the best lender after graduation rather than being stuck with having to go with the "one lender" rule. No gimics...done through the fed gov. I don't even have to make payments if I don't want to, because I have the option of deferment on my consolidation loan. Also, I would have been protected with a locked in low interest rate had the gov decided to switch to variable rates early.

And, yes, I'm talking about fed subsidized and unsubsidized as well...
In fact the interest on my subsidized portion of my consolidation loan is being subsidized right now.

You obviously didn't learn that much last year when you "researched" for yourself. The fact that you say you don't know what a "direct loan" is, means you should find out before being so dogmatic.

YOU CAN CONSOLIDATE WHILE STILL IN SCHOOL!!!!

http://www.loanconsolidation.ed.gov/index.shtml

Moving on...

I agree with cytoskelement and will be letting graduate leverage assist me in making a decision.

I will definitely not be paying off my loans early as both inflation itself and an interest rate on my loans (1.625 or less) that will likely be lower than returns on my investments would make it unwise from an economical standpoint to pay them off early.

 

[tkim]

Now this is interesting.

I consolidated my undergraduate loans several years ago, and did not immediately matriculate to med school after graduation. At the time, it made sense since I was about to enter repayment, could not defer since I was not in med school and consolidating meant some reduction in my interest rate(s).

Now I hear that interest rates are about to climb.

Question: Can I consolidate again - this time with my current med school loans and my previously consolidated undergraduate loans?

I still have two more years of med school, so I understand that those loans would not be considered. But I'd *love* to lock in the lower rates a consolidation at this point in time would offer me.

Anyone do this?

Additionally, when I do graduate, would I then be able to consolidate my remaining two years of med school loans with my previously consolidated UG and MSI/II loans?

 

[mpp]

You would need to have Direct Loans for you to consolidate while in medical school. If you have any Direct Loans, then yes, you can consolidate them all together (which would likely even lower the current interest rate on your previously consolidated loans). If you don't have any Direct Loans then you'll have to wait until you graduate, unfortunately.

 

[PassinGas]

You don't necessarily have to have Direct loans to consolidate with Direct while in school. I didn't have any, and I was able to consolidate while still in med school. Individual situations may vary, but I am going to be able to reconsolidate my Direct Consolidation loan and my latest med school loans after I graduate this May, so you would likely be able to reconsolidate after graduation as well.

You probably wouldn't want to reconsolidate in two years if the consolidation loans at that point go to variable rates.

I suggest that you contact Direct to see what your options are.

 

[tkim]

You don't necessarily have to have Direct loans to consolidate with Direct while in school. I didn't have any, and I was able to consolidate while still in med school. Individual situations may vary, but I am going to be able to reconsolidate my Direct Consolidation loan and my latest med school loans after I graduate this May, so you would likely be able to reconsolidate after graduation as well.

You probably wouldn't want to reconsolidate in two years if the consolidation loans at that point go to variable rates.

I suggest that you contact Direct to see what your options are.

I have a mix of federal and private loans, so at the very least, I would perhaps be able to consolidate my fed loans with my already consolidated loans.

So, interest rates are expected to rise in June - that's the date to beat?

When you say 'contact Direct', do you mean a specific lender?

 

[PassinGas]

Direct = the federal government (the only people I know of who allow you to consolidate while still in school).

You can contact Direct at http://www.loanconsolidation.ed.gov/index.shtml

I didn't have any private loans, but I think I heard that it wasn't a good idea to mix private loans in with your consolidation loan. You may have to research that out a bit.

To answer one of your questions, yes, you should be able to consolidate your fed loans with your current consolidation loans. You will have to contact Direct (the fed gov) to see if you are able to do so in your situation.

Interest rates are expected to go up on July 1, so if you choose to consolidate in the near future, you would likely want to do it on/before June 30th.

 

[tinkerbelle]

Y'all should really watch the grad leverage presentation from cytoskelment's link. It was really good. It'll answer your questions on whether you can consolidate during med school (if you're at an FELL school or whatever it's called, then no you can't consolidate till after graduation unless you have undergrad loans), whether you can include private loans in your consolidation, whether you can consolidate previously consolidated loans (yup), when you should consolidate (depends on the T-Bill which comes out in May... but everyone is assuming interest rates are going up....), and a whole bunch of things you need to look out for when you think about consolidating.

 

[tinkerbelle]

Interest rates are expected to go up on July 1, so if you choose to consolidate in the near future, you would likely want to do it on/before June 30th.

Make sure the lender gives you the interest rate at the time you submit your consolidation application rather than when your app is processed... just in case they hold on to your app and process it July 2nd.

 

[mpp]

PassinGas,

Please tell us about your specific situation. It does not make sense to me that you would have been able to consolidate loans unless you A) have Direct Loans (even if they are from undergrad) or B) go to a Direct Lending institution. I've never heard of anyone else being able to consolidate loans while in school. Could you please tell us which medical school you attend and what undergrad loans you have (which lenders)?

That information would be very helpful to many that would want to consolidate their loans before the rates go up. Feel free to PM me the information if you want to keep anonymity. I am the Financial Aid moderator here at SDN and will keep your information in confidence. Thanks.

 

[Idiopathic]

Let me just ask

With the value of money over time being what it is today (certainly not what it was in 2000, but also not what it was in 2002) would it be wiser to:

a) save 30K a year for 5 years and pay off 30K a year
b) save 50K a year and pay off minimums (i.e. 1K a month)
c) pay off loans as quickly as possible and not save anything (i.e. 6-8K a month)...but then to save beaucoup dollars after that.

Shoot straight with me...I was a sociology major.

 

[mpp]

It doesn't so much have to do with the value of money today but rather what opportunity are you losing by paying back money early. If the loan is at a 20% interest rate, then pay it back as fast as you can. Because usually the opportunity you have with the money is not worth the cost. If however the loan is at a 5% rate and then you might have better opportunities with that money; either investing in something that will return greater than 5% each year, or living in a nice house or driving a nice car, or paying for your kid's college, or whatever. That opportunity might be worth an extra 5% per year to have that money now. The choice is personal because the opportunity is as well.

From a pure monetary value standpoint, pay back loans with low interest slowly and with high interest quickly. If you can make more than the interest on the loan in some investment, then you should pay the loan back as slowly as possible and you will be ahead in the long run; regardless of what happens to the 'value' of the money.

 

[PassinGas]

mpp,

Prior to consolidating with Direct I didn't have any Direct Loans and I don't have any undergrad loans. I go to a state medical school that is not a Direct Lending institution. My consolidation loan with Direct was made up of subsidized and unsubsidized Federal Stafford Loans.

While I am still a full-time medical student, I did not qualify for what Direct calls their "In-school Direct Consolidation loan." That does not mean that I was not able to get a Direct Consolidation loan while still being a full-time medical student. I know it doesn't seem to make any sense, but it is true. The funny part is that my loan summary sheet says that my loan is "Not An In-School Consolidation," which I was told was because I was not at a Direct Loan School and did not have a Direct Loan to consolidate. I was informed that I did not meet the eligibility requirements for an "in-school Direct consolidation loan" that would allow me to save my grace period, but I was told that I could still consolidate my federal stafford loans with Direct while still being a full-time medical student but would simply loose my grace period, which was a small price to pay. To top it off, I was able to take my "Not An In-School Consolidation" loan with Direct and defer payments until graduation (which will come up this May '05) using an in-school deferment. I can't explain it; that's just how it is. Go figure! And, I thought that I was going to have to use up some of my economic hardship deferment to avoid payment. Nope, just a good ole in-school deferment on my non-in-school Direct Consolidation Loan.

I know it's confusing and weird, but all I can do is chalk it up to the fact that the "rules" are written by the government. To make a long story short, I contacted Direct again today and was told that they can consolidate any full-time student in a non Direct Lending school as long as they have federal funded loans to consolidate.

All I can say is that people should call Direct to check out their own situation and ask to speak to a higher up if they don't get their way, the supervisor may know a way to make things work.

 

[kirk002]

I cant access cytoskelements link to the graduateleverage presentation ...i get a blank page. Any suggestions....

 

[PassinGas]

click cytoskelement's link. Then, when the blank page shows up, cut the words "main/start.html" off the end of the link in the address bar at the top of your screen and hit the enter key. A home page pops up, and you click on the "Enter MedScope" button.

 

[Helper101]

It's probably already been said, but don't pay them off early... The additional money you use to "pay down" your low interest debt should be spent on other vehicles (not BMW's) which generate a higher rate of return. You're goal is to maximize your wealth why you are young and healthy. The extra money spent on paying down such low interest debt is better spent on:

1. Disability Insurance: Hey, if you become disabled you won't be able to pay little if any debt off never mind try to catch up for retirement. Remember disabilities aren't alway being in bed with a feeding tube. There are too many possibilities to list.
2. Whole Life Insurance: No better way to provide protection in the event of your death. The premiums are higher, but you get it all back before you retire anyway in the form of cash values and dividends. Also, as you're building wealth, you'll probably have some major estate tax bills when you die. No better way to pay that nasty bill than with the proceeds from life insurance. Term insurance is fine for the short haul, but it actually turns out, in most cases, to be the most expensive insurance. (Contact me if you have questions on that)
3. Be sure your liability insurance limits are maxed and deductibles are maxed! On your car(s), home, practice, ANYWHERE! Have an umbrella policy on your house AND/OR apartment!
4. Pay off high interest debt...ie CREDIT CARDS!!!!!!
5. Fund retirement accounts. This very important! But understand why this is #5. All investments, real estate, retirement accounts,ect. are at risk in the event of a disability, loss of life or law suit.

I've heard residents talk about their grandiose plans to pay off their student loans about 1 or 2 years after they finish their residency, but I need a reality check. How long does it really take to pay off loans? Are you a physician who has paid off $100,000+ in loans? Have you talked to physicians who have finished paying off $100,000+ in loans? How long did it take them? I need hard data (or at least credible anecdotes), not speculation and pipe dreams!

Thanks!