In debt far above my eye balls!!

[deleted77919]

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[The White Coat Investor]

What do you recommend for someone graduating med school owing 450k+ debt (500k+ after residency)? Continue living like a resident while putting the excess income towards loans, or take advantage of REPAYE?

You've got a bigger problem than what to do with your loans during residency. When you get out of residency you're going to owe $600K+. I recommend looking VERY carefully at attending jobs that qualify for PSLF (i.e. only taking one that does) and praying Congress doesn't change the rules. That means in residency you must stay in government programs like IBR/PAYE/RePAYE. It also means you probably shouldn't pay extra on the loans since the goal is to get something like $400-500K of them forgiven. If you plan to actually pay these loans off, you've got a long row to hoe. Either way, RePAYE should work fine during residency, especially if you're single, but I'd put any extra savings somewhere else for now like a Roth IRA.

 

[The White Coat Investor]

Are you all aware that the wealthiest of the wealthy, those with enough cash not to need to borrow, often use debt (if the interest rate is right for the purpose) to serve a purpose?

Corporate example: Even Apple Corp, the wealthiest company on the planet with biggest cash reserve in the world, uses debt for certain purposes. They park much cash overseas and borrow back in the USA against their cash, because the rate they can get is lower than the penalties they'd have to pay, repatriating the cash back onto US shores.

Personal example: I could cash out my 401k to pay off my students and be much closer to debt free. But it would be stupid, since my interest on my student loans costs me less than would the penalties paid and lost tax advantages of the retirement program, with matches, etc.

Who's better off, 1-someone with $1.5 million in assets and $0.5 million in debt, or 2-the guy with $1.0 million in assets and $0 in debt? They both have the identical net worth of $1 million.

Answer: It depends. Maybe guy #1, maybe guy #2, or maybe they're equally as good off. It depends on many, many factors; interest rate, liquidity and stability of the assets, tax rates, etc.

It just something to think about. That being said, and as I said above, everyone should do what they're most comfortable with.

That's a lovely little story about how awesome debt is. Now go tell it to Ibn Alnafis above who owes 9 times his salary in student loans that are increasing in size by an amount MORE than his salary each year no matter what he does about it. Trust me when I say Apple isn't borrowing money at an after-tax 6.8%-8% per year. (Apple bonds have a coupon of 2.4%.) Besides, Apple can get a far better return on its money than Ibn Alnafis can. So Apple borrows at 2.4% and earns at 15%. Ibn Alnafis borrows at 8% and earns at 1%.

In your situation, I would recommend you max out your retirement plans AND pay off your debt early through lifestyle control. It doesn't have to be an either/or choice. Those who do BOTH reach financial independence very early and tend to enjoy their careers (or early retirement if they hate their chosen career) more than those who choose either/or.

 

[The White Coat Investor]

Everyone needs to find their own balancing point.

I know a number of professionals locally who ended up with devestating medical conditions, none of them wish they had more in savings rather than spending more time/money enjoying life when they were healthy. Attorney with 7 figure savings, devestating stroke at 62, now hemiplegic. Ortho doc in his 50s working hard for early retirement, mountain biking accident, paraplegic. Second ortho doc also in his 50s, herniated disk, paraplegic. My brother obsessed over early retirement and socking money away. Dead of an MI at 47. Now his wife and her useless family members are trying really hard to piss it all away. Heck my own father saved aggressively but never stopped working. Now he is looking at withdrawing money from tax deferred accounts at a higher tax rate than when he contributed because his income is higher and he refuses to quit working.

Make sure not to sacrifice too much.

It is such a sacrifice to only spend $10K a month, isn't it? It's really limiting how many times a year I can vacation in Europe.

Seriously though, I agree with your main point. Try to create your ideal life as early in life as possible- ideal work, ideal play, ideal family life etc. On a typical EP salary, you really can have it all. But if you've got $450K+ in student loans, you need to take care of business before going for your ideal life.

 

[Birdstrike]

In your situation, I would recommend you max out your retirement plans AND pay off your debt early through lifestyle control.

Lol

That's exactly what I'm doing.

 

[Birdstrike]

You've got a bigger problem than what to do with your loans during residency. When you get out of residency you're going to owe $600K+. I recommend looking VERY carefully at attending jobs that qualify for PSLF (i.e. only taking one that does) and praying Congress doesn't change the rules. That means in residency you must stay in government programs like IBR/PAYE/RePAYE. It also means you probably shouldn't pay extra on the loans since the goal is to get something like $400-500K of them forgiven. If you plan to actually pay these loans off, you've got a long row to hoe. Either way, RePAYE should work fine during residency, especially if you're single, but I'd put any extra savings somewhere else for now like a Roth IRA.

Are you "100% debt free"? I bet dollars to donuts you're not...

 

[The White Coat Investor]

Are you "100% debt free"? I bet dollars to donuts you're not...

Do I get the dollars or the donuts?

But no, I'm not. I have a $285K 15 year 2.75% fixed mortgage. Here's my plan to pay it off early. http://whitecoatinvestor.com/my-quest-to-become-debt-free/ I'm about halfway there. I too struggle with the math of paying off very low interest rate debt (I figure after tax mine is something on the order of 1.5% while inflation is running at 2%) early. But when my debt is the equivalent of something like 10-20% of my net worth and rapidly falling, maybe I can afford the luxury of being debt free and not have to eke out every dollar of arbitraged income I can get.

 

[Birdstrike]

Do I get the dollars or the donuts?

But no, I'm not. I have a $285K 15 year 2.75% fixed mortgage. Here's my plan to pay it off early. http://whitecoatinvestor.com/my-quest-to-become-debt-free/ I'm about halfway there. I too struggle with the math of paying off very low interest rate debt (I figure after tax mine is something on the order of 1.5% while inflation is running at 2%) early. But when my debt is the equivalent of something like 10-20% of my net worth and rapidly falling, maybe I can afford the luxury of being debt free and not have to eke out every dollar of arbitraged income I can get.

So your debt serves a purpose?


PS-If you had won, you'd have gotten dollars, but since you lost the bet, you owe me donuts.

 

[emergentmd]

You've got a bigger problem than what to do with your loans during residency. When you get out of residency you're going to owe $600K+. I recommend looking VERY carefully at attending jobs that qualify for PSLF (i.e. only taking one that does) and praying Congress doesn't change the rules. That means in residency you must stay in government programs like IBR/PAYE/RePAYE. It also means you probably shouldn't pay extra on the loans since the goal is to get something like $400-500K of them forgiven. If you plan to actually pay these loans off, you've got a long row to hoe. Either way, RePAYE should work fine during residency, especially if you're single, but I'd put any extra savings somewhere else for now like a Roth IRA.

I don't think 600K in loans out of residency is that insurmountable being an EM doc. If I did not have kids out of residency and knowing what I know now, I could retire that comfortably in less than 2 yrs and if I really pushed it, I could get rid of it in one year.

 

[deleted109597]

So your debt serves a purpose?


PS-If you had won, you'd have gotten dollars, but since you lost the bet, you owe me donuts.

This is how I feel. Everyone points out that millionaires "don't have mortgages" or whatever. And it's true, but are they millionaires because they paid off their mortgage, or did they pay it off because they're millionaires? Millionaires wear Rolexes and have chauffeurs, if I get those will I become a millionaire too?
Yes, most poor people carry a lot of debt, but some debt isn't always a bad thing. Multiples of your annual salary (or, what everyone else calls a mortgage) might make it tougher, but only to a degree. That's why they don't let you borrow infinity. Hell, when I first tried to get my mortgage, due to me being a 1099 employee, it was tough to find anyone to lend me money. They all had their hands forced by the new laws, and were burned due to oil field money drying up. Right now our mortgage is approximately 1 annual salary for me and my wife. Add in student loans at 1.625%, and we are up to about 1.3x annual salary. I'm in no hurry to pay off either, because I'm dumping it all into Roths, SEP IRAs, and now taxable accounts. My vehicle is 9 years old, but we take a lot of vacations (conferences, so they're business expenses, but whatever).

 

[emergentmd]

I also do not think debt is all bad if you know how to manage it. My home jumbo loan is on a 2.5%30 yr mortgage. Why would I ever want to pay that off quickly? I just finished 5 yrs of payment on my 40k car at 0%, why pay that off early?

I took out a 0% credit card loan for 16 months when I got out of residency to put towards some school loans. It costs me $500 for a 20k loan which was way less than what i would have paid in loan interests.

 

[The White Coat Investor]

As your net worth grows you'll have less and less need and willingness to deal with little debts like credit cards and auto loans, even at low interest rates. I'm starting to feel the same way about my mortgage. The amount of "arbitrage there" from borrowing $285K while investing $285K isn't much compared to everything else in my financial life. I mean, if I earn 6% and pay 2%, that's 4%. 4% of $285K is about $11K a year. I think I put away $350K last year. $11K is almost insignificant in comparison. Now, back when I was in the military and only saving $30K a year, $11K was a much bigger deal.

 

[Brahnold Bloodaxe]

Can someone explain why the rates on medical school loans are so much higher now than they were when today's attendings were in school?

We've been in an unprecedentedly long run of near zero interest rates (Fed) that stretches all the way back to 2008. Additionally, the Fed has pumped over 4 trillion dollars into circulation via successive rounds of quantitative easing, pushing equities and other asset classes to dizzying highs completely unreflective of the strength of the underlying economy. We are awash with liquidity. So why are interest rates on our loans so damn high, literally 2 to 3 times higher than they were in times of much higher Fed rates? Physicians are still a pretty good bet to pay back their loans, and they're one of the few classes of individual borrowers who remain so in our hollowed out economy. I'd have expected our rates to be inching lower than they were in the mid 2000s, not higher.

 

[Psai]

Can someone explain why the rates on medical school loans are so much higher now than they were when today's attendings were in school?

We've been in an unprecedentedly long run of near zero interest rates (Fed) that stretches all the way back to 2008. Additionally, the Fed has pumped over 4 trillion dollars into circulation via successive rounds of quantitative easing, pushing equities and other asset classes to dizzying highs completely unreflective of the strength of the underlying economy. We are awash with liquidity. So why are interest rates on our loans so damn high, literally 2 to 3 times higher than they were in times of much higher Fed rates? Physicians are still a pretty good bet to pay back their loans, and they're one of the few classes of individual borrowers who remain so in our hollowed out economy. I'd have expected our rates to be inching lower than they were in the mid 2000s, not higher.

Because the government said so

 

[ISuckAtLife]

As your net worth grows you'll have less and less need and willingness to deal with little debts like credit cards and auto loans, even at low interest rates. I'm starting to feel the same way about my mortgage. The amount of "arbitrage there" from borrowing $285K while investing $285K isn't much compared to everything else in my financial life. I mean, if I earn 6% and pay 2%, that's 4%. 4% of $285K is about $11K a year. I think I put away $350K last year. $11K is almost insignificant in comparison. Now, back when I was in the military and only saving $30K a year, $11K was a much bigger deal.

On the contrary, 11k a year extra (which compounds) for doing essentially nothing is a lot regardless of your annual income. Also, 6% is probably overly conservative over the long haul.

Tax loss harvesting and other techniques can easily make the difference more. At the end of the day, just call it what it is...psychological. The math clearly does not favor paying off 6 figures of low interest debt regardless of income level.

 

[The White Coat Investor]

On the contrary, 11k a year extra (which compounds) for doing essentially nothing is a lot regardless of your annual income. Also, 6% is probably overly conservative over the long haul.

Tax loss harvesting and other techniques can easily make the difference more. At the end of the day, just call it what it is...psychological. The math clearly does not favor paying off 6 figures of low interest debt regardless of income level.

$11K isn't a lot of money when you're Warren Buffett. That's ridiculous.

Call me when you're a multimillionaire and let me know how much of it came from arbitraging stuff like this. People get rich by making a lot, saving a big chunk of it, and investing it in some reasonable way. People get broke by just doing the math and assuming that borrowing at 1-5% and investing at whatever you want your returns to be is easy. I have yet to run into someone who owed nothing who had to declare bankruptcy, who got foreclosed on etc etc.

I'm not going to criticize you for carrying some reasonable amount of low interest debt for a longer period of time than you have to. I'm doing the same thing. But the key is LOW interest and REASONABLE amount and recognizing that some of that additional return comes from taking on additional risk, it isn't free.

But I can tell you this-I've borrowed money to invest in the past and I suppose I'm doing it now with my mortgage. Overall, the amount I made by doing that makes up less than 1% of my net worth. If you want to do this with some chunk of money fine, but don't kid yourself that it's really doing much to move the needle in reaching your financial goals.