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Medical School Student loan question? Pay off early or carry it till you die?

Discussion in 'Finance and Investment' started by Leonardsean, Sep 4, 2014.

  1. Leonardsean

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    I'm a married, 44 y/o 4th year medical student who will (hopefully, knock-wood) be starting residency next year. I'll graduate with roughly $300,000 in student loan debt. I've recently read that federal student loan debt is cancelled upon death, but I'm also a big Dave Ramsey fan who advocates paying down all debt ASAP.

    By tightening the belt a little, I could probably pay off my loans early and save a lot of interest over the life of the loans, but if I paid the minimum, and just invested the income over and above expenses, I could maybe do better, if the loans outlive me and get cancelled.

    I also read that loan forgiveness (for people with disabilities, not deceased individuals) is taxable. So would my estate get taxed for the cost of the outstanding loan at the time of my death?

    Any thoughts?

    --Sean
     
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  3. NICUfello

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    Sean,

    When are you looking to die?

    If you finish by 47, you have almost 20 years of income generating years left, and you should be able to pay off debt by then.

    http://forums.studentdoctor.net/threads/pay-off-med-school-loans-vs-save-up-and-buy-a-house-first.1095280/

    I am 17 years younger than you are, 100K less debt, and hoping to pay it off in 10 years.

    Yes loan forgiveness is taxable. There is no free lunch.

    If you listen to Dave Ramsey, you already know the answer to the question you posed.
     
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  4. Leonardsean

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    I listen to Dave Ramsey, but don't always agree with him...:)

    (For instance, we've purchased a multi-family house where I attended school and the rental income from the tenanted unit and from renting my childhood home, have been life savers. Ramsey would say that it would be better for us to live in a rented apartment, and sell the owned properties in order to minimize the carried debt (i.e. use the equity to reduce my eventual school-loan burden). He would say that the risk is too great and to only purchase rental properties with cash, later on down the road, when you have all debt cleared.)

    Dave has a very strict financial program, which may not fit everyone cookie-cutter style.

    --Sean
     
  5. NICUfello

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    ^^^
    Most advise in the world doesn't fit everybody. You gotta do what is best for you....
     
  6. Wealth Anatomy

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    I recommend getting the debt paid down after you build up an emergency fund. Sure, there are loan forgiveness programs but you're playing with the government which has a tendency to change to rules mid-game. You might just find yourself extending those loans out forever only to find out that loan forgiveness is not an option any longer.

    I did a podcast a couple weeks ago on this issue called Invest, Debt, or Split the Rest? you may be interested in listening to: http://www.wealthanatomy.com/2014/07/31/15/

    Hope it triggers some thoughts and gives some clarity...
     
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  7. dpmd

    dpmd Relaxing
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    Rates for your loans make a huge difference. Nowadays it is hard to get a relatively safe investment that will beat the return you get on current loans (unlike those of us who were lucky enough to consolidate when rates were low)
     
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  8. krl7044

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    Well, the government will take your social security to pay for your loans. Don't worry, they'll take what's theirs. That can be a big hit by the way - they'll take it over 20, 30+ years potentially. So you'll end up paying one way or the other.
     
  9. QofQuimica

    QofQuimica Seriously, dude, I think you're overreacting....
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    This. What are your rates? Odds are good they're high enough that you should be paying the loans back sooner rather than later.
     
  10. thesauce

    thesauce Senior Member
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    How would you extend it out indefinitely even if you wanted to? There's not a 30-40 year payoff option that I'm aware of...
     
  11. hughesn2

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    Do you plan on dying in the next 20yrs??? It may even be hard for you to have a bank give you rates for a house if you have a $300K debt on student loans at age 47 (assuming that is when you plan on being finished). If we were allowed to use your logic then student loans would be worthless and you would just ignore them and they'd never haunt you.

    I also have one question, what did you do BEFORE you attended med school before your early 40s? Did you save up much money during the 18 to 20yrs before med school?

    The student loan companies don't want to wait 30yrs to get their money back and really for you that would not work that well because the amount of interested accrued in that time for how much you have will just as much interest to pay off than the original amount. If it took you 30yrs to pay back your loans on a $300K debt you will probably have to pay off the original $300K AND the $400K in interest that accrued for a combined $700K in loans.
     
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  12. thesauce

    thesauce Senior Member
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    I was with you until the end. His loans would have to be near 2% to only double in 30 years. In that case, his interest rate is lower than inflation and he probably should take as long as absolutely possible to pay them off. If they were closer to 5%, like most, they would more than quadruple.
     
    #11 thesauce, Sep 7, 2014
    Last edited: Sep 7, 2014
  13. Ibn Alnafis MD

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    Actually his/her estimation was a spot on. At 6.8% interest rate, paying off 300k over 30 years results in paying a little over than 400k of interests, resulting in a total repayment amount of 700k.

    http://www.finaid.org/calculators/scripts/loanpayments.cgi
     
  14. dpmd

    dpmd Relaxing
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    Perhaps the difference in estimates is because of compound interest (which federal loans don't have, they capitalize unpaid interest when changing payment plans but I think that is it)
     
  15. thesauce

    thesauce Senior Member
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    You're assuming simple interest only? Again, this is a very wishy-washy scenario since I'm not sure how you can string them out for 30 years, but you'll likely have to switch payment plans numerous times which will lead to compounding each time.

    If you can get away with simple interest only for the entire 30 years, why would anyone advocate for him to pay it off any earlier than he needs to? Inflation DOES compound and would easily wash out the savings from paying the loans off early.
     
  16. thesauce

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    Where is this 30-year payoff option? I want in.
     
  17. hughesn2

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    @thesauce but like I did say (and you stated in this last comment of yours) there ISN'T a 30yr payment plan. Yeah, I think you are correct. I was only looking at the current undergrad student loan payment of 6.8% simple interest.

    We can all agree on one thing though, the cost of higher education is increasing drastically, while the median salary of Americans is staying the same or barely increasing. One of the things I hate the most with my parents logic is when my dad talks about "back in my days" when he talks about moving out of the house and his finances. When he graduated in 1980 or so he could pay for an entire years worth of tuition and housing with just his summer jobs pay.
     
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  18. dpmd

    dpmd Relaxing
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    If you consolidated loans with a 20 yr standard repayment, then used deferments/forbearances/income based repayment plans leading to a smaller than standard repayment payments I could see someone dragging things out past 20 yrs. Not sure how the new forgiveness rules would affect that.

    Edit: I just checked the studentloans.gov site and they have a 30 yr consolidation repayment option, I would guess that means the forgiveness stuff wouldn't apply, but you never know with the government. Also there was an extended repayment plan in place since 1998 which let you pay it off over 25 yrs.
     
  19. thesauce

    thesauce Senior Member
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    Yep. Those good ol' days are long behind us.
     
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  20. thesauce

    thesauce Senior Member
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    Well, this has been a worthwhile discussion. If I can get on a 30 year consolidation repayment option, it might make the most sense. In the former situation you described, loans would compound numerous times, but if there's a 30 year repayment option...
     
  21. Mad Jack

    Mad Jack Critically Caring
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    PSLF is not taxable.
     
  22. Mad Jack

    Mad Jack Critically Caring
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    Extended repayment is 30 years in length.
     
  23. dpmd

    dpmd Relaxing
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    It says that it is based on what you owe and some other stuff, I didn't look that closely but I would guess it is something you can select when you apply for it.
     
  24. thesauce

    thesauce Senior Member
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    PSLF no, but the 20-25 year options are
     
  25. thesauce

    thesauce Senior Member
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    We've been discussing this, but it doesn't sound like the 30 years is absolute - possibly it depends on the amount you owe, etc. Do you know how this works?
     
  26. Mad Jack

    Mad Jack Critically Caring
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    http://www.finaid.org/loans/forgivenesstaxability.phtml

    Public service loan forgiveness, teacher loan forgiveness, law school loan repayment assistance programs and the National Health Service Corps Loan Repayment Program are not taxable. Loan discharges for closed schools, false certification, unpaid refunds, and death and disability are considered taxable income. The forgiveness of the remaining balance under income-contingent repayment and income-based repayment after 25 years in repayment is considered taxable income.
     
  27. Mad Jack

    Mad Jack Critically Caring
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    It depends on your debt level. You have to have at least 60k in debt, so basically anyone on this forum qualifies.

    http://www.finaid.org/loans/repayment.phtml

    Loan Term for Extended/Graduated Repayment

    For extended and graduated repayment, the following chart shows how the maximum loan term depends on the amount borrowed.

    Loan BalanceMaximum Loan Term
    Less than $7,50010 years
    $7,500 to $9,99912 years
    $10,000 to $19,99915 years
    $20,000 to $39,99920 years
    $40,000 to $59,99925 years
    $60,000 or more30 years
    There is a variation on extended repayment in the FFEL program that provides a repayment term of up to 25 years, not 30 years, if you have more than $30,000 in loans with a single lender. This 25-year extended repayment plan does not require you to consolidate your loans.
     
  28. The White Coat Investor

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    With the loan terms you likely have, I think it would be a terrible idea to stretch them out any longer than necessary. In fact, if I were you, I'd try to convert them to mortgage debt after residency if you don't anticipate PSLF. If nothing else, you should go for PAYE forgiveness at 20 years. Why anyone would stretch out loans longer than 20 years when PAYE is available is beyond me.

    Personally, I'd live like a resident for 2-5 years after residency and pay them off. That's essentially what I did (although my loans were time, not money, but it's really the same thing.)
     
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  29. thesauce

    thesauce Senior Member
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    Thanks, although I'm not sure why you posted this. That's what I just said.

    PSLF is not taxable, the 20-25 year options are ("The forgiveness of the remaining balance under income-contingent repayment and income-based repayment after 25 years in repayment is considered taxable income")
     
  30. thesauce

    thesauce Senior Member
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    I'm beginning to wonder about this. If you can stay on one payment plan without switching (thus avoiding compounding interest), the simple interest accrued in repayment may fall under the rate of inflation - in which case a 20-30 year plan may make sense.
     
  31. Mad Jack

    Mad Jack Critically Caring
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    I just misread your comment. PSLF or bust is the way to go so far as forgiveness options, as IBR and PAYE will land any physician with an epic tax bomb, something I think we both agree on.
     
  32. dpmd

    dpmd Relaxing
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    Most people aren't deciding between paying off their loans or putting their money in their mattress though, so you have to compare the rates tou would get from other actions to what you would get from paying your loans faster
     
  33. NICUfello

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    I started the standard repayment. $1260 a month now. Around 200K, 5%.

    The AES website shows its a 30 year payment plan (well 28 more years).

    I am making payments to finish in 10 years.
     
  34. The White Coat Investor

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    It would be very rare that it would make sense to carry loans for longer than 20 years when PAYE offers forgiveness after 20 years of payments.
     
  35. thesauce

    thesauce Senior Member
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    I don't think PAYE is available to me since I started borrowing in 2005
     
  36. The White Coat Investor

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    I'm not sure either. I'd check though. If it isn't, look into IBR forgiveness (same thing, but requires 25 years of payments.)
     
  37. Mass Effect

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    You are correct. PAYE is only available to those who started borrowing after 2007. Also, it's only for direct loans, so if you took out any FFEL loans, you won't qualify.
     
  38. SigmaFS

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    Per executive order issued around June 2014, PAYE will be extended to all federal direct loan borrowers effective Dec. 2015. If you have a mix of FFEL, Perkins, LDS, HPSL and/or Direct Loans, you may need to consolidate via Direct Loan Consolidation (www.studentloans.gov). There are other considerations that should be given before selecting Direct Loan Consolidation.
     

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