Need a few opinions...

[Green Grass]

Hi,

My wife and I are currently in med school. Together, we are looking at having ~$450,000 debt in school loans. With the current healthcare climate, do we have any hope of getting out of debt in a reasonable (i.e. 10-15 years) amount of time? I'd appreciate any opinions or words of wisdom about this HUGE issue. Thanks.

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[PostLessOne]

As the rules are written, easily.

It's called public service loan forgiveness. 10 years of public service while on Income Based Repayment, and all your loans are forgiven. Working for any non-profit evidently qualifies.

Current IRS rulings are that you do not have to pay taxes on the loan that was forgiven. (you do have to pay taxes if you take the 25 year loan forgiveness)

Elaborating further : finish medical school and choose a residency. The moment you start residency, start paying on your loans with Income Based Repayment. (15% of your income that is above 150% of the poverty line, so about $3600/year for a typical resident)

When you are finished with residency, you or your wife could take a private practice job that pays well for a couple years. The OTHER partner would start a job that is considered public service, such as an academic physician position. (since a medical school is a non-profit, if you are employed by the school or hospital system directly, that's public service, even if you are making $250,000 per year in salary). After a couple of years, switch off. You only have to make a total of 120 monthly payments while being employed full time in a public service job to get the loan forgiveness. It does NOT have to be consecutive, so you could alternate which partner is "working on their loans" to minimize the loss of family income.

Of course, consult with an accountant and a lawyer before you embark on this, yada yada. (you need a written contract from your lender or the government detailing the public service loan forgiveness option so that Congress can't change the rules without compensating you. No, even the Federal government is not allowed to violate a written law or contract under normal circumstances.)

 

[Green Grass]

I have never heard of this program, interesting. Thanks.

 

[Green Grass]

Am I reading this correctly? I could do 5 years of general surgery, 2 years of research, and 2 years of peds surg fellowship. Following this, I would have to work 1 more year for an academic center and my loans would be erased?

Seems to good to be true

 

[PostLessOne]

Since all of those years are working for a nonprofit, yes. And, again, you could do something like do a year or two working for a private group right after you finish that general surgery residency. Save up $100-200k during that time period that you would use to supplement your lifestyle during the years you are in fellowships and doing research.

I just used this calculator to get a rough estimate in your hypothetical situation : http://www.finaid.org/calculators/scripts/ibr.cgi

I assumed you'd have an average adjusted gross income of 45k during residency/fellowship, 3 family members (wife + 1 kid) and an average income of 200k during your 2 years as an academic surgeon.

I calculate that you would pay $50,000 in net present value towards your student loans whether your personal loans were $200,000 or $500,000. It does not matter at all how much you borrowed total, only how much you made over your 10 years of public service. Net present value, btw, is how much money it would cost if you had the money in today's dollars in the bank right now.

In the long run, this is a gigantic problem for the Federal government. We can't have people able to borrow any amount for school and then to only pay back a small fraction of it. That will encourage schools to raise their tuitions to unheard of levels since it will no longer matter at all how much they charge.

I have a strong hunch it won't last, just like they took away the student loans at 2% interest you could get a few years ago. This is why I said that you need something in writing stating that the government will forgive your loans after 120 payments, and that working job X qualifies as public service. That way if Congress were to change the laws before you got your loans forgiven, you would have evidence to be used in a lawsuit for compensation. As far as I know, while the federal government has enormous power it has historically nearly always had to obey it's own laws and written contracts. Those folks with the 2% student loans still have them, btw, just no one can get any new loans like that.

 

[Green Grass]

So you're saying it would be poor to assume that I will be able to take part in this program? Damn.

 

[PostLessOne]

So you're saying it would be poor to assume that I will be able to take part in this program? Damn.

I'm not saying that at all. I'm saying that this program will most likely not be a permanent thing, that's all. In the long run it would help bankrupt the Feds. However, reform could take decades. And, more likely than not, if you were in the middle of paying your loans with public service repayment when they changed the laws, they would allow you to finish or forgive whatever % of loans you had 'earned' forgiveness for. (for instance, 5/10 years would be 50% forgiveness)

 

[thorg12]

i was under the impression that you have make 120 consecutive payments. is this not true?

 

[Green Grass]

i was under the impression that you have make 120 consecutive payments. is this not true?

No, it's true. 10 years of payments.

 

[PostLessOne]

The consecutive part isn't true. It just has to be 120 total monthly payments, each one made during a month you were employed full time in a job considered to meet the definition of public service.

 

[illegallysmooth]

1. Google IBR and public service loan forgiveness. Read alllll about it. But don't COUNT on it.

2. I'm looking at possibly 300-360k BY MYSELF. So don't feel so bad

3. YOU CAN pay it off even without the loan forgiveness. You simply have to live on a resident's salary for a year (once you're an attending). This will knock out the bulk of your debt (if not all of it, depending on your salaries) and significantly decrease the interest you will pay. Make the sacrifice and you will thank yourself later.

EDIT: I do not know where that angry face came from. And I can't change it. I'm not angry!

 

[PostLessOne]

1. Google IBR and public service loan forgiveness. Read alllll about it. But don't COUNT on it.

2. I'm looking at possibly 300-360k BY MYSELF. So don't feel so bad

3. YOU CAN pay it off even without the loan forgiveness. You simply have to live on a resident's salary for a year (once you're an attending). This will knock out the bulk of your debt (if not all of it, depending on your salaries) and significantly decrease the interest you will pay. Make the sacrifice and you will thank yourself later.

EDIT: I do not know where that angry face came from. And I can't change it. I'm not angry!

You can? Suppose you get an attending job that pays $300k (most pay less). Go check how much that is AFTER TAXES (with current tax law...taxes are going to be increased in the future)

Then compare that to your 360k in loans, and make sure that 360k is the number WITH interest after all those years of residency.

You can't do it unless you become a spine or neurosurgeon or get a very sweet deal in some area noone else wants to practice in.

And at a more realistic number of 150-200k, it's even less likely. Your angry face is warranted.

 

[illegallysmooth]

You can? Suppose you get an attending job that pays $300k (most pay less). Go check how much that is AFTER TAXES (with current tax law...taxes are going to be increased in the future)

Then compare that to your 360k in loans, and make sure that 360k is the number WITH interest after all those years of residency.

You can't do it unless you become a spine or neurosurgeon or get a very sweet deal in some area noone else wants to practice in.

And at a more realistic number of 150-200k, it's even less likely. Your angry face is warranted.

Get a calculator and actually work it out before coming back here with that kind of attitude. Someone who graduates with an insane amount of debt (upwards of 300K) can knock off a huge chunk in the first year or two by living on a resident's salary and paying as much as possible toward loans. After that period, he/she will be able to make more reasonable monthly payments for the life of the loan. It simply requires discipline and sacrifice for a year or two.

Let's say for the sake of argument that take home income is 150k. Definitely a low estimate. Live on 50k. Pay off students loans with 100k for either a year or two depending on what kind of monthly payment you're aiming for and how much interest you're willing to pay. Simple, but requires a lifestyle sacrifice in the short term.

 

[PostLessOne]

Get a calculator and actually work it out before coming back here with that kind of attitude. Someone who graduates with an insane amount of debt (upwards of 300K) can knock off a huge chunk in the first year or two by living on a resident's salary and paying as much as possible toward loans. After that period, he/she will be able to make more reasonable monthly payments for the life of the loan. It simply requires discipline and sacrifice for a year or two.

Let's say for the sake of argument that take home income is 150k. Definitely a low estimate. Live on 50k. Pay off students loans with 100k for either a year or two depending on what kind of monthly payment you're aiming for and how much interest you're willing to pay. Simple, but requires a lifestyle sacrifice in the short term.

So for about 4 years, you have to live like a resident. Not smart.

 

[illegallysmooth]

So for about 4 years, you have to live like a resident. Not smart.

You're missing the entire point.

It's a question of being ABLE to pay it back AT ALL. YES, it's POSSIBLE, but requires a short-term sacrifice of having to live on about 50k for ONE OR TWO YEARS in order to eliminate a large PORTION of the debt to MINIMIZE interest which would accumulate if the borrower chose another route - i.e. extended period repayment.

This is ONE person's salary, and if you're using the OP's debt figure than you should be considering TWO salaries.

 

[PostLessOne]

You're missing the entire point.

It's a question of being ABLE to pay it back AT ALL. YES, it's POSSIBLE, but requires a short-term sacrifice of having to live on about 50k for ONE OR TWO YEARS in order to eliminate a large PORTION of the debt to MINIMIZE interest which would accumulate if the borrower chose another route - i.e. extended period repayment.

This is ONE person's salary, and if you're using the OP's debt figure than you should be considering TWO salaries.

Right, but it isn't a smart move at all because proper wealth management maximizes the lifetime utility you get from your wealth. Since you won't be done with residency until sometime in your 30s, you have scant few years during which you can get maximize marginal utility from your money. It doesn't make sense to live like a resident for some of those years so that you can have slightly more money in later years when you are older.

The most important fact you need to keep in mind : money has an exponentially diminishing effectiveness. The difference between spending 25k and 50k a year is bigger than the difference between 50k and 100k and so on. This is why it is a bad idea to live like a resident. Think about it, and get back to me if you understand the reasoning.

 

[illegallysmooth]

Right, but it isn't a smart move at all because proper wealth management maximizes the lifetime utility you get from your wealth. Since you won't be done with residency until sometime in your 30s, you have scant few years during which you can get maximize marginal utility from your money. It doesn't make sense to live like a resident for some of those years so that you can have slightly more money in later years when you are older.

The most important fact you need to keep in mind : money has an exponentially diminishing effectiveness. The difference between spending 25k and 50k a year is bigger than the difference between 50k and 100k and so on. This is why it is a bad idea to live like a resident. Think about it, and get back to me if you understand the reasoning.

When I said you were missing the point, this is what I meant: if the alternative is not being able to pay it back (so either not going to medical school altogether or defaulting on loans after the fact), the best option is to pay off the bulk in a year or two, thereby reducing your balance to a more managable number. This is my advice when you CANNOT do anything else or do not want to end up paying 175k in interest alone (that's not SLIGHTLY more money) via an extended plan.

 

[illegallysmooth]

I graduated with the equivalent of 190K debt 22 years ago. Lived like a resident for a few years out of training. Drove an old beat up Toyota Tercel. Bought a small house and lived on lawn furniture and cast offs from family members for a few years. Now have upgraded the house which is paid for and lots of cash banked.

My plan exactly

Especially in case IBR with public service loan forgiveness has been abolished by then...

 

[PostLessOne]

smooth has it right. Spend less than you make. pay off debt. Save well. Invest wisely. These are the time tested ways of acquiring wealth. The credit crisis of the last few years should have taught everyone that.

I graduated with the equivalent of 190K debt 22 years ago. Lived like a resident for a few years out of training. Drove an old beat up Toyota Tercel. Bought a small house and lived on lawn furniture and cast offs from family members for a few years. Now have upgraded the house which is paid for and lots of cash banked.

With 190k debt at 6.8% interest, after inflation the debt rises approximately 3.8% every year. That effectively consumes $7,000 for every year that you don't pay off the debt. (slightly less than that because the lowest repayment plan requires you pay off a small amount of the principle every year over 30 years)

Suppose your after tax income is 125k as an attending. If you choose to live to your means and pay the debt off slow, you would have roughly $118k every year to enjoy. If you live like a resident the first few years, you would enjoy about $50k for several years, followed by the 'deferred gratification' of enjoying $125k every year.

If you understand my theory, then you'll realize that there is basically no difference in terms of the marginal utility you get between 118k and 125k, but there's a huge difference between 50k and 118k. Thus, if you are trying to maximize your LIFETIME enjoyment of wealth, it is more efficient a choice to pay the debt off slowly.

This doesn't even include the possibility that you'll get more enjoyment from spending more money in those years in your 30s than you would later.

A lot of people make this basic error, and plan to defer gratification until the day they retire or the day they die. It means that when they finally die, lots of funds are left in the bank.

 

[PostLessOne]

Note I said AFTER INFLATION. Inflation has historically been about 3% for decades, and a reasonable speculation is that it will likely become higher in the future. The true interest rate on a loan = nominal interest rate - inflation.

Yes and no about deferring gratification, this is a complex equation. However, it's occurred to me that the exponentially diminishing value of money means that the correct solution to the problem needs to take that into account. There's a big difference between driving a Honda Odyssey (10 years old is still a 2000, a newer cars than many folks drive) and a crummy GM SUV from the 90s. Even vaster difference between owning an SUV at all or taking the public bus with your kids like the poor have to do. But the next step up from your wife's Honda Odyssey is a much, much smaller improvement. (probably a Land Rover or Lexus SUV)

If you look around, every product or service money can buy is like that. Rapidly diminishing returns.

So your grand plan of being flush with cash when you're in your 70s may not be so bright. What good will it be to drive a Bentley then and live in a McMansion if your body is falling apart and you can't really enjoy your wealth? I'm saying that once you have a stable financial footing (aka a medical degree and skills that no one can take away from you) maybe you should plan to spend the same amount of money every year for the rest of your life. This is the ideal, mathematically correct solution to the problem. Much better to drive a Mercedes for 40 years than a Toyota Camry for 30 and a Bentley for 10, which is analogous to be your current thinking.

As for leaving a pile of cash to your kids : nothing wrong with that. But it's kind of silly to leave more wealth to your kids to squander than you ever spent in your lifetime. I know of examples where this has happened in my own family.

 

[illegallysmooth]

Postlessone: You continue to ignore that the interest from ~450k in debt will amount to several hundreds of thousands of dollars if one elects to pay it off as slowly as possible. The cost of education could literally DOUBLE due to the interest. That is money which could have been invested and earning returns instead of being sucked out of your bank account because you couldn't stand living on a tight budget for another year or two.

 

[PostLessOne]

Postlessone: You continue to ignore that the interest from ~450k in debt will amount to several hundreds of thousands of dollars if one elects to pay it off as slowly as possible. The cost of education could literally DOUBLE due to the interest. That is money which could have been invested and earning returns instead of being sucked out of your bank account because you couldn't stand living on a tight budget for another year or two.

All I'm saying is that when you make your financial plans, you need to keep in mind that if you are making a big sacrifice in order to have a small amount more money per year later, then perhaps you should rethink your planning. 'small' is relative.

 

[Lonestar]

well everyone here has some good points.

I will tell you guys my financial story. I am doing a little bit of both.

Income: 350k + 36K retirement.

Expenses: 137K at 4.5% (residency house that family members are living in)
20K (left on car purchase at 0.9%), 166K at 4.25% stafford loans.

Live in an apartment for $825 per month. Have been living for 1.5 years (place of private practice). No issues. will continue to live here for another year.

Saving the rest for a 20% down payment on a house in the city where I work (saved 80k so far). Rest (50k) has gone into stock portfolio that can be liquidated for emergencies or a future business. This leaves another 15k for vacation per year. Already spent 15k on a vaction for the entire family in the past year.... really fun. Spent 8k on dental work. 15k on refinancing the first house with a lower interest rate with 10K towards principal.

So in a year and a half, I now consider myself in better financial footing. I will need another year before I consider making the move to a house.

I am doing a little of both. Having fun and saving.