Nontrad Debt Management ?

[wholeheartedly]

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I'm definitely not a financial whiz, and I've been mulling over this question for awhile so I thought I'd post it here and see what you all think. (note: I'm asking how you'd do this, not if it's worth it to take on the med school debt)

Let's pretend you are about 27 yrs old planning on applying 5 years from now.

you have 49k in student loans consolidated at 4.75%
a fairly new mortgage at 5% 150k
don't see much chance of a scholarship if you do get into med school...
a three months income emergency fund saved up.

where would you allocate any extra funds (lets say around $500-$600/month) and why:
pay down the student loan, pay down the mortgage, savings for medical school and expenses, something else, or combination of the above (at what ratio) ?

Interested to hear your thoughts. 🙂

 

[billw]

If you have the discipline to save the money, I say save it and do not pay down anything other than credit card debt. It is great to pay down loans, but very difficult to get the money back if you need it. If you miss a payment, nobody cares that you have paid down much of the loan ahead of schedule - only that missed payment counts. Having savings means that you can keep making payments if you run into unexpected trouble. When you graduate, you can take most of that savings and use it to pay down a portion of your debt.

This is advice I would particularly recommend for mortgages. I know people in the recent troubles who had paid extra every month for several years until they got into trouble. They eventually lost their house and all that extra they had paid into it. Better to save your pennies until you have the full pay-off amount and then kill the loan. Any extra paid before then brings relatively little benefit to you, but puts your lender in a stronger position if you default.

 

[kia ora]

don't pay extra twd the mortgage - 5% is a very good interest rate for a mortgage (I'm assuming it is a 30 year?) and odds are you will have to sell the house and move for medical school (maybe not, but more likely than not depending on where you live). so, there really is no point in paying down the principal

I don't know anything about student loans (yet), but 4.75% sounds like a fairly good rate on those. however, $49k is a sizeable balance and if you can get rid of some of that debt before medical school (where you likely will be taking on more debt) that probably would be a good idea. however, you probably should find an online calculator or talk to a $ person or something and run some numbers to find out whether this would be the best approach

savings is always a good idea. it's good that you have a 3 month emergency fund, but that's really not much, esp. when you own a home.

you're wise to be thinking so far ahead, now you just need to run some actual numbers to figure out the best plan for yourself. good luck!

 

[wholeheartedly]

thanks folks, I'll being going to talk to some kind of financial advisor sometime here. My plan is to get my emergency fund up quite a bit higher. I'm lucky and have great job security so that's a plus (still hiring here), & excellent benefits if there's a medical crisis and I can't work. I just figured that one nice thing about SDN (and one of it's biggest evils) is the variety of perspectives on things. In this case, that's definitely what I want.


yeah, highly doubt I'll be able to stay here for medical school so will mostly likely be selling the house, though I would stay in a hearbeat if they'd take me 🙂

any other takers for feedback?

 

[7starmantis]

Seems like pretty sound advice so far.

The student loans are a bit high, and I believe will count towards the maximum loan amount you could take out in med school, so you may want to address those without compromising your savings.

 

[dotdash]

I'd also consider the tax implications, if I were you. You have a secure job, so you are paying federal income tax. If your income is high enough so that you can't deduct your student loan interest, then that's a real reason to pay it off before you even think about paying down your mortgage, the interest on which is always deductible. I presume you are maxing out your 401K or IRA or whatever, because that's the no-brainer thing to do.

After those thoughts, you've got ~$6000 a year for 5 years. If you can get more than 5% return on any relatively safe and liquid investment you make, you might try that (Vanguard bond fund, maybe?). If you don't get 5% return (adjusted for whatever tax implications there are), then it is costing you money to save (over paying down your student loan). However, that may still be the safest thing to do anyway, for the reasons others have mentioned.

 

[MacVA]

🙂 Two words: ROTH IRA.

You can use the Roth IRA at a later date to pay for medical school because the earning on the dividends/capital gains are.... wait for it... TAX FREE.

Sorry for my rant it just amazes me how many of my friends don't know about this wonderful savings device. Of course, you can only contribute if you make less than $109,000 (I believe) if single. If married, I think it is $149,000.

 

[mjjdm1985]

🙂 Two words: ROTH IRA.

You can use the Roth IRA at a later date to pay for medical school because the earning on the dividends/capital gains are.... wait for it... TAX FREE.

Sorry for my rant it just amazes me how many of my friends don't know about this wonderful savings device. Of course, you can only contribute if you make less than $109,000 (I believe) if single. If married, I think it is $149,000.

Hey this is not directly related to medical school but how do you feel about a traditional IRA versus a Roth IRA for actual retirement savings? My thought was that a traditional IRA would be better because if you wait until you retire to withdraw the earnings then they will all be taxed in the lowest tax bracket based on your lack of income after retiring.

 

[dotdash]

Hey this is not directly related to medical school but how do you feel about a traditional IRA versus a Roth IRA for actual retirement savings? My thought was that a traditional IRA would be better because if you wait until you retire to withdraw the earnings then they will all be taxed in the lowest tax bracket based on your lack of income after retiring.

Most advisors argue the opposite: that your tax bracket at retirement will (hopefully) be higher than it is early in your earning life, so go with the Roth.

 

[kami333]

You could also convert a traditional to a Roth in low income years (ie medical school).

 

[billw]

The only consideration with a Roth, if you are eligible, is that you have to trust that the government won't decide to tax it down the road.

(And they'll always decide to tax it down the road.)

 

[austinblnd]

I'd also consider the tax implications, if I were you. You have a secure job, so you are paying federal income tax. If your income is high enough so that you can't deduct your student loan interest, then that's a real reason to pay it off before you even think about paying down your mortgage, the interest on which is always deductible. I presume you are maxing out your 401K or IRA or whatever, because that's the no-brainer thing to do.

After those thoughts, you've got ~$6000 a year for 5 years. If you can get more than 5% return on any relatively safe and liquid investment you make, you might try that (Vanguard bond fund, maybe?). If you don't get 5% return (adjusted for whatever tax implications there are), then it is costing you money to save (over paying down your student loan). However, that may still be the safest thing to do anyway, for the reasons others have mentioned.

Wise words 👍