pay off loan or invest during residency?

[hellojed]

Sorry if this topic has beaten to death, but I couldn't find an answer that applied to my specific situation:
I have no consumer debt.
I have about $130,000 in med school debt; about 1/2 of that is at a 2.9% fixed interest rate, the next 1/4 at 4.75%, and the last 1/4 at 6.8%. It's all under economic hardship forbearance right now but is accruing interest.
I'm in my first year of residency and am starting to learn about investing. The sources I've read so far really stress the importance of investing your money ASAP (the whole time is on your side and power of compound interest thing) after paying off credit card debt (which I don't have).

So, now I'm wondering, should I start putting aside a fixed part of my (very modest) paycheck into paying down the interest on my student loans (the highest-interest one first?), or should I use that money to invest, or a combination of both? I'd really appreciate any advice or thoughts... thanks!!

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[Stroganoff]

I'd go with combination of both. You can deduct $2500 of student loan interest paid as an above-the-line adjustment to your resident's income, and that'll help out a little bit when you file your 2008 taxes. So maybe pay off $2500 of your 6.8% debt every year...

The rest of your student loans aren't worth paying [extra] back for quite a while -- stick with investing. Good luck!

 

[DoctorWannaBe]

I'd go with combination of both. You can deduct $2500 of student loan interest paid as an above-the-line adjustment to your resident's income, and that'll help out a little bit when you file your 2008 taxes. So maybe pay off $2500 of your 6.8% debt every year...

The rest of your student loans aren't worth paying [extra] back for quite a while -- stick with investing. Good luck!

How do you know how much of your payment goes toward interest vs. principal? If the OP isn't required to start repayment yet, can any payment be counted as interest for tax purposes, as long as it doesn't exceed the yearly interest on the loan?

 

[Stroganoff]

How do you know how much of your payment goes toward interest vs. principal? If the OP isn't required to start repayment yet, can any payment be counted as interest for tax purposes, as long as it doesn't exceed the yearly interest on the loan?

Well I'm still enrolled in school so I'm not in repayment, but what I did was go to www.nslds.ed.gov (for Federal loans) and find out my accrued interest. And -- it depends on the fine print of the lender -- a lot of times lenders will apply ANY payments towards interest first and foremost, so basically 100% of my payments went towards interest. You can keep track of your balances online, plus at the end of the year you'll get a 1098-E "Student Loan Interest Statement" and in Box 1 "Student loan interest received by lender" it'll say how much you paid and you can put that on your 1040.

 

[Ecoastcaligirl]

Great question, im in pretty much the same situation.

Given that the rate of return long term on an ira is 8-10%, wouldn't it make more sense to invest that money in a roth or traditional ira (post tax vs. pre tax) rather than pay off a student loan with a 6.8% interest? Even if that amount towards student loan interest is tax deductible up to 2500, does that add up to greater than 8-10% return that the ira would give you? argh this stuff is a headache.

also, have been told to leave the 2-3 percent interest rate loans alone b/c this is less than the rate of inflation, and you are def. better off investing that money.

 

[mshheaddoc]

Great question, im in pretty much the same situation.

Given that the rate of return long term on an ira is 8-10%, wouldn't it make more sense to invest that money in a roth or traditional ira (post tax vs. pre tax) rather than pay off a student loan with a 6.8% interest? Even if that amount towards student loan interest is tax deductible up to 2500, does that add up to greater than 8-10% return that the ira would give you? argh this stuff is a headache.

also, have been told to leave the 2-3 percent interest rate loans alone b/c this is less than the rate of inflation, and you are def. better off investing that money.

If your 2=3% are fixed rates, (consolidated loans) yes LEAVE THEM. Until you possibly pay off ALL other debts ever (including house, etc). That money is dirt cheap money from the gov't and the cheapest you can ever find.

Long-term rates are variable (depend on how "long" your long-term is). I think long term, 20 years long term. 8-10% has been historic average but things can always change. The boom of the 90's and early 00's are over with for now. Keep this in mind with your investment choices.

 

[mackaikai]

I have about 80,000 debt which is at the current 6.8% and 80,000 locked into the 4.75%. If i have 40,000 dollars in cash, should I pay back the 6.8% debt now or should I save it for a future house down payment (while leave it in a 4% CD) or invest it? If I should invest it, what kind of investment?

 

[The White Coat Investor]

Sorry if this topic has beaten to death, but I couldn't find an answer that applied to my specific situation:
I have no consumer debt.
I have about $130,000 in med school debt; about 1/2 of that is at a 2.9% fixed interest rate, the next 1/4 at 4.75%, and the last 1/4 at 6.8%. It's all under economic hardship forbearance right now but is accruing interest.
I'm in my first year of residency and am starting to learn about investing. The sources I've read so far really stress the importance of investing your money ASAP (the whole time is on your side and power of compound interest thing) after paying off credit card debt (which I don't have).

So, now I'm wondering, should I start putting aside a fixed part of my (very modest) paycheck into paying down the interest on my student loans (the highest-interest one first?), or should I use that money to invest, or a combination of both? I'd really appreciate any advice or thoughts... thanks!!

1) Max out your own and any spousal Roth IRAs. These won't be available to you when you're making the big bucks.

2) Make sure you get any match offered by your employer's 401K.

3) Pay down the 6.8% loan. I'd invest over paying off the other ones.

Here's a good thread from the Bogleheads on the subject:

http://www.bogleheads.org/forum/viewtopic.php?t=4263&highlight=poll+loan+rate

 

[The White Coat Investor]

I have about 80,000 debt which is at the current 6.8% and 80,000 locked into the 4.75%. If i have 40,000 dollars in cash, should I pay back the 6.8% debt now or should I save it for a future house down payment (while leave it in a 4% CD) or invest it? If I should invest it, what kind of investment?

If you're planning to use this money to buy a house (and not to fund a Roth IRA or get a match on a 401K (see above)), then I'd pay off $40K of the 6.8% loan. No point in investing at 4% when you have a risk free 6.8% investment staring you in the face. Of course, if you need the money to make a downpayment in 6 months, you need to keep it liquid. But if this house fund is for some vague time in the future, then I'd pay off the loan.

 

[The White Coat Investor]

Great question, im in pretty much the same situation.

Given that the rate of return long term on an ira is 8-10%, wouldn't it make more sense to invest that money in a roth or traditional ira (post tax vs. pre tax) rather than pay off a student loan with a 6.8% interest? Even if that amount towards student loan interest is tax deductible up to 2500, does that add up to greater than 8-10% return that the ira would give you? argh this stuff is a headache.

also, have been told to leave the 2-3 percent interest rate loans alone b/c this is less than the rate of inflation, and you are def. better off investing that money.

There is no guarantee on an IRA investment. A student loan payback is guaranteed. Many experts think 8-10% on stocks in the next 10 years is a bit high also. I do agree that you should drag 2-3% loans out for as long as possible due to them having a negative real (after-inflation) cost.

 

[mackaikai]

thanks a lot! that was very helpful!!

 

[SFO-IST]

Sorry if this topic has beaten to death, but I couldn't find an answer that applied to my specific situation:
I have no consumer debt.
I have about $130,000 in med school debt; about 1/2 of that is at a 2.9% fixed interest rate, the next 1/4 at 4.75%, and the last 1/4 at 6.8%. It's all under economic hardship forbearance right now but is accruing interest.
I'm in my first year of residency and am starting to learn about investing. The sources I've read so far really stress the importance of investing your money ASAP (the whole time is on your side and power of compound interest thing) after paying off credit card debt (which I don't have).

So, now I'm wondering, should I start putting aside a fixed part of my (very modest) paycheck into paying down the interest on my student loans (the highest-interest one first?), or should I use that money to invest, or a combination of both? I'd really appreciate any advice or thoughts... thanks!!

Hey everyone, newly accepted med student here.

How is it that you're getting a loan at 2.9%? The financial aid people at all the schools I went to basically told me that I get a small ammount, like 10k interest free during school, a larger chunk, like 45k at 6.8% but secured by the govt., and the rest is unsecured at 6.8%. Is there another option or something?

 

[amakhosidlo]

Hey everyone, newly accepted med student here.

How is it that you're getting a loan at 2.9%? The financial aid people at all the schools I went to basically told me that I get a small ammount, like 10k interest free during school, a larger chunk, like 45k at 6.8% but secured by the govt., and the rest is unsecured at 6.8%. Is there another option or something?

No, these people with the 4.5 and 2.9%'s took their loans out before the rates were upped, I believe in 2006? You, and I, and everyone else taking out loans right now are pretty much **cked. Pay those babies back ASAP.

 

[SFO-IST]

No, these people with the 4.5 and 2.9%'s took their loans out before the rates were upped, I believe in 2006? You, and I, and everyone else taking out loans right now are pretty much **cked. Pay those babies back ASAP.

That's so unfortunate. It is incomprehensible to me how our national interest rates are around 0.25% and yet student loans are 6.8%. It's as if they are purposefully trying to discourage students or something. Does anyone know if, in this climate, private lenders may actually offer better terms? How is it possible for a loan that can't go away with bankruptcy to have such a high rate?

 

[amakhosidlo]

That's so unfortunate. It is incomprehensible to me how our national interest rates are around 0.25% and yet student loans are 6.8%. It's as if they are purposefully trying to discourage students or something. Does anyone know if, in this climate, private lenders may actually offer better terms? How is it possible for a loan that can't go away with bankruptcy to have such a high rate?

I agree. Far from incomprehensible though, especially since the government's now directly funding student loans (taking bank lenders out of the equation). Basically the gov has a near-guaranteed investment vehicle, making a buck of the nation's students. Disgusting. Smart, but disgusting.

A) Where are you going to get a private $200k+ loan with no collateral? and B) Even if you could get a sub-6.8% rate, where are you going to get a loan with options like deferment/forbearance/forgiveness/IRB? Going to private lenders is a last resort.

 

[DrYoda]

That's so unfortunate. It is incomprehensible to me how our national interest rates are around 0.25% and yet student loans are 6.8%. It's as if they are purposefully trying to discourage students or something. Does anyone know if, in this climate, private lenders may actually offer better terms? How is it possible for a loan that can't go away with bankruptcy to have such a high rate?

Yes, private loans with better terms can be had, but most students aren't qualified for them.

 

[soulofmpatel]

I'd go with combination of both. You can deduct $2500 of student loan interest paid as an above-the-line adjustment to your resident's income, and that'll help out a little bit when you file your 2008 taxes. So maybe pay off $2500 of your 6.8% debt every year...

The rest of your student loans aren't worth paying [extra] back for quite a while -- stick with investing. Good luck!

This is a very astute point. However, making student loan payments also builds credit which could lead to a lower home loan in the future.

 

[docscience]

Great conversation, but I just wanted to also make the point of "investing" in real estate while a resident. As a medical student I bought a condo in my town and will be either renting it out when I move or will be selling it. It helps that I have lived in town for 7 years now and instead of throwing away rent money, I invested in a condo and it seems like a safe thing to do.

There are multiple rent vs. buy threads on the net...and some good articles...usually 7 years is the "breaking point"

Just a thought. Carry on.

 

[winkleweizen]

any updates on this. 6.8% subsidized will be gone next year, and i think the unsubsidized stafford is 8.25%

 

[JacobMcCandles]

any updates on this. 6.8% subsidized will be gone next year, and i think the unsubsidized stafford is 8.25%

All Stafford loans are 6.8%.

 

[winkleweizen]

All Stafford loans are 6.8%.

ok, So probably best to pay that down then?

 

[JacobMcCandles]

ok, So probably best to pay that down then?

As a general rule of thumb, yes. Paying those loans off are a guaranteed 6.8% investment. There's no guarantee in today's market for anything close to 6.8%. I'm envious of those attendings who got their loans consolidated at 2%. There's no reason to hurry and pay those off at that rate.

 

[freaker]

That's so unfortunate. It is incomprehensible to me how our national interest rates are around 0.25% and yet student loans are 6.8%. It's as if they are purposefully trying to discourage students or something. Does anyone know if, in this climate, private lenders may actually offer better terms? How is it possible for a loan that can't go away with bankruptcy to have such a high rate?

The federal government took over the student loan business and forced the private lenders out. They then jacked up interest rates to 6.8% and did away with deferment for graduate loans.

The Obama administration has since come around and seized control over the college loan business, as well. The healthcare mandate law is in part funded by this move, jacking up college loans again to 6.8% and using the proceeds to pay off the healthcare bill.

And schools continue to increase tuition rates at an exhorbitant pace, spend like crazy--all to the detriment of their future and current students--all of it subsidzed by over-generous upfront federal lending policies with nasty consequences.

I government. It helps so much.

 

[JacobMcCandles]

The federal government took over the student loan business and forced the private lenders out. They then jacked up interest rates to 6.8% and did away with deferment for graduate loans.

The government thought that interest rates were going to go way up so that 6.8% would be cheap. Since the rates didn't go up, fittingly, they haven't felt the need to adjust their rates.

 

[nightowl]

I am one of those students who entered after 2006 and now have 186,000k in student loans at 6.8%. Should I consolidate? If they're not consolidated, does that mean that 6.8% can go up to a higher percentage?

Secondly, does it make more sense to start contributing to a roth IRA or pay back on the loans? What if I decide not to contribute to a roth IRA and then I join a practice/group that has loan repayment benefits (I've heard of $25k a year toward student loan debt). What if the roth IRA actually does pay back 10% or so by the time I want to retire?

Also I spoke to a resident who said that she chose forebearance while in residency bc she can write them off of her taxes once she's an attending.

They need to teach us MUCH MORE about managing our debt and investing in medical school- I know NOTHING!

 

[JacobMcCandles]

I am one of those students who entered after 2006 and now have 186,000k in student loans at 6.8%. Should I consolidate? If they're not consolidated, does that mean that 6.8% can go up to a higher percentage?

Secondly, does it make more sense to start contributing to a roth IRA or pay back on the loans? What if I decide not to contribute to a roth IRA and then I join a practice/group that has loan repayment benefits (I've heard of $25k a year toward student loan debt). What if the roth IRA actually does pay back 10% or so by the time I want to retire?

Also I spoke to a resident who said that she chose forebearance while in residency bc she can write them off of her taxes once she's an attending.

They need to teach us MUCH MORE about managing our debt and investing in medical school- I know NOTHING!

1.) Your only option is to consolidate your federal loans with the federal government. You don't get any better interest rates, you just get to pay one place instead of several. There was an email sent out about possibly getting a .5% interest rate deduction if consolidated by June but apparently they'll contact you if you're eligible. The 6.8% rates are fixed and cannot be changed.

2.) It would make sense to contribute enough to receive the full benefit of your employer's match. If you join a practice that offers loan repayment benefits but say you don't have any loans because you've paid them, then negotiate a larger signing bonus, better benefits, etc.

3.) I've never heard of the forbearance and taxes thing. That doesn't mean it doesn't exist. I'd concentrate on paying off as much loans as you can as that is a guaranteed 6.8% return and you'll won't find a guaranteed return like that in today's current market.

 

[futuredoc1004]

I am one of those students who entered after 2006 and now have 186,000k in student loans at 6.8%. Should I consolidate? If they're not consolidated, does that mean that 6.8% can go up to a higher percentage?

Secondly, does it make more sense to start contributing to a roth IRA or pay back on the loans? What if I decide not to contribute to a roth IRA and then I join a practice/group that has loan repayment benefits (I've heard of $25k a year toward student loan debt). What if the roth IRA actually does pay back 10% or so by the time I want to retire?

Also I spoke to a resident who said that she chose forebearance while in residency bc she can write them off of her taxes once she's an attending.

They need to teach us MUCH MORE about managing our debt and investing in medical school- I know NOTHING!

Consult an experienced accountant to receive meaningful advice.

 

[The White Coat Investor]

Consult an experienced accountant to receive meaningful advice.

Yes, they have all the answers. That's why they're so well to do.

Seriously though, that question doesn't require any accounting skills to answer. The answer is, we don't know if you're better off investing in the Roth IRA or paying down the loans. You're comparing a known return to an unknown/risky one. It might work out, it might not.

The Roth IRA as a resident isn't as much of a no-brainer as it used to be, since attendings can still use a Roth IRA via the backdoor Roth these days.

6.8% loans are an awfully attractive investment.