Pay off loans or Invest?

[ActionFigure]

I'm new to this whole saving money/investing for retirement idea, so this might be a stupid question but I have about 100K in student loans. Would it be smart to put money away in a retirement/investment plan while paying off the student loans, or should I try to pay off the student loans as fast as possible? Because right now my plan is to do an IBR plan which will bring my monthly payment to about $400, and then save whatever I can from my budget and invest it all in a portfolio/IRA/401k,etc.
The interest rate on the loan is 7.9% (gradPLUS) and I don't think I will be getting a return on my investments higher than that, but it would be nice to start saving for retirement.

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[eefen]

I'm new to this whole saving money/investing for retirement idea, so this might be a stupid question but I have about 100K in student loans. Would it be smart to put money away in a retirement/investment plan while paying off the student loans, or should I try to pay off the student loans as fast as possible? Because right now my plan is to do an IBR plan which will bring my monthly payment to about $400, and then save whatever I can from my budget and invest it all in a portfolio/IRA/401k,etc.
The interest rate on the loan is 7.9% (gradPLUS) and I don't think I will be getting a return on my investments higher than that, but it would be nice to start saving for retirement.

Does your program offer a match for the 401k? If so, it would be smart to contribute at least the minimum amount to get the maximum match - that's free money. After that, you might contribute to a Roth - these are the last few years you'll have of eligibility (you can do a backdoor Roth later, but between the power of compounding interest, your age now, your lower tax bracket now [relative to later], and greater tax-free gains later, this is a prime opportunity).

If you have money left over after that, I would probably max out my loan payments. You could also finish maxing out your 401k, if it has decent options for investment. But this would be where I would probably just try to get the loans "gone" as soon as possible, particularly with a guaranteed return of 7.9%.

 

[ActionFigure]

Thanks for the advice. My program offers TDA through TIAA-CREF or Fidelity and I'm thinking about doing it through TIAA-CREF, but my program won't match any of my contributions. Either way I think I will make the monthly payment on my school loans or at least pay the interest so it doesn't compound, and then with whatever money I have left, I will try to max out the Roth IRA and 401k

 

[eefen]

Thanks for the advice. My program offers TDA through TIAA-CREF or Fidelity and I'm thinking about doing it through TIAA-CREF, but my program won't match any of my contributions. Either way I think I will make the monthly payment on my school loans or at least pay the interest so it doesn't compound, and then with whatever money I have left, I will try to max out the Roth IRA and 401k

I would be very cautious with the tax-deferred annuity. Here are a couple things to consider: First, though the annuity advertises itself as being "tax-deferred," it might not be what you think. Your gains will be taxed at normal income tax rates, rather than long term capital gains rates. That alone eats up your earnings when compared to a more traditional tax-deferred vehicle. Also, make sure that the annuity is within an IRA - otherwise, your gains may be tax-deferred, but not your contributions. Annuities themselves, remember, are products - which means that the institution/agent/etc selling it to you will make a profit somehow. This usually comes in the form of miscellaneous expenses. Finally, the investment options within the annuity itself tend to be sub-par, and can just be darn hard to change around if you decide to do so.

If I were you, and didn't have a match on my 401k, I would probably max out my Roth IRA and put as much as I could in my 401k, in that order. (As soon as you leave residency, consider converting your 401k into a traditional IRA for better investment options and lower fees. In your first year out, while you are still in a lower income bracket, you might also just roll the 401k into an traditional IRA and then into your Roth IRA so you can collect tax-free earnings 30 years down the road. You can also contribute to a spousal IRA if you are married.)

If you wanted to pay off your loans faster, I would consider maxing out your Roth (at least!) and, in the absence of a match for your 401k, use the rest of your available funds to them off.

The only time I would consider an annuity in residency is if I had maxed out my Roth IRA, 401k, paid off as much as I could possibly want to with respect to my loans, and maxed out a spousal IRA. Of course, if you can do all of that during residency, then you're probably doing fine regardless of what you chose to do with your investments.

Just my $0.02. Good luck! 🙂

 

[Stroganoff]

Would it be smart to put money away in a retirement/investment plan while paying off the student loans, or should I try to pay off the student loans as fast as possible?

Yes to both questions. One can benefit the other.

Because right now my plan is to do an IBR plan which will bring my monthly payment to about $400, and then save whatever I can from my budget and invest it all in a portfolio/IRA/401k,etc.
The interest rate on the loan is 7.9% (gradPLUS) and I don't think I will be getting a return on my investments higher than that, but it would be nice to start saving for retirement.

Google something like "401k to lower AGI for IBR" or something like that. IBR goes off Adjusted Gross Income, and contributions to 401k lower AGI, meaning IBR for the subsequent year are lower. It's a nice strategy and seems to be popular in search results.

Thanks for the advice. My program offers TDA through TIAA-CREF or Fidelity and I'm thinking about doing it through TIAA-CREF, but my program won't match any of my contributions. Either way I think I will make the monthly payment on my school loans or at least pay the interest so it doesn't compound, and then with whatever money I have left, I will try to max out the Roth IRA and 401k

Just curious why TIAA-CREF over Fidelity? Better investment choices?

Anyway, it all seems like a wash for the several years of residency. For such a low $100K @ 7.9% med school debt, I'd almost rather just dump a lot of it into the 401k which would lower the IBR student loan minimum payments. And like someone said, maxing out the $5500 in a Roth IRA now isn't a bad idea.

 

[ActionFigure]

Thank you everyone for the responses. I have a few more questions just to clarify

I would be very cautious with the tax-deferred annuity. Here are a couple things to consider: First, though the annuity advertises itself as being "tax-deferred," it might not be what you think. Your gains will be taxed at normal income tax rates, rather than long term capital gains rates. That alone eats up your earnings when compared to a more traditional tax-deferred vehicle. Also, make sure that the annuity is within an IRA - otherwise, your gains may be tax-deferred, but not your contributions. Annuities themselves, remember, are products - which means that the institution/agent/etc selling it to you will make a profit somehow. This usually comes in the form of miscellaneous expenses. Finally, the investment options within the annuity itself tend to be sub-par, and can just be darn hard to change around if you decide to do so.

If I were you, and didn't have a match on my 401k, I would probably max out my Roth IRA and put as much as I could in my 401k, in that order. (As soon as you leave residency, consider converting your 401k into a traditional IRA for better investment options and lower fees. In your first year out, while you are still in a lower income bracket, you might also just roll the 401k into an traditional IRA and then into your Roth IRA so you can collect tax-free earnings 30 years down the road. You can also contribute to a spousal IRA if you are married.)

If you wanted to pay off your loans faster, I would consider maxing out your Roth (at least!) and, in the absence of a match for your 401k, use the rest of your available funds to them off.

The only time I would consider an annuity in residency is if I had maxed out my Roth IRA, 401k, paid off as much as I could possibly want to with respect to my loans, and maxed out a spousal IRA. Of course, if you can do all of that during residency, then you're probably doing fine regardless of what you chose to do with your investments.

Just my $0.02. Good luck! 🙂

So you're saying don't put money into a TDA plan that my program is offering through TIAA-CREF/Fidelity and instead just put the money into a Roth IRA and 401k myself? And then whatever money I have left, use that to pay off loans. If that's the case then I will not even bother with TIAA-CREF and use Vanguard instead since that seems like a popular company on SDN.

Google something like "401k to lower AGI for IBR" or something like that. IBR goes off Adjusted Gross Income, and contributions to 401k lower AGI, meaning IBR for the subsequent year are lower. It's a nice strategy and seems to be popular in search results.



Just curious why TIAA-CREF over Fidelity? Better investment choices?

Anyway, it all seems like a wash for the several years of residency. For such a low $100K @ 7.9% med school debt, I'd almost rather just dump a lot of it into the 401k which would lower the IBR student loan minimum payments. And like someone said, maxing out the $5500 in a Roth IRA now isn't a bad idea.

I will look into this. And I picked TIAA-CREF because it's older than Fidelity and after doing a google search, on other investing/financial/bogleheads forums people had better things to say about TIAA-CREF than Fidelity. I don't have any real hard evidence as to why I picked TIAA-CREF, but just went on gut instincts. I know Fidelity offers more options in investing, but TIAA-CREF kept things simple and classical in that sense. I guess I was following the adage, "old is gold"
But now, if I'm not doing the TDA, then I will go ahead and sign up with Vanguard.
Would you have not picked TIAA-CREF over Fidelity?

 

[eefen]

So you're saying don't put money into a TDA plan that my program is offering through TIAA-CREF/Fidelity and instead just put the money into a Roth IRA and 401k myself? And then whatever money I have left, use that to pay off loans. If that's the case then I will not even bother with TIAA-CREF and use Vanguard instead since that seems like a popular company on SDN.

Personally? During residency, I would open up a target retirement account with Vanguard for my Roth IRA with your preferred asset allocation and max that out every year I could. At the very least.

You could then either 1) contribute to your 401k (since its not matched, only put in as much as can) and use the rest to pay off loans or 2) just off loans ASAP. Again, personally, unless I had money flowing from my ears, I would tend toward the latter - guaranteed 7.9% return. And I would avoid the annuity.

Whatever you choose, go in with your eyes wide open. Good luck!

 

[ActionFigure]

Personally? During residency, I would open up a target retirement account with Vanguard for my Roth IRA with your preferred asset allocation and max that out every year I could. At the very least.

You could then either 1) contribute to your 401k (since its not matched, only put in as much as can) and use the rest to pay off loans or 2) just off loans ASAP. Again, personally, unless I had money flowing from my ears, I would tend toward the latter - guaranteed 7.9% return. And I would avoid the annuity.

Whatever you choose, go in with your eyes wide open. Good luck!

Ok great. Thanks for the tips on how and where to start. I think I will set up an account through Vanguard and not go through with the TDA.

 

[PistolPete]

Not to hijack the thread, but I am a first year resident who also recently started learning more about investing, and I have some questions from those that are more experienced in this arena.

I have about $300k in student loans. I took the max out during medical school at $250k + 50k from grad school previously (the 50k is at about 6% interest, which has been accruing), about $65k per year of med school at interest of 3%, which has been accruing since the money has been disbursed every year in med school, but my mom has been paying down my interest every month so that my principle on the 250k is about the same.

At this juncture, with this larger amount of student debt, would you guys recommend investing in Roth IRA while I still am eligible, or just pay down the student loans? I am currently paying down the 50k grad school loan and the med school loans will enter repayment in June.

 

[eefen]

Not to hijack the thread, but I am a first year resident who also recently started learning more about investing, and I have some questions from those that are more experienced in this arena.

I have about $300k in student loans. I took the max out during medical school at $250k + 50k from grad school previously (the 50k is at about 6% interest, which has been accruing), about $65k per year of med school at interest of 3%, which has been accruing since the money has been disbursed every year in med school, but my mom has been paying down my interest every month so that my principle on the 250k is about the same.

At this juncture, with this larger amount of student debt, would you guys recommend investing in Roth IRA while I still am eligible, or just pay down the student loans? I am currently paying down the 50k grad school loan and the med school loans will enter repayment in June.

I don't know all of your financial details, obviously, but you have two things going for you: first, it's awesome that your mom has been paying your interest. Compound interest is great for investing, but it's a double-edged sword with regard to loans. Second, although you do have a fairly significant loan burden, it's at a ridiculously low interest rate relative to those of us who are just coming in.

Again, I don't know all your details, but I would recommend getting started on your Roth IRA now if you are able, for all the reasons mentioned above. (Of course, if your program offers a matched 401k or something similar, I would prioritize that first, at least up to the maximum matched amount - free money is the best return you can get.)

After that, I would make the minimum payment on your med school loans @3% and throw everything else at your higher-interest grad school loan, as it sounds like you are doing. Any extra income, moonlighting money later on, etc., can go here, depending on how aggressive you want to be. Once that's paid off, take whatever monthly amount you had been putting towards the grad loan and throw it at the other loan, plus the minimum payment you had been making.

Once you finish residency, you can continue living like a resident, but be much more aggressive with repayment until it's dead and gone - although, since your interest rate essentially matches inflation, you may be able justify being a bit less aggressive than I'll have to be.

Anyway....just some thoughts from a random internet guy. Good luck!

 

[PistolPete]

Thanks so much eefen I appreciate! Basically what I was thinking. I have been researching some stuff on investing for a few months and I think I'll open a Roth, and primarily invest in index funds, since the research I've seen shows that one cannot meaningfully time the market or really beat the market in the long run. Hoping for a 5% return over the long haul.

 

[The White Coat Investor]

Here's an article I wrote addressing this issue:

http://whitecoatinvestor.com/student-loans-vs-investing/

 

[PistolPete]

Oh wow, I've been reading whitecoatinvestor for about a month, such a great website! No idea that it came from one of our own SDNers! Thanks for much for the great resource! 1 million banana $$$ for you ActiveDutyMD!