Pay off student loan debt or add to savings?

[Director1]

Was thinking about this issue and wasn't sure what was the right answer. But there is a rational approach to this issue. Take a look at this article:

http://radsresident.com/2016/09/16/student-loans-vs-savings/

What do you think?

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[RadOncDoc21]

Do both... I would lean towards putting more in savings coming out of residency and paying off credit cards as soon as possible.

 

[link2swim06]

I am planning on paying off all my loans my first year out.

It's going to be my fellowship...called "Work in Texas and be debt free in 10 months"...the newest approved fellowship.

Then I can start living like an attending and feel much more comfortable spending and saving money.

 

[ProfMD]

That article makes sense. As a general rule:
- rate of return on investments > interest rate on loans -> save money
- interest rate on loans > rate of return on investments -> pay off debt

 

[link2swim06]

That article makes sense. As a general rule:
- rate of return on investments > interest rate on loans -> save money
- interest rate on loans > rate of return on investments -> pay off debt

Remember, 5% earning rate does not equal 5% loan interest rate. You have to pay taxes on money earned.

As an attending (earning six figures) there is no tax write off for student loan interest.

You may need to earn 7% on investments to equal a 5% loan interest rate.

Now long-term investments like retirement may yield 7% or so over the long term. But short to moderate term investment probably should be more conservative and might earn less (4%).

It makes more sense to pay off your loans quickly unless they are at a very very low interest rate (1-3%).

 

[ProfMD]

Remember, 5% earning rate does not equal 5% loan interest rate. You have to pay taxes on money earned.

As an attending (earning six figures) there is no tax write off for student loan interest.

You may need to earn 7% on investments to equal a 5% loan interest rate.

Now long-term investments like retirement may yield 7% or so over the long term. But short to moderate term investment probably should be more conservative and might earn less (4%).

It makes more sense to pay off your loans quickly unless they are at a very very low interest rate (1-3%).

True, with a couple caveats:
1) As a resident, you likely can contribute to a Roth IRA. This should be done in lieu of paying off loans. As an attending you will not be able to contribute to a Roth, so might as well do it when you can.
2) Earnings on after-tax contributions to a 401k are not taxed. Earnings on pre-tax contributions to a 401k are tax deferred, so you can take advantage of compounded interest.

But, you are right - if you are just putting the money in the stock market, mutual funds, etc then you do need to account for capital gains tax when considering whether to invest vs pay off debt.

 

[mvenus929]

True, with a couple caveats:
1) As a resident, you likely can contribute to a Roth IRA. This should be done in lieu of paying off loans. As an attending you will not be able to contribute to a Roth, so might as well do it when you can.
2) Earnings on after-tax contributions to a 401k are not taxed. Earnings on pre-tax contributions to a 401k are tax deferred, so you can take advantage of compounded interest.

But, you are right - if you are just putting the money in the stock market, mutual funds, etc then you do need to account for capital gains tax when considering whether to invest vs pay off debt.

You can continue to contribute to a Roth as an attending, it just has to be a backdoor Roth. Until they close that loophole.

 

[Redtwogreen]

There seem to be two camps of people on this issue. One group says "stuff your retirement savings"-- max out 401(k)s, iras, roths, whatever retirement options are available to you, and THEN aggressively pay off student loans. The other camp says "pay off loans first and then worry about retirement savings." We have received both pieces of advice from different financial experts.

I agree that you ought to consider whether your student loan interest rate is > return on investments (or vice versa) BUT, one problem with the assumption that saving for retirement is better is the fact that no one has a crystal ball. No one knows what things are going to be like over the next 20-40 years. Yes you can look at historical data in the market, but there is no guarantee that your interest will be 5% or more.

On the other hand, there is a guarantee that you student loan interest rate will steadily accrue (though can be mitigated with continual refinancing to get lowest rates possible if you are willing to refinance with a private lender). For some people, it is just not worth having the negative psychological effects of having high debt (even if it is low interest) and they'd rather pay it off even if they are leaving money on the table by not throwing it at retirement (and reaping those tax benefits).

Anyway, you have to consider your own unique situation. How much debt do you have? What is your interest rate on your loans? What is your income? What tax bracket will you be in? How comfortable are you with risk? Map out your situation and then subscribe to whichever camp makes more sense for you.