Paying off med school loans immediately

[jp104]

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If it were theoretically possible to pay off your med school loans (~190k) in one shot right after graduation would you/should you do it?

The pros are that you would only pay the amount you owe and minimize the amount you'd pay in the long term in interest.

The cons are that you are dumping a ton of cash which you may or may not need in the future.

Any feedback is appreciated!

 

[Gute]

http://www.bogleheads.org/wiki/Leverage

 

[almost_there]

If it were theoretically possible to pay off your med school loans (~190k) in one shot right after graduation would you/should you do it?

The pros are that you would only pay the amount you owe and minimize the amount you'd pay in the long term in interest.

The cons are that you are dumping a ton of cash which you may or may not need in the future.

Any feedback is appreciated!

Paying off your student loans is like putting 190k into an investment that guarantees exactly 6.8% (assuming these are direct loans) annually. If you believe that you can do better than 6.8% annual return, you would be better off investing in that rather than paying off the student loans (e.g. invest 190k in stocks with a return of 9%). The problem, of course, is the risk of these higher-yielding investments (i.e. you are not guaranteed to make a 9% return in any short term period of time).

In terms of cash flow, yes, you will have less cash on hand. However, if you want to make larger purchases, your physician status and salary will qualify you for mortgages that are quite large. If you want to buy a house right away, though, the 190k will allow you to make a huge down-payment that will reduce your loan-term interest costs and avoid other fees (like mortgage insurance). However, with current 30-yr fixed interest rates around 5%, borrowing more money on a mortgage and paying off your student loans saves you money in the long run (i.e. it is better to borrow money at 5% rather than 6.8%).

 

[anthroguy]

Paying off your student loans is like putting 190k into an investment that guarantees exactly 6.8% (assuming these are direct loans) annually. If you believe that you can do better than 6.8% annual return, you would be better off investing in that rather than paying off the student loans (e.g. invest 190k in stocks with a return of 9%). The problem, of course, is the risk of these higher-yielding investments (i.e. you are not guaranteed to make a 9% return in any short term period of time).

In terms of cash flow, yes, you will have less cash on hand. However, if you want to make larger purchases, your physician status and salary will qualify you for mortgages that are quite large. If you want to buy a house right away, though, the 190k will allow you to make a huge down-payment that will reduce your loan-term interest costs and avoid other fees (like mortgage insurance). However, with current 30-yr fixed interest rates around 5%, borrowing more money on a mortgage and paying off your student loans saves you money in the long run (i.e. it is better to borrow money at 5% rather
than 6.8%).

Making 9% on investments year after year is no guarantee and capital gains taxes would trim that close to 6.8%. Pay off the loans if you have this option.

 

[Twitch]

+1 to pay off student loans if at 6.8%

 

[jp104]

Thank you everyone for your input! I appreciate the advice. 👍