Repaying student loans- what am I doing wrong?

[nykids]

I've been reading threads about how we should pay off our student loans as fast as we can, and further threads lamenting about living a resident's lifestyle after residency because of paying off student loans. I can understand the idea of decreasing the overall amount of debt you have, but why is it so important to attack the student loans? What is the harm of having student loan debt?

I am 3 years post-residency and I am working at an outpatient clinic in primary care, so I don't make a whole lot of money. I have around $100K in student loans at 3%, which I deferred/forebeared during residency. So far, I'm on a graduated payment plan and I'm just making the minimum payments. I understand that interest is accruing so in the long run I'm paying more, but in the meantime, I can live a little better than a resident and I'm saving for retirement. I didn't have any problems getting a mortgage on my home, and since my mortgage rate is higher than my student loan rate, I'd think it'd be better to pay the mortgage first.

What's wrong with my thinking? Should I really be attacking my student loans instead of putting money aside for retirement and general savings?

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[FutureInternist]

I've been reading threads about how we should pay off our student loans as fast as we can, and further threads lamenting about living a resident's lifestyle after residency because of paying off student loans. I can understand the idea of decreasing the overall amount of debt you have, but why is it so important to attack the student loans? What is the harm of having student loan debt?

I am 3 years post-residency and I am working at an outpatient clinic in primary care, so I don't make a whole lot of money. I have around $100K in student loans at 3%, which I deferred/forebeared during residency. So far, I'm on a graduated payment plan and I'm just making the minimum payments. I understand that interest is accruing so in the long run I'm paying more, but in the meantime, I can live a little better than a resident and I'm saving for retirement. I didn't have any problems getting a mortgage on my home, and since my mortgage rate is higher than my student loan rate, I'd think it'd be better to pay the mortgage first.

What's wrong with my thinking? Should I really be attacking my student loans instead of putting money aside for retirement and general savings?

Those two statements contradict each other......Pay off as much as you can now, get rid of cable TV etc if you have to but my bias is to pay more now & save in the long run

 

[45408]

I am 3 years post-residency and I am working at an outpatient clinic in primary care, so I don't make a whole lot of money. I have around $100K in student loans at 3%, which I deferred/forebeared during residency.

None of us still in residency (some seniors or chiefs excepted) or med school have loans consolidated at 3%. It's not allowed any more. 3% is a little higher than inflation, so there's hardly a rush to pay it off. My loans are at 6.8%, which means they'll double in 12 years. Yours will take more like 25 years to double.

 

[odieoh]

I've been reading threads about how we should pay off our student loans as fast as we can, and further threads lamenting about living a resident's lifestyle after residency because of paying off student loans. I can understand the idea of decreasing the overall amount of debt you have, but why is it so important to attack the student loans? What is the harm of having student loan debt?

I am 3 years post-residency and I am working at an outpatient clinic in primary care, so I don't make a whole lot of money. I have around $100K in student loans at 3%, which I deferred/forebeared during residency. So far, I'm on a graduated payment plan and I'm just making the minimum payments. I understand that interest is accruing so in the long run I'm paying more, but in the meantime, I can live a little better than a resident and I'm saving for retirement. I didn't have any problems getting a mortgage on my home, and since my mortgage rate is higher than my student loan rate, I'd think it'd be better to pay the mortgage first.

What's wrong with my thinking? Should I really be attacking my student loans instead of putting money aside for retirement and general savings?

There's not anything particularly wrong with your thinking, especially at your debt level and with the interest rate you have. I am in a similar situation (slightly more debt, same rate.) However a lot of the people graduating now have loans at almost 7% and their total is much higher, very common to have 250k.

So for you, making the minimum payments only ends up accrueing ~3k/year interest. For them, first of all the minimum payment will be a LOT higher than what your minimum is, and second the interest that accrues in the meantime is much more significant-- between 15-20k/year. When you are faced with those kinds of numbers, doing everything you can to make a dent in the debt early goes a long ways toward reducing the overall interest you pay.

I am kind of trying to decide myself if I want to go your route or just pay everything off ASAP. I have one loan at slightly higher interest and I am paying it off ASAP. After that my loans are all consolidated at 2.87%. Right now its hard to find a savings account or CD that will beat that rate, but we are at all time low rates. I think I will wait a few years and pay the minimum in the meantime, socking the extra that I would have paid away in savings. If interest rates improve then great, if not I can still just pay it off sooner.

 

[NotAProgDirector]

The answer, as usual, is "it depends".

You have a loan at 3% fixed.

Let's say you have an extra $10,000 that you could either put into your retirement account, spend on house upgrades, or pay off part of your loan.

Financially, if you pay off more of your loan principle you basically get 3% on your investment. If you hadn't paid the $10K off on your loan, it would have generated $10,000 x 3% = $300 in interest that you would owe. So, basically you made 3% (because you don't have that interest to pay)

Instead, you could put it into your retirement account, or into anything else. If you can do better than 3%, then theoretically it's the right thing to do financially. So, if you put it into a 5% 1 year CD, you'd get $10,500 back at the end of the year, you could pay that $300 in interest, and still end up $200 ahead (except for the taxes, of course...) Of course, if you invest it in the market and it goes down, then you would have been better off paying the loan.

This ignores the "utilitarian" view -- if you pay off part of the loan with the $10,000, then you can't get it back. Saving it in some way would allow you to draw off of it in the future as needed, so it might be better to build up a nest egg of some sort before diverting money to your loan.

So:
1. The easiest / most conservative thing to do is pay off the loan faster than the minimum. This is safe, it's guaranteed a 3% rate of return (forever), and easy to organize / do. Plus, if you tend to spend money you see sitting in an account, it prevents that from happening.

2. 3% is a low rate, so you can probably do better investing your money elsewhere. Do you feel lucky, punk?

3. Try to do something that avoids taxes, as that's free money. Saving for retirement is tax free (principal and interest). Paying off your student loans, only interest is deductible. Hence, you get to keep more of your money now if you put it into a 401K/403B/IRA -- but of course you'll pay uncle sam somewhere along the line.

 

[babel]

Yeah, as one of those people wtih $250k+ in debt at 6.8%, I die a little inside when I see what a HUGE difference a low interest rate can make. You guys who have it locked it at 3% are so very, very fortunate.

It doesn't make much of a difference in the short term (paying off $250k in 10yrs at 3% vs. 6.8% is a difference of less than $500/mo), but it makes a big difference in the long term when you look at the TOTAL amount paid over the life of the loan.

For example, paying off $250k @ 6.8% over 10 years = $2877/mo, ~$345k total. To get to appx that same total at 3%, you would only have to pay $1185/mo over 25 years, ~$355k total. That's a whopping $1700 a month that you get to put towards a house, retirement etc NOW if you are fortunate enough to have a low interest rate. That's why we are all so concerned about getting these loans paid off ASAP.

As another point of comparison, if you were to pay that $250k @ 6.8% off over 25 years (like the people with the low % rates commonly do), you would of course pay more per month - $1735 - but it adds up to much more - $520k.