You are not getting a lower interest rate if you refinance when your debt is 4x your income. You’d be high risk for default and will be offered an interest rate to match that risk
Student debt: what does the math actually say?
- Thread starter Skarl
- Start date
Judging from recent posts, options as a resident are to pursue:
1. IDR
2. PAYE
3. REPAYE
4. Refinance
With REPAYE > PAYE > IDR vs. refinance, depending on if you are going for PSLF or not (in which case, compare numbers for REPAYE vs. refinance)?
1. IDR
2. PAYE
3. REPAYE
4. Refinance
With REPAYE > PAYE > IDR vs. refinance, depending on if you are going for PSLF or not (in which case, compare numbers for REPAYE vs. refinance)?
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To clarify:
IDR = income-driven repayment = the 4 federal plans based on income and have loan forgiveness = REPAYE, PAYE, IBR, ICR
IBR = income-based repayment, one of the IDR plans (yea, a little confusing)
PSLF = uses any of the IDR plans but forgiveness at 10 years with no tax bomb (only for nonprofits)
What plan you choose during residency will depend on your overall strategy. Your income as a resident doesn't allow for much repayment so I suggest federal plans to keep payments low and possibly get some subsidy.
- If you plan to pay off ASAP, choose REPAYE for interest subsidy. You could refinance at the start of residency, but you probably won't be able to afford the payments unless your debt is really low. Even then, mathematically the interest subsidy would trump a lower rate. There's no point in paying more than the monthly payment since it eats into the interest subsidy, if you can even afford to pay more. If you do, it'd be better to save it up to make a larger payment when you refinance after residency
- If you plan to do PSLF, choose any of the IDR plans, probably the one with the lowest monthly payment to maximize the forgiven amount
- If you plan to do full IDR, then choose the plan with lowest total cost in NPV
Its possible using an IDR plan for aggressive repayment, instead of refinancing, might have a lower interest since its not compounding and federal student loan rates are pretty low (though I expect private rates to fall to remain competitive). I still have to run the numbers. Regardless of your strategy, you should always re-evaluate your financial position at least once a year.
I stress that the point of learning about repayment is to know what to do and have the skills to make a good decision when you get there, NOT to plan it all right now. You don't know what your exact situation will be until you get there.
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@Skarl
Sorry, I realize I never answered your question about my thoughts on IDR and the WCI's advice on it. Well, I disagree with all of his points involving money since the math shows IDR can be of lower cost than aggressive repayment. I think the risk of an invested tax bomb fund is fairly low given a 20 year span, and as the math shows, the fund would only have to return about 2-3% per-annum to be effective (less the higher your debt). I also think the legislative risk is pretty darn low. While I understand his point about "sticking it the tax payer," if an option is readily available and advantageous, I don't see the shame in taking it.
That said, after giving it a lot of thought, I would still recommend aggressive repayment for most people, even big debtors. I agree with the WCI's points on the psychological effects of debt. Most people are risk averse and don't sit well with having a ton of debt and are not disciplined enough to build their tax bomb funds and trust in the long game. All this adds to a lot of extra stress on top of being a doctor. Most people also do not have the financial interest and knowledge to achieve the mathematical advantage of IDR nor the skills to determine if such an advantage exists. The biggest reason, however, is that most people will benefit from living below their means, delaying gratification, and learning to save instead of spend (especially in tax-advantaged retirement accounts). IMO, these are among the most important skills for everyone to have. The FIRE-eating asceticism camp is not for everyone, but I think most people would benefit tremendously from boot camping there for a few years to acquire these skills and make them habits. After that, 20% savings is a good thumb-rule that leaves plenty left to be enjoyed.
Sorry, I realize I never answered your question about my thoughts on IDR and the WCI's advice on it. Well, I disagree with all of his points involving money since the math shows IDR can be of lower cost than aggressive repayment. I think the risk of an invested tax bomb fund is fairly low given a 20 year span, and as the math shows, the fund would only have to return about 2-3% per-annum to be effective (less the higher your debt). I also think the legislative risk is pretty darn low. While I understand his point about "sticking it the tax payer," if an option is readily available and advantageous, I don't see the shame in taking it.
That said, after giving it a lot of thought, I would still recommend aggressive repayment for most people, even big debtors. I agree with the WCI's points on the psychological effects of debt. Most people are risk averse and don't sit well with having a ton of debt and are not disciplined enough to build their tax bomb funds and trust in the long game. All this adds to a lot of extra stress on top of being a doctor. Most people also do not have the financial interest and knowledge to achieve the mathematical advantage of IDR nor the skills to determine if such an advantage exists. The biggest reason, however, is that most people will benefit from living below their means, delaying gratification, and learning to save instead of spend (especially in tax-advantaged retirement accounts). IMO, these are among the most important skills for everyone to have. The FIRE-eating asceticism camp is not for everyone, but I think most people would benefit tremendously from boot camping there for a few years to acquire these skills and make them habits. After that, 20% savings is a good thumb-rule that leaves plenty left to be enjoyed.
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