Why pay off student loans?

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Wasnt replying to anyone in particular. Just saying that each individual should do the math for themselves and there is a component of "cost of safety" involved especially as you get older that shouldnt be ignored.
Worrying about market cycles isn't my thing. Im not smart enough to time the market but certainly you need to look at the cost of what you're paying for especially if you dont have the means to ride out a drop. Are you going to do just fine paying for colgate with a PE of 40 and holding for 40 years. Probably. But is your money better put to work somewhere else, also probably.

Why not invest in a total market fund instead of individual stocks? Then you have more protection, especially over the long term.

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Also, just to address a previous post, you can still take a mortgage deduction with AMT.

Yes, you're right, only home equity interest is excluded under AMT, but with AMT I ended up paying about 28% federal income tax, which in your scenario would bring down the interest rate by 1% with state tax. That's not nothing, it's true, in terms of interest rate. But in terms of dollar amount, it's 10k the first year, but will be less every year thereafter. So I agree, not nothing, but 10k and less each year.

But keep in mind, that the interest deduction is somewhat balanced out by the fact that the alternative investments are taxed as well. So while you get a tax deduction on the interest expense for the loan, you get a tax liability on the investment. So if your 4% loan is costing you 3%, your 7% yield is actually 5.25%. So when comparing loan vs investments, the deduction is generally a wash.

Yes, you can invest in municipal bonds, and yes, there are tax deferred investment options, but none of those are likely to apply here, and we can play this game forever.
 
1-This was exactly my point. As I said in the post above yours, making the term artificially long makes it look comparable. Having a shorter term like 10 years and and much longer investing time frame like 30 is what makes it work. However, yes you can find student loan repayment schedules that are 25-30 years, but that doesnt make them a good idea.

2-Yes, this is the choice. Why would you fight against time when time is devaluing the debt you owe? The gain is still limited to the amount of interest owed/cost. It is fixed, you cannot gain more than that. There is NO COMPOUND INTEREST. Words have meaning, including these. Look them up and see how its structured. They are literally absolutely different equations. Its like a pts saying vaccines cause autism.

Wait, what do you mean NO COMPOUND INTEREST? Student loans are always COMPOUND INTEREST. Unless you're talking about trying to pay the monthly payment AND the accrued interest on top of that, which in this case would make it an opportunity cost like others have said. Meaning the money you pay these interest would not be available to invest , which is what you want to do in the first place. Below is the link to an explanation of how student loans ARE compound interest.
https://studentloanhero.com/featured/how-student-loan-interest-works/

3-Theres no guarantee outside of death. We can only go on what we know and probabilities. The probability that money invested today in an index will be worth more in 30 years is very high. If you understand inflation than why the rush to paying down the loans ASAP. We should remember the point of investing is to preserve purchasing power in the future.

To clarify, I still want to MAX out on all of retirement accounts first, 401k and whatnot , THEN put everything in student loans. That's my stand on this issue.

For example, off the top of my head from memory of this thread it would look like this.

100k student loan, entering repayment @7%, 10y term
The TOTAL amount of interest owed if paid as scheduled is 39,330. Thats the total possible to be avoided. You cannot do better than that. This is true of any loan. This number is always disclosed up front and should be thought of and indeed is labeled as the "cost".

Otoh, if you invested it and let it ride 20, 30 years you will eventually have multiples of that total cost/interest on the loan. I did this exact calculation in post #19 with conservative numbers. Punch your assumptions into a calculator. For fun lets do a 500/month that could have been paid to loan and instead invest it, but only up until the term is over and then let it ride, never contributing after the loan term is up.

After 10 y
Loan interest paid/10y=39,330.
Invest account (@4%) 73.5k, (60/13.5) This looks great. HOWEVER, is it GUARANTEED ? IT could very well be MINUS 6 %

20y
Inv (@4%)=108.8k

30y
Inv (@4%)=161.1k

This is with a nearly half the interest rate and never contributing more than you would have to the loan. With most people taking advantage of low interest rates (my loans are at 3.06%) and even with the market at ATH, the odds are actually quite stacked in favor of investing in real life. Even better if you have a bear market at the beginning.

Hopefully in real life you can contribute more and dont stop because your loans are gone but rather increase. That doesnt mean you shouldnt pay off your loans or mortgage if you value those trade offs, which there are many. However, there is no need to make things up to justify your position that make no sense, which seems to happen all the time.

Thanks for your input though.
 
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Let's say a high salary is private practice specialist income (550K). Generally, a reasonable mortgage is equal or less than 2x your gross income. In this case, that's about $1 million.

Using your 4% mortgage rate, that's $40,000 of interest a year. Given the highest tax bracket, that's a deduction of about $16,000 every year for the entire term of the mortgage. The effective interest rate becomes (40k-16k)/1000k, or 2.4%.

Regardless of how much your loan actually is, the reduction in the effective interest rate is the same in the highest tax bracket. How is this "nothing?"

Also, just to address a previous post, you can still take a mortgage deduction with AMT.

First off 1 million is the max mortgage amount eligible for mortgage interest deduction.
Second it phases out at 3% for every dollar above an AGI of 275k so for your 550k earner that lops a nice 8,250 off your 16k calculation. Not literally nothing but about what your wife will spend on baby **** over the course of a quarter. I wouldn't take a million dollar mortgage for my primary home anyway so make that income, have a lower mortgage and it really turns into a rounding error.
 
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Yes, you're right, only home equity interest is excluded under AMT, but with AMT I ended up paying about 28% federal income tax, which in your scenario would bring down the interest rate by 1% with state tax. That's not nothing, it's true, in terms of interest rate. But in terms of dollar amount, it's 10k the first year, but will be less every year thereafter. So I agree, not nothing, but 10k and less each year.

But keep in mind, that the interest deduction is somewhat balanced out by the fact that the alternative investments are taxed as well. So while you get a tax deduction on the interest expense for the loan, you get a tax liability on the investment. So if your 4% loan is costing you 3%, your 7% yield is actually 5.25%. So when comparing loan vs investments, the deduction is generally a wash.

Yes, you can invest in municipal bonds, and yes, there are tax deferred investment options, but none of those are likely to apply here, and we can play this game forever.

That is not quite accurate. Even in a taxable account, if it's invested in a total market index for example, you are only paying tax on long-term capital gains and dividends, which may amount to 2% of the gain. The remainder of the gains are not taxed until you withdraw. If you withdraw in retirement while you are in the lowest brackets, there is no tax.

As you said, there are also tax-deferred options. We can agree that if you've gotten to this point, you probably already maxed out the 401k, backdoor roth, and HSA. You still have the 529, though. That gives you a state tax deduction and tax-free growth forever that you can use for all your kids or other relatives. You could also do a defined benefit plan.
 
That is not quite accurate. Even in a taxable account, if it's invested in a total market index for example, you are only paying tax on long-term capital gains and dividends, which may amount to 2% of the gain. The remainder of the gains are not taxed until you withdraw. If you withdraw in retirement while you are in the lowest brackets, there is no tax.

As you said, there are also tax-deferred options. We can agree that if you've gotten to this point, you probably already maxed out the 401k, backdoor roth, and HSA. You still have the 529, though. That gives you a state tax deduction and tax-free growth forever that you can use for all your kids or other relatives. You could also do a defined benefit plan.

Yes, but this is what I was referring to when I said " we can play this game forever" i.e. One-upmanship

So, yes only 1.89% of the gain will be taxable, in my case at 50% in California. Actually, in retirement I will pay around 43% capital gains if I sell. But I won't sell. So while my kids will get the step up in basis and avoid capital gains, my estate will pay 40% in estate tax.

My state has no 529 deduction. However, it does avoid estate tax, but is subject to the rules being changed, which congress has considered. I have put a lot into mine, but will pay tuition from outside funds to keep it as full as I can. IRS might eventually ding 529 s with unreasonable amounts in them, or so my estate attorney advised me.


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Haha it's all in good fun. I don't see it as one-upmanship as much as drilling down on the details to make accurate comparisons and possibly learn something new.

In the end, I think we have established that investing wins over paying off school loans (that are either in a good repayment plan or refinanced) over the long term. I think it is also clear that investing wins over paying down a low-interest deductible mortgage, especially in the common doctor tax brackets.
 
At these low rates and with the Pease phase outs, unless you live in a high property tax state (Cali at least has that ok) mortgage deductions while no one is going to forget to take it, just arent that large overall.

I dont like the 529 in the off chance its not used for school, but a defined benefit plan can be really nice (and rolled over every now and then).

If you have an estate tax issue then you've done amazing, congrats.

Obviously a lot of the choices and what you weigh as most important is going to depend largely on whether you just graduated or are well established, and I do not pretend to think the same things will occupy the priority list at those different times. Younger folks tend to want to stack the retirement assets, once established and thats nice and plush, you probably desire to toss debt more. Your priorities change.
 
Thanks for your input though.

Hard to see your link in there, had to expand to view. Sorry, but that is not compound interest. Interest accrual does not equal interest compounding in the same sense that you are using it. Yes its called compounding, no it does not have a compounding effect on the loan balance. This subtle difference is super important. Unless you pay interest on interest, it is not compound interest. You can tell by missing a mortgage payment, your payment or interest doesnt change, but you're charged a late fee. Since you pay off the accrued interest every month in full it does not compound (in repayment, it can capitalize one time at deferment/forbearance).

No one is choosing an either/or scenario, in real life its whether you pay extra on top of the payment to reduce interest burden over the life of the loan or put it to work elsewhere. bc65's scenario of lump sum is not a reality many of us have and therefore mostly irrelevant. No one has suggested not paying your loan at least on time as contracted.

Simple interest: Interest calculated only on principle
-this is how all but a negatively amortized loan works
-if you look at any loan you'll find this to be mathematically true for yourself.

Compound interest: Interest calculated on principal + accrued interest
-this is how equity investing works, both up/down though

If you rather read a blogs opinion, then the government student loan site hopefully will have enough validity for you. https://studentaid.ed.gov/sa/types/loans/interest-rates#how-calculated
 
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In the end, I think we have established that investing wins over paying off school loans (that are either in a good repayment plan or refinanced) over the long term. I think it is also clear that investing wins over paying down a low-interest deductible mortgage, especially in the common doctor tax brackets.

All in good fun, yes.

But No, we did not establish that investing wins over school loans. What we established is that if your investing earns you a higher interest rate than your loans are costing, you come out ahead, but if your investments earn you less than your loans cost, you come out behind.

Some of us, with more experience, understand that your investments can lose 50% of their value and stay down for 10 or more years. Some of us know that some investments can go to zero and stay there. Some of us understand that there's a place for risk-free investments paying above market rates ( ie paying off a loan ) , and a there's a cost for getting a higher yield in the form of higher risk.

So what I'm saying is, understand the risk and know what you're doing. Be sure of your ability to hold on to your stocks when the market crashes before you take huge risks for a small premium.

Look at it this way: Many fund managers, pension fund managers, hedge fund managers, are willing to buy bonds today paying 1%, even though they know the market averages 10% over time. Someone with a student loan can get an immediate guaranteed return of 4%, tax free, by paying off their loans. What do you know that they don't know? Granted, each of us is in a different situation than they are, but still, I think you would be less contemptuous of an absolute guaranteed immediate 4% return, and you would be less confident of your future returns, if you had more experience with investing.


Simple interest: Interest calculated only on principle
-this is how all but a negatively amortized loan works


Sure, because you'll just be in default if you don't pay. But if the loan will negatively amortize rather than just default, then the interest will compound.

But any loan will come out the same mathematically as an investment that's compounding simply because the interest that you have to pay on the loan isn't available to grow and compound.

For example, I say that if you spend $100,000 on a round-the-world cruise today at age 30, you will have $800,000 less when you retire at age 60, because if you had invested that money at 7% , it would have compounded to $800,000 in 30 years.
Will you argue that I'm wrong, because cruises don't pay interest and don't compound? It's the same with the loan. If you are paying interest on a loan every year, then you will lose the growth and compounding of the loan payments every year for as long as you have the loan. Hence the loan will decrease your net worth by the same amount as the investment gets you. Hence there's no value in holding the loan vs paying it off, if interest rates are the same. Saying that a loan doesn't compound is ignoring the fact that the effect on your net worth is the same as if it did.

Again, the loan doesn't compound because you keep paying it off, just as an investment won't compound if you keep spending the interest every year. The loan stays the same because you're adding money to it, fighting against the interest that would otherwise grow. If you do the same to the investment, pulling the interest out every year, it won't grow either. Both work exactly the same way.

Try this thought experiment: You get the interest from your investment, but instead of keeping it in this account, you open a new account and put all the interest there every year. Did the first account stop compounding? Is it less valuable? I say it's just as valuable as it was, and it's still compounding, you just see it and recognize it in another account. Similarly, the loan account drains the same amount of money out of your investment accounts, even though you don't see it in the loan account, and has the same negative compounding effect.

BTW, my lump sum scenario works exactly the same for any amount, or for a single payment. Again, it makes sense if you think it through, and in fact I demonstrated this in an earlier post above with a specific example.

I dont like the 529 in the off chance its not used for school,

In my case I don't plan on using it for school. I'll pay tuition directly ( no gift tax on tuition paid for kids) My kids will inherit it, and it can be used for grandkids. Worst case scenario, there's just a 10% penalty, which isn't that bad. I'll probably come out ahead anyway since we'll be in a lower tax bracket.
 
Hard to see your link in there, had to expand to view. Sorry, but that is not compound interest. Interest accrual does not equal interest compounding in the same sense that you are using it. Yes its called compounding, no it does not have a compounding effect on the loan balance. This subtle difference is super important. Unless you pay interest on interest, it is not compound interest. You can tell by missing a mortgage payment, your payment or interest doesnt change, but you're charged a late fee. Since you pay off the accrued interest every month in full it does not compound (in repayment, it can capitalize one time at deferment/forbearance).

No one is choosing an either/or scenario, in real life its whether you pay extra on top of the payment to reduce interest burden over the life of the loan or put it to work elsewhere. bc65's scenario of lump sum is not a reality many of us have and therefore mostly irrelevant. No one has suggested not paying your loan at least on time as contracted.

Simple interest: Interest calculated only on principle
-this is how all but a negatively amortized loan works
-if you look at any loan you'll find this to be mathematically true for yourself.

Compound interest: Interest calculated on principal + accrued interest
-this is how equity investing works, both up/down though

If you rather read a blogs opinion, then the government student loan site hopefully will have enough validity for you. https://studentaid.ed.gov/sa/types/loans/interest-rates#how-calculated
I believe it is compound. It's called Capitalization.
Capitalization is the addition of unpaid accrued interest to the principal balance of your loans. This means that your principal balance increases, so you will pay more in interest over the life of the loans.
https://myfedloan.org/help-center/faq/interest-faq.shtml

Also this
http://schoolgrantsfor.com/compounded-interest.html
Compound interest generally refers to gains from investments that result from earning returns on previously earned returns. Capitalized interest refers to debt that compounds because you are paying interest on interest that you have already accrued but not yet paid. These are similar terms but used in different contexts.
 
Refinancing. People have been refinancing at around 4%. I finished residency 4 years ago and refinanced with a very average credit score. My loans are at 5% fixed.
Because you now have private loans. If anything were to happen to you, your spouse would be on the hook for them, or you would be if you were disabled. Private loans can be a nightmare, so either stash an emergency payoff fund for them or pay them off entirely.

There is also the aspect of retiring early- so long as you have large, regular payments that need to be made, retirement is substantially farther from reach. And then there is the psychological aspect of being debt-free and knowing you can basically pack up and do whatever with your life because you don't owe anything to anyone. For some of us it is less about doing the thing that will make us the most money, and more about what will make our day-to-day life better.
 
I believe it is compound. It's called Capitalization.
Capitalization is the addition of unpaid accrued interest to the principal balance of your loans. This means that your principal balance increases, so you will pay more in interest over the life of the loans.
https://myfedloan.org/help-center/faq/interest-faq.shtml

Also this
http://schoolgrantsfor.com/compounded-interest.html
Compound interest generally refers to gains from investments that result from earning returns on previously earned returns. Capitalized interest refers to debt that compounds because you are paying interest on interest that you have already accrued but not yet paid. These are similar terms but used in different contexts.

Yes, thats what capitalization means. That is a one time event usually as far as student loans go. If it capitalizes every day, month, year, etc...this is compound interest. Also, that has nothing to do with how the interest behaves once in repayment. In repayment, after capitalization even, the interest rate you are charged and how it is charged is simple. It is still known 100% up front the "cost". Even the charges going forward after capitalization are simple. That is the point. You cannot save yourself from that in any meaningful way except to never be in deferment or forbearance. You can only save yourself from the interest and cost of the loan during repayment, that is the max one can save. Again, its simple interest because you pay it fully every month and it no longer capitalizes.

You have almost zero control over the initial capitalization unless you never needed the loans in the first place, so that is really a moot point that doesnt apply. The only part we're in control of is during repayment where it doesnt capitalize anymore. Yes, its a little complex, but its still simple. You can still only save a finite, already known up front amount by paying more aggressively.
 
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All in good fun, yes.

But No, we did not establish that investing wins over school loans. What we established is that if your investing earns you a higher interest rate than your loans are costing, you come out ahead, but if your investments earn you less than your loans cost, you come out behind.

Some of us, with more experience, understand that your investments can lose 50% of their value and stay down for 10 or more years. Some of us know that some investments can go to zero and stay there. Some of us understand that there's a place for risk-free investments paying above market rates ( ie paying off a loan ) , and a there's a cost for getting a higher yield in the form of higher risk.

So what I'm saying is, understand the risk and know what you're doing. Be sure of your ability to hold on to your stocks when the market crashes before you take huge risks for a small premium.

Look at it this way: Many fund managers, pension fund managers, hedge fund managers, are willing to buy bonds today paying 1%, even though they know the market averages 10% over time. Someone with a student loan can get an immediate guaranteed return of 4%, tax free, by paying off their loans. What do you know that they don't know? Granted, each of us is in a different situation than they are, but still, I think you would be less contemptuous of an absolute guaranteed immediate 4% return, and you would be less confident of your future returns, if you had more experience with investing.

I actually showed that with a rate 50% less than the loan the investing came out ahead. It appears you just ignored the whole thing. You did show with your example of exactly the same rate loan and investment over the exact same time frame came out to a similar amount. I pointed out, but you must have glossed over it that it cost you more than 2x the amount of contributions to reach a similar number. In reality, interest rates for loans are rock bottom, and the whole advantage is to take a shorter term loan and pit it against a longer term investment. You literally control both ends of the term issue and get to set your advantage.

What money managers do is completely irrelevant to this. Why they do what they do is often mandated, insurance, hedging, carry, and relative. You can not compare a sovereign wealth fund or pension fund and their mandates or motivations to something of this nature. Their time frames and obligations are entirely different, and they have different regulations as well.

The hurdle rate to beat your loan while investing is simply whatever the "cost of the loan" is, it is literally your total cost to hold onto that debt instead of pay it off. No one is saying dont pay it as required, nor are we starting out with a lump sum. Just because we dont agree doesnt make me contemptuous, we're obviously at different points in our careers and have different goals.
 
Because you now have private loans. If anything were to happen to you, your spouse would be on the hook for them, or you would be if you were disabled. Private loans can be a nightmare, so either stash an emergency payoff fund for them or pay them off entirely.

There is also the aspect of retiring early- so long as you have large, regular payments that need to be made, retirement is substantially farther from reach. And then there is the psychological aspect of being debt-free and knowing you can basically pack up and do whatever with your life because you don't owe anything to anyone. For some of us it is less about doing the thing that will make us the most money, and more about what will make our day-to-day life better.

That isnt true of all private lenders so when you refinance its definitely something to consider among your choices. Also, that is what life insurance is for.
 
That isnt true of all private lenders so when you refinance its definitely something to consider among your choices. Also, that is what life insurance is for.
True. I'm virtually uninsurable, so it really doesn't apply to me. But I've yet to find a private lender that forgives the loan balance upon death- every single one I've reviewed will come for my estate.
 
Why not invest in a total market fund instead of individual stocks? Then you have more protection, especially over the long term.
Cause I'm a busy body and probably over estimate my own investment ability. I do pay a lot of attention and enjoy valuing and following company financials. I've done well so far even through 2008 (not "well" in 2008 but less bad I guess) and I enjoy it so that's my reason. I agree index funds are probably better for most people that don't want to put in the time and as my wife gets more annoyed with the time I commit I've thought of switching over. Especially for her benefit if something were to happen to me, she'd have no idea what to do with individual stock positions. That's the long and short of it.
 
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What I dont understand about the comment is that if someone couldnt be trusted to invest their money and behavioral factors would lead them astray, how come they will pay down student loans instead? It makes no sense whatsoever. If there is something peculiar or unique about paying debt vs. investing what is it?

I missed this quote earlier. The behavioral factors that lead them astray is this:

Short version: They invest just fine when the market is up for 10 years. Comes the crash, they sell everything and stay in cash, forever locking in their losses, never to return.

Long version: Sure, they are really good at putting money into the market every day while is slowly goes up. He does it like clockwork. Then one day it drops 3%. Scary, but they can handle it. Then it drops 10% next week. Now he's really worried. Then 10% the next week. Really worried, but he read about this. Meanwhile half his friends have sold everything. Now it goes down another 10%. Maybe he should sell some? His wife is screaming at him. Their kids have to go to college in a few years. Now it drops 20% more. He sells. He can't afford to lose anymore. Maybe it goes down another 20%. He's afraid to jump back in. Over the next few years he keeps his money in cash. The market goes up, but all the commentators on tv are all doom and gloom. It's now 10 years later, the market is 20% higher than it was before the crash, but the commentators still keep predicting recession, so our friend is still in cash.

Sadly, not only do I know people like this, I know doctors like this. Most of them in fact.

Were you invested in 2000? In 2007? If so, how much? And how far out of residency. Because if you had $10,000 in the market, that's a different experience than 5 million. If you're 25 years from early retirement, that's different from 65 wanting to retire next year.



I actually showed that with a rate 50% less than the loan the investing came out ahead. It appears you just ignored the whole thing.

I honestly don't follow your numbers or logic at all. Maybe you can't follow mine. But I think that once again you you didn't account for the fact that the money that you put towards the loan is money that has to come out of your other investments. I also think that you're assuming that after paying off the loan you stop investing that money. That's not the case. The whole point as I indicated in my example of paying off the lump sum, is that any money not need for the loan payments is instead invested.

The loan won't compound, because you paid off the monthly interest accrual. But the money you use to pay off the loan isn't in your accounts anymore, so your equivalent asset can't compound grow either.

If you pay off the loan principal, it decreases your assets, so they can't grow and give you interest. But by paying down the principal, the amount of interest you have to pay goes down as well. If those interest rates were the same, it's a wash. It's the same for any dollar amount.

IF you account for the lost opportunity costs of the loan, its a wash.

Let's say you have all your assets in Vanguard. Some are mutual funds, some are bond funds, some is your emergency fund. They are all earning interest. Maybe some are earning more interest, some less. All are compounding, unless you are spending the interest from that particular account.

In another bank you have your mortgage. You owe principle and interest every month. So in order to stop your loan from defaulting, or compounding (negatively amortizing) you have to come up with the interest payment. That money has to come from your investment account. Whichever account you pull it from will stop that account from compounding. You lose the compounding of that money forever. So as long as you have the loan, your comparable investment will not be able to compound. That account will grow in the future, but it will always be behind.

You also have to make a principle payment that month. Whatever money you take out to pay the principal you owe on the loan will decrease your assets by the same amount. You will lose the future growth of that asset money forever. However, your net worth won't change, because while you have decreased your assets by that fixed amount, you have simultaneously decreased your debt by that same amount. So you net worth won't change when you pay off your monthly payment. By paying off , let's say $1,0000 of your loan, you lose $1,000 of money that would have been earning you interest forever. That's terrible! But meanwhile, you have also paid down $1,000 of you loan. Now you won't have to pay the interest on the $1,000, that you would have had to pay forever. That's wonderful! For any given amount of money, whether it's $1 or $1 million, you are simply transferring your asset from one column to another. Your net assets stay the same. Meanwhile, when you make a principle transfer, the money that was generating interest in your favor now goes over to the debt column and decreases the growth of your debt by that same amount.

Before, the asset was pouring money into your account, but the loan was draining it out the bottom. By moving the asset to the loan, the hole draining the money gets plugged. If the rate at which the money was pouring in and out is the same ( ie interest rate) then the amount by which you plug the hole will have no net effect on the total assets.

The loan doesn't compound, because you paid the interest off immediately.
However, you asset won't compound either, because you spent the interest that would have compounded to pay the loan.

This is quite clear. I showed it with numbers, and I showed it with words. You may not understand it, but I think most everyone else will.
 
I missed this quote earlier. The behavioral factors that lead them astray is this:
I honestly don't follow your numbers or logic at all. Maybe you can't follow mine. But I think that once again you you didn't account for the fact that the money that you put towards the loan is money that has to come out of your other investments. I also think that you're assuming that after paying off the loan you stop investing that money. That's not the case. The whole point as I indicated in my example of paying off the lump sum, is that any money not need for the loan payments is instead invested.

The loan won't compound, because you paid off the monthly interest accrual. But the money you use to pay off the loan isn't in your accounts anymore, so your equivalent asset can't compound grow either.

If you pay off the loan principal, it decreases your assets, so they can't grow and give you interest. But by paying down the principal, the amount of interest you have to pay goes down as well. If those interest rates were the same, it's a wash. It's the same for any dollar amount.

IF you account for the lost opportunity costs of the loan, its a wash.

Let's say you have all your assets in Vanguard. Some are mutual funds, some are bond funds, some is your emergency fund. They are all earning interest. Maybe some are earning more interest, some less. All are compounding, unless you are spending the interest from that particular account.

In another bank you have your mortgage. You owe principle and interest every month. So in order to stop your loan from defaulting, or compounding (negatively amortizing) you have to come up with the interest payment. That money has to come from your investment account. Whichever account you pull it from will stop that account from compounding. You lose the compounding of that money forever. So as long as you have the loan, your comparable investment will not be able to compound. That account will grow in the future, but it will always be behind.

You also have to make a principle payment that month. Whatever money you take out to pay the principal you owe on the loan will decrease your assets by the same amount. You will lose the future growth of that asset money forever. However, your net worth won't change, because while you have decreased your assets by that fixed amount, you have simultaneously decreased your debt by that same amount. So you net worth won't change when you pay off your monthly payment. By paying off , let's say $1,0000 of your loan, you lose $1,000 of money that would have been earning you interest forever. That's terrible! But meanwhile, you have also paid down $1,000 of you loan. Now you won't have to pay the interest on the $1,000, that you would have had to pay forever. That's wonderful! For any given amount of money, whether it's $1 or $1 million, you are simply transferring your asset from one column to another. Your net assets stay the same. Meanwhile, when you make a principle transfer, the money that was generating interest in your favor now goes over to the debt column and decreases the growth of your debt by that same amount.

Before, the asset was pouring money into your account, but the loan was draining it out the bottom. By moving the asset to the loan, the hole draining the money gets plugged. If the rate at which the money was pouring in and out is the same ( ie interest rate) then the amount by which you plug the hole will have no net effect on the total assets.

The loan doesn't compound, because you paid the interest off immediately.
However, you asset won't compound either, because you spent the interest that would have compounded to pay the loan.

This is quite clear. I showed it with numbers, and I showed it with words. You may not understand it, but I think most everyone else will.

The point about being 25 and 65 has been mentioned ad nauseam. Everyone is different and in different time periods in their professional and investing career, the choices one makes at one time are not necessarily the ones they will make later. We have all agreed that this is so, its a dead horse.

Its not logic its math. If you dont get it, its because you dont want to. There is nothing to believe in and no logic, the math is pure and simple and does not lie. You keep proposing this unrealistic not true version of a scenario you believe works best to illustrate your point, it still doesnt. You told me we were done discussing this, and I hoped it to be true. I dont think you will even entertain to look at it how I presented it, and when I did take your numbers and did what you said, turned out you were wrong. However, it seems people are very dogmatic about this issue and want to believe its true, rather than anything else.

Since I am at the beginning stages of both, a market drop that was large but not large enough to effect the economy and slow down work would be the best case scenario long term. Agree that most doctors are not great at finances. If you are nearing retirement and a 50% drop in the market changes your outlook than you did not have a proper allocation or plan for retirement at all. Thats exactly what bonds are for, volatility smoothing and increasing the consistency of your sustainable withdrawal rate.
 
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I missed this quote earlier. The behavioral factors that lead them astray is this:

Short version: They invest just fine when the market is up for 10 years. Comes the crash, they sell everything and stay in cash, forever locking in their losses, never to return.

Long version: Sure, they are really good at putting money into the market every day while is slowly goes up. He does it like clockwork. Then one day it drops 3%. Scary, but they can handle it. Then it drops 10% next week. Now he's really worried. Then 10% the next week. Really worried, but he read about this. Meanwhile half his friends have sold everything. Now it goes down another 10%. Maybe he should sell some? His wife is screaming at him. Their kids have to go to college in a few years. Now it drops 20% more. He sells. He can't afford to lose anymore. Maybe it goes down another 20%. He's afraid to jump back in. Over the next few years he keeps his money in cash. The market goes up, but all the commentators on tv are all doom and gloom. It's now 10 years later, the market is 20% higher than it was before the crash, but the commentators still keep predicting recession, so our friend is still in cash.

Sadly, not only do I know people like this, I know doctors like this. Most of them in fact.

Were you invested in 2000? In 2007? If so, how much? And how far out of residency. Because if you had $10,000 in the market, that's a different experience than 5 million. If you're 25 years from early retirement, that's different from 65 wanting to retire next year.





I honestly don't follow your numbers or logic at all. Maybe you can't follow mine. But I think that once again you you didn't account for the fact that the money that you put towards the loan is money that has to come out of your other investments. I also think that you're assuming that after paying off the loan you stop investing that money. That's not the case. The whole point as I indicated in my example of paying off the lump sum, is that any money not need for the loan payments is instead invested.

The loan won't compound, because you paid off the monthly interest accrual. But the money you use to pay off the loan isn't in your accounts anymore, so your equivalent asset can't compound grow either.

If you pay off the loan principal, it decreases your assets, so they can't grow and give you interest. But by paying down the principal, the amount of interest you have to pay goes down as well. If those interest rates were the same, it's a wash. It's the same for any dollar amount.

IF you account for the lost opportunity costs of the loan, its a wash.

Let's say you have all your assets in Vanguard. Some are mutual funds, some are bond funds, some is your emergency fund. They are all earning interest. Maybe some are earning more interest, some less. All are compounding, unless you are spending the interest from that particular account.

In another bank you have your mortgage. You owe principle and interest every month. So in order to stop your loan from defaulting, or compounding (negatively amortizing) you have to come up with the interest payment. That money has to come from your investment account. Whichever account you pull it from will stop that account from compounding. You lose the compounding of that money forever. So as long as you have the loan, your comparable investment will not be able to compound. That account will grow in the future, but it will always be behind.

You also have to make a principle payment that month. Whatever money you take out to pay the principal you owe on the loan will decrease your assets by the same amount. You will lose the future growth of that asset money forever. However, your net worth won't change, because while you have decreased your assets by that fixed amount, you have simultaneously decreased your debt by that same amount. So you net worth won't change when you pay off your monthly payment. By paying off , let's say $1,0000 of your loan, you lose $1,000 of money that would have been earning you interest forever. That's terrible! But meanwhile, you have also paid down $1,000 of you loan. Now you won't have to pay the interest on the $1,000, that you would have had to pay forever. That's wonderful! For any given amount of money, whether it's $1 or $1 million, you are simply transferring your asset from one column to another. Your net assets stay the same. Meanwhile, when you make a principle transfer, the money that was generating interest in your favor now goes over to the debt column and decreases the growth of your debt by that same amount.

Before, the asset was pouring money into your account, but the loan was draining it out the bottom. By moving the asset to the loan, the hole draining the money gets plugged. If the rate at which the money was pouring in and out is the same ( ie interest rate) then the amount by which you plug the hole will have no net effect on the total assets.

The loan doesn't compound, because you paid the interest off immediately.
However, you asset won't compound either, because you spent the interest that would have compounded to pay the loan.

This is quite clear. I showed it with numbers, and I showed it with words. You may not understand it, but I think most everyone else will.
I am pretty sure you both are talking past each other. The situation he is discussing is someone with a six figure student loan that is on a repayment plan that currently has a payment which does not cover the monthly interest accrual (because that is a situation many people in residency will find themselves in unless their student loan debt is low). Because that interest just hangs out without getting capitalized (that only happens when you come out of deferment or forbearance) a one time extra payment may not touch the principal but it will at least reduce the time it will take to get to a point where extra payments affect the principal. So then they graduate and have a good job so now they have an extra several thousand dollars they have to figure out what to do with because the student loan repayment amount is capped at a certain level (which courtesy of all the interest accumulated during residency may still be applied to interest for a while). That is the scenario he is talking about. So if you take the extra few thousand the first month and pay the interest that had previously accumulated you affect the principal not at all and affect the amount of interest that will accrue next month not at all. Whereas if you took you took the extra few thousand and invested it in something you would have x% more money in the account while the loan interest still accrues. So then if nothing else different is done that investment money eventually grows in a compound fashion to a large amount over the time it took to pay off the loan. But if instead you had paid it towards the loan you don't see a change in the loan interest or principal for a while and the difference you end up seeing is a slightly faster payoff of the loan with the decrease in interest paid being the interest rate over the time period of the faster payoff because your payments otherwise didn't change. Now if you want to go through that math and show what interest rates make paying the loan faster in that situation rather than investing i would welcome that because the way i am seeing it investing looks better even with equal interest rate/rate of return (though risk and taxes complicates the equation)
 
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I am pretty sure you both are talking past each other. The situation he is discussing is someone with a six figure student loan that is on a repayment plan that currently has a payment which does not cover the monthly interest accrual (because that is a situation many people in residency will find themselves in unless their student loan debt is low). Because that interest just hangs out without getting capitalized (that only happens when you come out of deferment or forbearance) a one time extra payment may not touch the principal but it will at least reduce the time it will take to get to a point where extra payments affect the principal. So then they graduate and have a good job so now they have an extra several thousand dollars they have to figure out what to do with because the student loan repayment amount is capped at a certain level (which courtesy of all the interest accumulated during residency may still be applied to interest for a while). That is the scenario he is talking about. So if you take the extra few thousand the first month and pay the interest that had previously accumulated you affect the principal not at all and affect the amount of interest that will accrue next month not at all. Whereas if you took you took the extra few thousand and invested it in something you would have x% more money in the account while the loan interest still accrues. So then if nothing else different is done that investment money eventually grows in a compound fashion to a large amount over the time it took to pay off the loan. But if instead you had paid it towards the loan you don't see a change in the loan interest or principal for a while and the difference you end up seeing is a slightly faster payoff of the loan with the decrease in interest paid being the interest rate over the time period of the faster payoff because your payments otherwise didn't change. Now if you want to go through that math and show what interest rates make paying the loan faster in that situation rather than investing i would welcome that because the way i am seeing it investing looks better even with equal interest rate/rate of return (though risk and taxes complicates the equation)


Yes, this is the correct analysis. I would also point out that investing does not just win, it wins by a very wide margin over the long term. bc65 is framing his own scenarios that do not address the actual issues faced by posters here. He glosses over the difference between simple versus compound interest on student loans. Not only is the simple nature of the interest relevant, it is the most critical factor in the analysis. Student loans not only do not capitalize, but interest paid is deductible to $2500, further reducing the effective interest rate. My current student loan interest rate is effectively 2.2%. I hope to have this loan as long as possible!
 
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Yes, this is the correct analysis. I would also point out that investing does not just win, it wins by a very wide margin over the long term. bc65 is framing his own scenarios that do not address the actual issues faced by posters here. He glosses over the difference between simple versus compount interest on students loans. Not only is the simple nature of the interest relevant, it is the most critical factor in the analysis. Student loans not only do not capitalize, but interest paid is deductible to $2500, further reducing the effective interest rate. My current student loan interest rate is effectively 2.2%. I hope to have this loan as long as possible!
Well they capitalize after you graduate but you can't help that except by not having to borrow as much. Also once you make good money it is no longer deductible :(
 
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Yes, this is the correct analysis. I would also point out that investing does not just win, it wins by a very wide margin over the long term. bc65 is framing his own scenarios that do not address the actual issues faced by posters here. He glosses over the difference between simple versus compount interest on students loans. Not only is the simple nature of the interest relevant, it is the most critical factor in the analysis. Student loans not only do not capitalize, but interest paid is deductible to $2500, further reducing the effective interest rate. My current student loan interest rate is effectively 2.2%. I hope to have this loan as long as possible!

Yes, the scenario is tailor made to work, but is absolutely non representative of reality, so I refuse to act as if those are the true choices. Most people are looking at what they should do with all the extra money they have each month. Pay a little or a lot faster, or shoot for more assets (RE/market), or more likely some mixture of both.

The nature of the interest and the differences in term lengths are the critical factors. The longer your investing time horizon is over the loan term the greater your advantage and you can get even less of a return. Obviously if you are near retirement, those odds are not in your favor. This is mostly an issue for younger physicians to consider. Many, even a great majority will still choose to pay off their loans and thats fine, but they dont have to do so because of misrepresentations of the trade offs. There are plenty of good reasons to do so that do not involve terminal wealth. For myself its just a mindset and goal progression thing. If I end up with more wealth/net worth at X period, it will be even easier to do whatever I want, including paying off all debts if I chose to.

Not mentioned yet but important, is that when investing in a taxable account you have the option to change your mind and pay down debt instead. Once you pay extra towards the debt its gone forever until totally paid off and shows up as increased cash flow. After being out a couple years and feeling more secure, you cant just get it back and put it to work, but you can do the opposite. Obviously, tax/loss can impact that choice.

As dpmd says, you will not see that deduction when you're making money, and they will capitalize, but you can only try to keep your overall balance low to avoid the impact of that.
 
Under my repayment plan (repaye), they never capitalize (unless I leave repaye).

A potential workaround for the deduction is to use a home equity loan to pay for the student loan and deduct that interest instead.
 
Mostly academic interest for me since my student loans are fixed at under 2% (graduated and consolidated at a very good time) but i do like to make sure i give good advice when other people ask.
 
Under my repayment plan (repaye), they never capitalize (unless I leave repaye).

A potential workaround for the deduction is to use a home equity loan to pay for the student loan and deduct that interest instead.
Have to have enough equity for that to work and the typical resident isn't in that position.

Edit: check your stuff, it probably did capitalize when you went from in school deferment to repaye. This was something i didn't realize back when i came into repayment many moons ago.
 
Have to have enough equity for that to work and the typical resident isn't in that position.

Well you wouldn't do it as a resident since you would still qualify for the loan deduction on resident income.
 
Well you wouldn't do it as a resident since you would still qualify for the loan deduction on resident income.
I meant the new resident grad trying to decide what to do with their giant increase in income that bumped them out of being able to deduct it probably probably doesn't have a home with much equity where they could immediately put this in play.
 
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I meant the new resident grad trying to decide what to do with their giant increase in income that bumped them out of being able to deduct it probably probably doesn't have a home with much equity where they could immediately put this in play.

It's actually even easier then. You would just take out a bigger mortgage than you need for the home and use that.
 
Yes, thats what capitalization means. That is a one time event usually as far as student loans go. If it capitalizes every day, month, year, etc...this is compound interest. Also, that has nothing to do with how the interest behaves once in repayment. In repayment, after capitalization even, the interest rate you are charged and how it is charged is simple. It is still known 100% up front the "cost". Even the charges going forward after capitalization are simple. That is the point. You cannot save yourself from that in any meaningful way except to never be in deferment or forbearance. You can only save yourself from the interest and cost of the loan during repayment, that is the max one can save. Again, its simple interest because you pay it fully every month and it no longer capitalizes.

You have almost zero control over the initial capitalization unless you never needed the loans in the first place, so that is really a moot point that doesnt apply. The only part we're in control of is during repayment where it doesnt capitalize anymore. Yes, its a little complex, but its still simple. You can still only save a finite, already known up front amount by paying more aggressively.
Great point. So now it comes down to that ONE fact. Now I do not know if that is really the case that IN REPAYMENT the interest would NOT be added to the principal amount. Are you sure about this??? Could you provide me with some evidence on this??? Because if that is the case then I agree with you 100%.

Because all I see is that student loan interest accrues DAILY, ALL the time.
https://myfedloan.org/billing-payment/about-interest/

Please provide some evidence to support your argument. I would love to see it. Thanks
 
It's actually even easier then. You would just take out a bigger mortgage than you need for the home and use that.
i dont think it works that way haha. I wish but I dont think you can just tell the mortgage loan company that you want to take out as much money as you want as a mortgage loan to use it however you want.
 
i dont think it works that way haha. I wish but I dont think you can just tell the mortgage loan company that you want to take out as much money as you want as a mortgage loan to use it however you want.
I don't know about initial mortages, but there is such thing as cash out refinancing where you get a mortgage for more than you owe but the rates are higher. If such a thing exists for intial mortgages (which I highly doubt) it would be at the cost of a higher interest rate so the benefit would possibly be negated by that anyway.
 
Out of curiosity...

For those of you who favor paying off loans before investing, do you also favor extra loan payments over contributing to 401k, IRA, and/or HSA?

Just to throw my two cents in...

I'm debt averse. Because I had parents who declared bankruptcy ad vowed never to do so myself. So the idea of being debt free, and not having to worry about anything going to collections should I lose my job tomorrow or next year is very appealing.

That said, while I'm in residency, I'm contributing to my IRA. I'm choosing not to contribute to an HSA or 403b at this time, but max out my Roth IRA each year. I'm also making nominally larger payments on one of my student loans (I've paid the principal down about 2K since I started residency). I'll be an attending next year, and plan on stopping my IRA contributions due to an expected increase in one time expenses (fellowship applications, interviews, and board exams), and will contribute a large portion of my increased income to pay off my non-federal student loan. Once I start fellowship, I will go back to contributing to my Roth IRA, may contribute to a 403b, but will contribute the amount I formerly applied to the loan I paid off to my federal loans, rather than investing. I'm not sure what I'll do after fellowship--that will probably depend a lot on what happens in the next 4-5 years.
 
Great point. So now it comes down to that ONE fact. Now I do not know if that is really the case that IN REPAYMENT the interest would NOT be added to the principal amount. Are you sure about this??? Could you provide me with some evidence on this??? Because if that is the case then I agree with you 100%.

Because all I see is that student loan interest accrues DAILY, ALL the time.
https://myfedloan.org/billing-payment/about-interest/

Please provide some evidence to support your argument. I would love to see it. Thanks
Daily accrual of interest is not the same as compounding of interest

https://studentaid.ed.gov/sa/types/loans/interest-rates
How is interest calculated?
The amount of interest that accrues (accumulates) on your loan from month to month is determined by a simple daily interest formula. This formula consists of multiplying your loan balance by the number of days since the last payment times the interest rate factor.

Simple daily interest formula:

Outstanding principal balance
x number of days since last payment
x interest rate factor
= interest amount

Compare to a compound interest formula
Compound Interest

The formula for calculating compound interest is:

Compound Interest = Total amount of Principal and Interest in future (or Future Value) less Principal amount at present (or Present Value)

= [P (1 + i)n] – P

= P [(1 + i)n – 1]
where P = Principal, i = annual interest rate in percentage terms, and n = number of compounding periods.



Read more: Learn Simple And Compound Interest | Investopedia http://www.investopedia.com/article...imple-and-compound-interest.asp#ixzz4J3BdOAue
Follow us: Investopedia on Facebook
 
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Just to throw my two cents in...

I'm debt averse. Because I had parents who declared bankruptcy ad vowed never to do so myself. So the idea of being debt free, and not having to worry about anything going to collections should I lose my job tomorrow or next year is very appealing.

That said, while I'm in residency, I'm contributing to my IRA. I'm choosing not to contribute to an HSA or 403b at this time, but max out my Roth IRA each year. I'm also making nominally larger payments on one of my student loans (I've paid the principal down about 2K since I started residency). I'll be an attending next year, and plan on stopping my IRA contributions due to an expected increase in one time expenses (fellowship applications, interviews, and board exams), and will contribute a large portion of my increased income to pay off my non-federal student loan. Once I start fellowship, I will go back to contributing to my Roth IRA, may contribute to a 403b, but will contribute the amount I formerly applied to the loan I paid off to my federal loans, rather than investing. I'm not sure what I'll do after fellowship--that will probably depend a lot on what happens in the next 4-5 years.
Is there a match for your 403b now or will there be later? If so I think you are doing yourself a great disservice. If not I would have to know your loan interest rates to comment.
 
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Daily accrual of interest is not the same as compounding of interest

https://studentaid.ed.gov/sa/types/loans/interest-rates
How is interest calculated?
The amount of interest that accrues (accumulates) on your loan from month to month is determined by a simple daily interest formula. This formula consists of multiplying your loan balance by the number of days since the last payment times the interest rate factor.

Simple daily interest formula:

Outstanding principal balance
x number of days since last payment
x interest rate factor
= interest amount

Compare to a compound interest formula
Compound Interest

The formula for calculating compound interest is:

Compound Interest = Total amount of Principal and Interest in future (or Future Value) less Principal amount at present (or Present Value)

= [P (1 + i)n] – P

= P [(1 + i)n – 1]
where P = Principal, i = annual interest rate in percentage terms, and n = number of compounding periods.



Read more: Learn Simple And Compound Interest | Investopedia http://www.investopedia.com/article...imple-and-compound-interest.asp#ixzz4J3BdOAue
Follow us: Investopedia on Facebook
Thank you !
 
Just to throw my two cents in...

I'm debt averse. Because I had parents who declared bankruptcy ad vowed never to do so myself. So the idea of being debt free, and not having to worry about anything going to collections should I lose my job tomorrow or next year is very appealing.

That said, while I'm in residency, I'm contributing to my IRA. I'm choosing not to contribute to an HSA or 403b at this time, but max out my Roth IRA each year. I'm also making nominally larger payments on one of my student loans (I've paid the principal down about 2K since I started residency). I'll be an attending next year, and plan on stopping my IRA contributions due to an expected increase in one time expenses (fellowship applications, interviews, and board exams), and will contribute a large portion of my increased income to pay off my non-federal student loan. Once I start fellowship, I will go back to contributing to my Roth IRA, may contribute to a 403b, but will contribute the amount I formerly applied to the loan I paid off to my federal loans, rather than investing. I'm not sure what I'll do after fellowship--that will probably depend a lot on what happens in the next 4-5 years.

Thats excellent motivation, but...you kind of put yourself into a position where fear of turning into your parents and repeating their mistakes is most likely absolutely in the rear view. No need to let fear make decisions for you any more, especially to your detriment (come from a not great background as well). I get the impression you're going to be fine. Either get on one of the payment/forgiveness programs or refinance to as low a rate as you can get. The weighting of your choices will depend on the rates. You should still put what you can into retirement funds however. As an attending, the choice to avoid retirement funds not only has the long term wealth trade off I have been trying to demonstrate in this thread, it also means you will pay 30-50% more on your marginal taxes for the pleasure of doing so with those dollars.

Putting 60k away a year saves me ~30k on my taxes. If I instead paid everything to loans, I'd first have to pay 30k more in taxes, and nothing comes of that to your individual benefit, at least not in your control. My original plan was to do the same as you, until I then saw the tax/net worth implications. I would pay a colossal fine for my feat and while net worth would go to zero it would equal my assets of zero. So I went the other route, invest like mad, refinance, and pay off in a reasonable time frame (i pay a small nominal extra/mo). Now when net worth hits zero I will also have loads of assets, and it will flip from zero to largely positive almost instantaneously. At this rate it might even do so before the loans are gone.
 
Interesting thread. I just wanted to share some of my thoughts and opinions. I am by no means a financial specialist, however I do find personal finance interesting. That being said, these are only my opinions and that everybody's circumstances and goals may differ from mine. That's why it's called "personal" finance I guess.

Anyway, I'm in the camp of paying off your student loans ASAP. Personally, I hate my student loans. I physically hate them. They gave me so much stress and angst during med school and residency that my goal in life is to destroy them as soon as possible. Another reason is that I want to be financially independent as soon as possible. My job is just a job to me. It's not a calling. I do enjoy my work at times, but other times it beats me down. I want to be able to say "peace out" as soon as I can and not feel that I "have to" keep working. I also have other interests and am thinking about starting a side career/business, and I would feel better knowing that that 300K debt is gone.

In terms of the math, I get that you come out ahead if you invest any additional payments (especially over long periods such as 20-30 years) when compared to how much total cost and interest you would pay (and how much you would save on interest if payer earlier) on your loan.

For example, using the OP's loan info (200k, 5%, 17yrs left of repayment), you would have the following results if you a) paid the loan as scheduled over 17 years; b) paying an additional $500 per month toward the loan; c) invested the $500 per month instead at 7% over the 17 years. Using a loan calculator, the monthly loan payments would be $1,457.31.

Paying off as scheduled
Total payment: $297,291.24
Total interest: $97,291.24

Paying ahead of schedule (finish 70 months, or roughly 5.8 years earlier)
Total payment: $261,114.35
Total interest: $61,114.35 (saved $36,176.89)

Investing
Total: $193,564.34

So if you look at things in terms of interest saved paying the additional $500/month, then no doubt you're better off investing. But I think that's only part of the equation to consider. The other part is the opportunity cost of having your $1,457.31 tied up in monthly loan payments and not available for other things (i.e. investing). Let's just use the B scenario above. You would be done with your loans in 11.2 years (still staying within the 17yr timeframe of the loan). You then invest your monthly $1,457.31 at 7% for the remaining 5.8 years and you get $125,422.26, which is less then your Investing total above. What if you aggressively pay off your loans in 5 years then invest your monthly $1,457.31 for the next 12 years at 7%? You would get $327,849.17, which is more (by $134,284.83) than the Investing total above. The effect is actually more prominent with a longer time horizon and with continuing to invest your additional loan payments along with your original monthly loan payment.

For instance, let's take scenario A above but extend the timeframe out to 30 years. You pay off your loan in 17 years while investing the extra $500/month (which would yield $193,564.34). You then continue to invest the $500 along with the $1,457.31 (or $1,957.31) monthly for the next 13 years. Your grand total after 30 years would be $957,269.22.

In the next scenario you pay off early with the additional $500/month. You would be done in 11.2 years. Now invest what you had been paying ($1,957.31, or $500 + $1,457.31) for the next 18.8 years. After 30 years you would get $896,758.10, which is less than the above amount.

What if you paid an extra $1,000 (total of $2,457.31) a month instead? You would be done 8.6 years (104 months) earlier. You then invest that $2,457.31 a month at 7% for the next 21.4 years and you get $1,424,346.87. Well sure, you're investing more money so you're expected to get more returns. That's true but up to a certain point in time. For instance, if you invested the original loan amount of $1,457.31 for 21.4 years you would get $844,710.25. If you pay off your loans in 5 years, then invest the original $1,457.31 for the next 25 years you would get $1,155,496.36, which actually exceeds the total of $957,269.22 from the first scenario (by $198,200.14).

These advantages only work if you fully invest your loan payments once you're finished with repayment (including any additional money used to pay off early). This is also assuming that you have maxed out all of your tax-advantaged accounts (i.e. 401k, IRAs, HSA, etc.) and have no other consumer debt, such as car loans or credit cards (which you should pay off ASAP).

In terms of my home mortgage, that one will not be paid off aggressively for a few reasons. One reason is that the interest is tax deductible (in my case). Also, the house is asset which we own and can appreciate in value. On the other hand, student loans are debt in which you do not own anything of value.

Again, these are just my opinions and everyone has their own priorities and financial goals. If you're already maxing out your retirement accounts, HSA, backdoor Roth, and have no credit card debt or car loan payments, then you're already better than the average person (and possibly the average physician). I do, however, think there is an advantage to paying off your student loans ASAP and then investing those payments for the long term.
 
Is there a match for your 403b now or will there be later? If so I think you are doing yourself a great disservice. If not I would have to know your loan interest rates to comment.

No current match for the 403b, which is why I am choosing not to use it at this time and spending some of my limited post-tax income to max out my Roth IRA. This next year is going to be rocky, but I want to make sure I have enough disposable income to apply, interview, and move for my fellowship (there is no fellowship at my home institution, so I'm going to have to move). If I'm more frugal than I anticipate, then I will max out my Roth prior to filing taxes, but otherwise, I'm going to defer a year until I get back in fellowship.

Either get on one of the payment/forgiveness programs or refinance to as low a rate as you can get. The weighting of your choices will depend on the rates. You should still put what you can into retirement funds however.

I'm on PAYE. Pretty sure I'm not going to qualify for PSLF, but I might. I'm not going to refinance as a resident because there doesn't seem to be a lot of advantage to doing so (marginal benefit in interest rate, but would have to capitalize my interest, thus increasing my monthly payment), and there's little benefit to me doing so my first year out because I'm going to be going back to a fellow salary for 3 years.

As an attending, the choice to avoid retirement funds not only has the long term wealth trade off I have been trying to demonstrate in this thread, it also means you will pay 30-50% more on your marginal taxes for the pleasure of doing so with those dollars.

Not on an attending salary yet, and will only be on one for 1 academic year (half of a tax year for 2 years) at a not quite real attending salary (lower end of the spectrum, probably under 120K, thus not having the disposable income as you for that year). Obviously, I'm going to change things once I'm out in the real world long term, but that's not going to be for another 4-5 years. And how my budget works out as a fellow will depend on where I match for fellowship.
 
Interesting thread. I just wanted to share some of my thoughts and opinions. I am by no means a financial specialist, however I do find personal finance interesting. That being said, these are only my opinions and that everybody's circumstances and goals may differ from mine. That's why it's called "personal" finance I guess.

Anyway, I'm in the camp of paying off your student loans ASAP. Personally, I hate my student loans. I physically hate them. They gave me so much stress and angst during med school and residency that my goal in life is to destroy them as soon as possible. Another reason is that I want to be financially independent as soon as possible. My job is just a job to me. It's not a calling. I do enjoy my work at times, but other times it beats me down. I want to be able to say "peace out" as soon as I can and not feel that I "have to" keep working. I also have other interests and am thinking about starting a side career/business, and I would feel better knowing that that 300K debt is gone.

In terms of the math, I get that you come out ahead if you invest any additional payments (especially over long periods such as 20-30 years) when compared to how much total cost and interest you would pay (and how much you would save on interest if payer earlier) on your loan.

For example, using the OP's loan info (200k, 5%, 17yrs left of repayment), you would have the following results if you a) paid the loan as scheduled over 17 years; b) paying an additional $500 per month toward the loan; c) invested the $500 per month instead at 7% over the 17 years. Using a loan calculator, the monthly loan payments would be $1,457.31.

Paying off as scheduled
Total payment: $297,291.24
Total interest: $97,291.24

Paying ahead of schedule (finish 70 months, or roughly 5.8 years earlier)
Total payment: $261,114.35
Total interest: $61,114.35 (saved $36,176.89)

Investing
Total: $193,564.34

So if you look at things in terms of interest saved paying the additional $500/month, then no doubt you're better off investing. But I think that's only part of the equation to consider. The other part is the opportunity cost of having your $1,457.31 tied up in monthly loan payments and not available for other things (i.e. investing). Let's just use the B scenario above. You would be done with your loans in 11.2 years (still staying within the 17yr timeframe of the loan). You then invest your monthly $1,457.31 at 7% for the remaining 5.8 years and you get $125,422.26, which is less then your Investing total above. What if you aggressively pay off your loans in 5 years then invest your monthly $1,457.31 for the next 12 years at 7%? You would get $327,849.17, which is more (by $134,284.83) than the Investing total above. The effect is actually more prominent with a longer time horizon and with continuing to invest your additional loan payments along with your original monthly loan payment.

For instance, let's take scenario A above but extend the timeframe out to 30 years. You pay off your loan in 17 years while investing the extra $500/month (which would yield $193,564.34). You then continue to invest the $500 along with the $1,457.31 (or $1,957.31) monthly for the next 13 years. Your grand total after 30 years would be $957,269.22.

In the next scenario you pay off early with the additional $500/month. You would be done in 11.2 years. Now invest what you had been paying ($1,957.31, or $500 + $1,457.31) for the next 18.8 years. After 30 years you would get $896,758.10, which is less than the above amount.

What if you paid an extra $1,000 (total of $2,457.31) a month instead? You would be done 8.6 years (104 months) earlier. You then invest that $2,457.31 a month at 7% for the next 21.4 years and you get $1,424,346.87. Well sure, you're investing more money so you're expected to get more returns. That's true but up to a certain point in time. For instance, if you invested the original loan amount of $1,457.31 for 21.4 years you would get $844,710.25. If you pay off your loans in 5 years, then invest the original $1,457.31 for the next 25 years you would get $1,155,496.36, which actually exceeds the total of $957,269.22 from the first scenario (by $198,200.14).

These advantages only work if you fully invest your loan payments once you're finished with repayment (including any additional money used to pay off early). This is also assuming that you have maxed out all of your tax-advantaged accounts (i.e. 401k, IRAs, HSA, etc.) and have no other consumer debt, such as car loans or credit cards (which you should pay off ASAP).

In terms of my home mortgage, that one will not be paid off aggressively for a few reasons. One reason is that the interest is tax deductible (in my case). Also, the house is asset which we own and can appreciate in value. On the other hand, student loans are debt in which you do not own anything of value.

Again, these are just my opinions and everyone has their own priorities and financial goals. If you're already maxing out your retirement accounts, HSA, backdoor Roth, and have no credit card debt or car loan payments, then you're already better than the average person (and possibly the average physician). I do, however, think there is an advantage to paying off your student loans ASAP and then investing those payments for the long term.
Why are you comparing your more aggressive payoff strategy to just investing 500 extra a month? Obviously a more aggressive payoff would need to be compared to investing that more aggressive payoff amount.
 
I did exactly what you're doing in my examples. Obviously, no matter how you change the time frame it comes out similarly. In all of your examples investing came out ahead, money wise. There are of course different reasons one may want to pay off a loan faster, but its not or shouldnt be more ultimate wealth. Remember, the important parts are that:

1. You have to pay the loan off. There is no choice either/or here. You dont get to choose what to do with the monthly payment, you either pay it monthly or more aggressively (at once or slower), nothing else. That is, theres no opportunity cost to this, it is sunk cost. To eliminate it you have to pay it off somehow, so thats not relevant if that makes any sense.
2. The maximum you can save is the cost of the loan, or the total interest charge. You already know this number up front and gives you your hurdle rate and likelihood of success. Sunk costs are sunk. Remember, you earn your attending salary because of them, so it was not a bad trade off anyway.
3. Your advantage is you get to invest for longer than the loan term, inflation, and compounding. All of these factors are in your favor on investing side.
4. If investing any extra can beat that on a conservative estimate over your time frame to retirement, etc...think about it.
5. Otherwise, you have no improved cash flow until loan paid off, and loss of compounding/growth until that time.

I felt sick and disgusted by my loans, just as you did. I didnt even like my job, hated it. Hated that doing everything I was supposed to do, pick self up from bad situation, work hard, become something could lead to feeling trapped and worse off. However, learning about finances, making a plan, seeing that one day none of these monster loans will matter and I will still be better off than most of the world, made those feelings go away. Understanding things and knowing a plan is in place and watching it work is very powerful. I even get to enjoy what I do now. Those feelings will subside in time as you get more secure and more control over things, but yes the first year was rough.

Oh, and theres no camps, this is mostly academic as many people seem to have misconceptions about how things work. None of these are "wrong" or "bad" compared to the other, theyre both excellent choices and the people doing them will excel. Theyre just different, and if the benefits of one compared to the other suit you better, great.
 
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I did exactly what you're doing in my examples. Obviously, no matter how you change the time frame it comes out similarly. In all of your examples investing came out ahead, money wise. There are of course different reasons one may want to pay off a loan faster, but its not or shouldnt be more ultimate wealth. Remember, the important parts are that:

1. You have to pay the loan off. There is no choice either/or here. You dont get to choose what to do with the monthly payment, you either pay it monthly or more aggressively (at once or slower), nothing else. That is, theres no opportunity cost to this, it is sunk cost. To eliminate it you have to pay it off somehow, so thats not relevant if that makes any sense.
2. The maximum you can save is the cost of the loan, or the total interest charge. You already know this number up front and gives you your hurdle rate and likelihood of success. Sunk costs are sunk. Remember, you earn your attending salary because of them, so it was not a bad trade off anyway.
3. Your advantage is you get to invest for longer than the loan term, inflation, and compounding. All of these factors are in your favor on investing side.
4. If investing any extra can beat that on a conservative estimate over your time frame to retirement, etc...think about it.
5. Otherwise, you have no improved cash flow until loan paid off, and loss of compounding/growth until that time.

I felt sick and disgusted by my loans, just as you did. I didnt even like my job, hated it. Hated that doing everything I was supposed to do, pick self up from bad situation, work hard, become something could lead to feeling trapped and worse off. However, learning about finances, making a plan, seeing that one day none of these monster loans will matter and I will still be better off than most of the world, made those feelings go away. Understanding things and knowing a plan is in place and watching it work is very powerful. I even get to enjoy what I do now. Those feelings will subside in time as you get more secure and more control over things, but yes the first year was rough.

Oh, and theres no camps, this is mostly academic as many people seem to have misconceptions about how things work. None of these are "wrong" or "bad" compared to the other, theyre both excellent choices and the people doing them will excel. Theyre just different, and if the benefits of one compared to the other suit you better, great.

After re-crunching some numbers, I agree with you. When it comes to ultimate/terminal wealth, then investing comes out ahead, particularly for low interest rate student loans and over long time periods. I also agree with you in that, as pertains to the discussion, there is no "wrong" or "bad" choices because if you're saving for retirement, investing, and paying off your loans responsibly, then you're doing much better than the average person. And everyone has different financial goals and plans anyway.

Personally, my plan is to be financially independent by the time I'm 55 (in 17 years). Based on my current savings rate, I'll be able to meet that goal. I will also be able to pay off all my student loans in the next year and a half (graduated in 2014). In my case, paying off the loans earlier didn't affect my ability to save for my goal. But just the act of writing down that I'll be done with student loans in the next two years makes me feel great. As you said, having a plan and seeing it unfold is powerful. It also feels good to know that if I continue to invest what I would have been paying towards loans (the aggressive amount), then I could be financially independent 7 years from now. That's good to know (for me anyways) in case I don't want to keep practicing medicine until I'm 55.

Out of curiosity, I did check the numbers to see the difference between investing versus paying down aggressively (pay off in 5 years) during my retirement time horizon (17yrs). I used the OP's loan information because the term is also 17 years and his interest rate is similar to mine (although I owe less). Paying off in five years ($3,774.25 monthly), then investing that amount for the next 12 years at 7% would get you $849,088. Standard payoff ($1,457.31) while investing the difference of $2,316.94 (from the aggressive amount) for 17 years would get you $896,954, or +$47,866. Even over 30 years, the net difference is not too drastic (at least if my math is correct) in my opinion - $2.99 million vs $3.11 million (+$120k). Of course, the differences will be larger using an even longer time horizon and/or using a lower loan interest rate. And these numbers assume that you will invest your loan payments in full (even the total aggressive amount) over the entire length of time.

And yes, dpmd, you are correct. I was comparing apples to oranges.
 
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OK After all this debate, could anyone who favor investing the extra money give us some of their investing methods or stock options? Thanks;)
 
More of what you're comfortable with, thats what I do. Things I am comfortable with are probably not right for everyone else. You should only do what you're comfortable with of course.
 
Very interesting thread, I read though all of it. As some may know, I paid off 350k in loans in 18 months. One year after graduating residency. However, my decision was simple since my loans were at outrageous rates and I could not refinance due to poor credit at the time. With my 7.4% average interest rate, I saved much more than what I would have made in that time span with sp500 index fund. I was a workaholic steam engine that could not be stopped. However, this was just variability (luck) during this short term frame. I also fully funded my retirement in one year but regret not dropping money in December of 2014 when I started paying them. I had to choose to pay off 60k of 8.5% loans or take the tax deductions, had I known how successful I would be at paying these off (I was in my 4tj year of residency in this December, I would have put it in retirement first to get the tax benefits).

However in my fourth of residency my net worth was NEGATIVE 350k and at the end of this year it will be around POSITIVE 200k. I have no debt and just index funds

The decision would have been harder had my loans been at below 3% interest rate. I am not sure if I would go with plastikos or bc65 if my interest rates were rock bottom.

I have two points to add to this thread as I don't see the point in rehashing the arguments already made.

1. As already mentioned, do not forget the incredible tax gift from the IRS when you deduct at the maximum federal rate for your retirement accounts. These outweigh the benefit of paying down low interest rate debt whether it is a mortage or student loans.

2. This core of this discussion is focusing on which strategy will give you a higher net worth. I add a third scenario of the highest net worth belonging to those with a successful business (entrepreneur). Having a very successful enterprise will yield much more that passive investing with the S&P 500. For example, the White Coat Investor makes more from his blog than his medical license. However, you are taking a risk that you fail/underperform versus having your capital passively invested (and time value of full time as a doctor for the next 30 years). However, this comes down to risk tolerance and whether you have a passion for business. Having said that, I am continuing to fund all nontaxable accounts to the max as my personal insurance policy of something going wrong in my in my future business ventures. I will always fund them to the max but have my eye with using some or maybe the majority of my taxable accounts (basically savings invested in index funds) towards an enterprise of some sort. I want to do this without debt or loans. Having said that, the less debt and more cash flow the better to personally finance this. Though, I am open to a mortgage because of the low rates and the time value of having to save up cash for a property.
 
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Very interesting thread, I read though all of it. As some may know, I paid off 350k in loans in 18 months. One year after graduating residency. However, my decision was simple since my loans were at outrageous rates and I could not refinance due to poor credit at the time. With my 7.4% average interest rate, I saved much more than what I would have made in that time span with sp500 index fund. I was a workaholic steam engine that could not be stopped. However, this was just variability (luck) during this short term frame. I also fully funded my retirement in one year but regret not dropping money in December of 2014 when I started paying them. I had to choose to pay off 60k of 8.5% loans or take the tax deductions, had I known how successful I would be at paying these off (I was in my 4tj year of residency in this December, I would have put it in retirement first to get the tax benefits).

However in my fourth of residency my net worth was NEGATIVE 350k and at the end of this year it will be around POSITIVE 200k. I have no debt and just index funds

The decision would have been harder had my loans been at below 3% interest rate. I am not sure if I would go with plastikos or bc65 if my interest rates were rock bottom.

I have two points to add to this thread as I don't see the point in rehashing the arguments already made.

1. As already mentioned, do not forget the incredible tax gift from the IRS when you deduct at the maximum federal rate for your retirement accounts. These outweigh the benefit of paying down low interest rate debt whether it is a mortage or student loans.

2. This core of this discussion is focusing on which strategy will give you a higher net worth. I add a third scenario of the highest net worth belonging to those with a successful business (entrepreneur). Having a very successful enterprise will yield much more that passive investing with the S&P 500. For example, the White Coat Investor makes more from his blog than his medical license. However, you are taking a risk that you fail/underperform versus having your capital passively invested (and time value of full time as a doctor for the next 30 years). However, this comes down to risk tolerance and whether you have a passion for business. Having said that, I am continuing to fund all nontaxable accounts to the max as my personal insurance policy of something going wrong in my in my future business ventures. I will always fund them to the max but have my eye with using some or maybe the majority of my taxable accounts (basically savings invested in index funds) towards an enterprise of some sort. I want to do this without debt or loans. Having said that, the less debt and more cash flow the better to personally finance this. Though, I am open to a mortgage because of the low rates and the time value of having to save up cash for a property.
I was following your other thread and was really impressed. One question for you. During your aggressive student loan pay down, did you save any cash reserve in the bank for raining days? Liek 6 months worth of income like most people recommend? OR not? I plan on just have about 3 months worth of income in reserve pot. Everything goes into student loans.
 
I was following your other thread and was really impressed. One question for you. During your aggressive student loan pay down, did you save any cash reserve in the bank for raining days? Liek 6 months worth of income like most people recommend? OR not? I plan on just have about 3 months worth of income in reserve pot. Everything goes into student loans.

I would not recommend you do what I did. I lived so far below my means that my living expenses could have been paid for 8 months with a two week paycheck. Since I was always 2 weeks behind betting paid, I chose not to have any cash reserve. My monthly expenses were roughly $2000 a month but are higher now since I moved. I would suggest 3-6 months of expenses saved.
 
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Scenario #1 : You keep the loan, and use the $665.30 to make your monthly payments. You take the $100,000 and invest it as a lump sum at 7%, and let it compound for 30 years ( instead of using it to pay off the loan ).

At the end of 30 years, the loan is paid off, and the same investment calculator has the total of your investments at $761,225.50.
Er here, you're assuming annual compounding on your investment, whereas the mortgage payment is based on monthly compounding.

Scenario #2 : You pay off the loan with the $100,000 as a lump sum, and then invest the monthly payments that you no longer have to make at 7%. ( i.e. monthly payments of $665.30 at 7%, compounding annually for 30 years ). At the end of 30 years you will have investments worth $759,225.50 ( per the investment calculator at investor.gov )
It's not compounding annually, it's compounding monthly (based on the mortgage calculation's assumptions). If you take the effective annual rate from your mortgage example, it's 7.229% (in other words, monthly rate compounded over 12 months gives you this as an effective rate for the year). The comparable lump sum from 100 k at the appropriate EAR over 30 years would be 811,650 (since mortgage payment is based on monthly compounding) not 761,225 (annual compounding). The 811,650 is the same as investing the 665.30 (monthly) over 30 years with monthly compounding from an APR of 7%.

So essentially no difference between the two scenarios we were comparing.
I would rework the problem here. I won't go through it all, but I happened to notice those mistakes as I was skimming.
 
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Since student loan interest isn't tax deductible, it's like getting a guaranteed return in your retirement account of 0.04/(1-0.4)= 6.67%.

Almost every single person on this forum would put their money in a bank certificate of deposit IRA if it offered such a rate. Hence you should pay off your debt.
 
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