Advice on Debt Repayment for Dentist

[ClimbGneiss]

Hello All:

I've been a long time lurker, who has been able to apply MMM principles to payoff my personal debt, down from ~$80K to ~$17K in a short period of time.
However, my wife's situation appears to be trickier and our possible options appear to be more nuanced. I could use some guidance.

The details:
Me:
- $17K in remaining debt at 6.8% to 7.0% between several loan branches
- $20K in cash savings
- $80K in Gross Income
- Fully paid off car

Her:
- ~$450K in student debt at 6.2% to 7.9% over many loan branches
- ~$120K in cash savings
- ~$150K in Gross Income
- Fully paid off car

Additional Details:
- I have a moderate commute compared to the average person's standards. She has a short commute. Both are probably too long by MMM standards. We presently live in the second unit of my parents home for ~$400 per month total. She is using income based repayment on her student loans presently while we determine what the best course of action is. Essentially, her total loan balance gets larger and larger every month because she pays next to nothing based on the program. The idea is that in 20 years, the total amount is forgiven, but the government considers that forgiven amount as income and you must pay tax. So, if the total amount forgiven were to be $1.5 Million, she'd owe $500K in taxes. Alternatively, we could live off my income and basically take every penny she makes to pay off her debt. That projects to take 5 to 7 years, using some back of the envelope calcs. Finally, we are both 31 and looking forward to having children and buying a house. Our current place wouldn't be suitable for a child.
If we consider my debt situation, paid of my debt in one go, and live off of my income, could we start our lives with buying a house and having kids? Any input would be appreciated.

Thank you

[Beriberi]

That is complicated! I would head over to White Coat Investor - there is a lot of information there that is pertinent to your situation (high debt, high income financial advice).

[SwordGuy]

You need to do a proper case study to get truly quality responses.

My gut says get that stuff paid off pronto.  Get it off your back.   

You don't need a house, you need a very inexpensive place to live.   Your young child won't have any real memories of where you live for years to come.    In 5-7 years your debt load will be manageable and if you have a kid tomorrow you don't need to live in a good school district until then.  As it is, you've got 5.75 to 7.75 years before you have to worry about that and you'll have close to 9 month's notice before that countdown starts.

You have the ability to cut her debt by $120k tomorrow.   I say do it.  Get yours paid off and start slamming down hers.

And, frankly, if you're a team, you should be focusing on "our debt" not "your debt" and "her debt".   

[Villanelle]

What will the loan balance actually be when it's paid off?  Seems like you could do the math and get a pretty close estimate.  Is it really $1.5?  And do you expect to be paying 33% taxes when that happens?  (Clearly it would bump you up a few brackets when it actually happens.)

And I agree that you don't need much space or stuff for a baby.  And if they are willing, doing it while living in your parents building would also mean you likely have some free, much-needed assistance in those painful early months (or years!). 

[MDM]

Have you (plural) considered Refinancing the Student Loans?

[Kronsey]

Does your wife plan on purchasing a practice or doing a scratch startup? If yes, dental practice lenders would much rather see cash in savings rather than paid off student loans.

Your entire strategy should be determined on future plans for wife's employment IMHO.

[ClimbGneiss]

All:

I'll look into the details requires for a more fully detailed case study.

- Based on a couple of conservative assumptions, and using the present to future value equation, she would owe ~$1.75 million in 20 years. So, whatever the tax rate is at that point would be applied to that tax bracket and she would owe tax on ~1.75 million of "income".

- We have considered refinancing, but it's our understanding that it takes a lot of options off the table in terms of safety nets.

- Yes, she intends on purchasing/starting/joining the ownership of a practice someday.

[mistymoney]

what is the interest? on a monthly basis?

I'm not sure why at 150k salary, paying (half?) 400/month for accommodations, that she can't be making good headway here. This isn't making sense to me. Where is the money going?

at 7% interest the yearly interest on 450k is less than 32k so if she devoted even 50k/year to repayments, she would be whittling it down, have plenty to live on, invest in retirement, and start a family.

[mistymoney]

I would also say to stop focusing on loan forgiveness, and for her to focus on income growth while making sure the balance is not growing on this - paying at least the interest monthly.

Also - why so extreme - paying less than the interest, or devoting her entire salary for 7 years? with combined income over 200k - figure out a decent lifestyle you two can maintain long-term, including having kids, and then send the rest to these loans. You should have at least about 120k after taxes, benefits, and maxing 2 401k.

Send 50k to the loans, and live off 70k.

[Jon Bon]

Another vote for pay it off.

1. You make >200k a year and could kill 30% of your debt tomorrow. This is an easy situation (compared to many)

2. I would worry about the tax implications. I would also VERY much worry about staying qualified for loan forgiveness. Tons of horror stories out there.

3. She is on income based repayment, she makes really good money how is the payment not covering the interest? Have you looked into this? I feels like her payment should be going way up with that sort of income.


Lastly, Kids

If people waited until they were "ready" to have kids NO ONE would ever have them! They are pretty cheap to start, heck the food is free! You have 6 years to get into a good school district.

[mistymoney]

Another vote for pay it off.

1. You make >200k a year and could kill 30% of your debt tomorrow. This is an easy situation (compared to many)

2. I would worry about the tax implications. I would also VERY much worry about staying qualified for loan forgiveness. Tons of horror stories out there.

3. She is on income based repayment, she makes really good money how is the payment not covering the interest? Have you looked into this? I feels like her payment should be going way up with that sort of income.


Lastly, Kids

If people waited until they were "ready" to have kids NO ONE would ever have them! They are pretty cheap to start, heck the food is free! You have 6 years to get into a good school district.

good point. the income based repayment was likely set when her income was lower. I believe this is reset on a yearly basis, so it will reset at some point.

[eav]

Another vote to pay them off as soon as you can (while still enjoying life!)

My favorite thing about student loan repayment is the tax refund I get that then goes directly toward the loans. I'm thinking the loan interest credit would still apply in your situation? I'm not too savvy on tax code. It's a great boost at the beginning of the year. Started at 40k with an 8% interest rate, now down to 13k with a refinanced 3% interest rate.

If I were you, I'd put a lump sum on the loans as soon as possible, refinance, then decide on an amount to come out of each pay check/pay period to be put on auto-pay towards the loans.

Good luck!

[MDM]

My favorite thing about student loan repayment is the tax refund I get that then goes directly toward the loans.

That tax refund is a 0% loan one gives to the IRS.  If someone else is charging you more than 0% on a debt you owe, decreasing tax withholding and increasing regular debt payments is worth considering.

[Proud Foot]

I would take your cash and get rid of your student loans immediately. For her student loans, has her payment reset based upon her income of $150k? You are already in the phaseout of the student loan interest deduction of not already phased out. Like MDM said, look into refinancing the student loans to get a lower interest rate then work to pay them off. You have plenty of income and an extremely favorable housing situation. No reason why you can't live off your income and use hers plus her cash savings and have her loans knocked out in 5 years. 

[JGS1980]

"If I were you, I'd put a lump sum on the loans as soon as possible, refinance, then decide on an amount to come out of each pay check/pay period to be put on auto-pay towards the loans."

+1

Use your desire to start a family is as your prime motivator for yourself and your wife. That's too much debt to hang over your head when the Full Time vs Part Time decision is made after you have your first child.

My Recommendation:
1. Pay off your 20 K loan
2. Pay off 100 K of her loans
3. Keep 20 K for an Emergency Fund for you both [You're in it together!]
4. Refinance her loans ASAP:
-at 7% of 450 K = 31.5 K INTEREST per year
-at 4.5% of 350 K = 15.75 K INTEREST per year
-the latter is much more manageable, do it NOW

5. AGGRESSIVELY pay off remaining student debt on a month to month or quarterly basis in big satisfying checks for the next 3 years. See where you stand at that time.

6. You cannot afford to buy into a dental practice right now. You are too broke.

P.S. -why wife and I paid off 250K+ in loans in about 6-7 years while buying a house, maxing out our 401K's, and having 3 children on a LOWER income than yourselves. We started at age 31. Good Luck!!!

[JGS1980]

So what did you decide? Updates?

[JGS1980]

Any updates? Just curious.

JGS

[thesis]

$450K in the hole??? Geez, what sort of degree did she get?

Anyway, I agree with killing off your debt, it is relatively small and you are both in a position to do that. However, I'd be cautious about dumping all of her cash into her loans...right now. Since what you have to pay monthly must be pretty high, make sure you take that into consideration when figuring out how much to keep as an emergency fund.

Live off your income, dump all of hers into those loans. What's great is that this appears to be very doable for the two of you, and thank goodness it's doable. Also, if/when you do decide to have kids, maybe just don't share that around the office :)