Aggressively pay off loans myself - or wait for federal loan repayment?

[scott44]

Hello everyone.

I was hoping you could help me develop a strategy for paying off my student loan debt.

I make $120,000 per year. Also, I received a lump sum of $50,000 (tax exempt) from the federal government in exchange for 2 years of work (I'm in healthcare) at one of their designated under-served locations. I am halfway finished with this time commitment.

My remaining debt is $40,000. The interest rate is 6.55%.

I know I likely won't make any investments that will garner interest higher than 6.55%, so it would behoove me to pay off the debt as aggressively as possible.

However, at the end of my 2 year commitment with the government, if I choose to sign up for a third year, I will receive an additional $20,000 (tax exempt). If I do not have at least $20,000 of debt at that time, I will be ineligible to receive the lump sum of $20k for loan repayment.

So, would it make more sense to pay off this debt on my own as fast as possible and not worry about that potential lost federally-funded loan repayment.

Or should I make minimal monthly payments on my debt and invest that money elsewhere? (follow up question: if this is preferred, where would you recommend I put that money? I already match my employer's contribution for my 401k and have maximally contributed to my Roth IRA. I'd like to buy land, or a home, or my own practice in the next 5 years - so I'd prefer to keep investments such that I could pull them out for these purposes).

I know a lot of this depends on whether or not I choose to stay for this 3rd year. I wish I knew how I'll be feeling in a year or so when I have to make that decision. But I don't. So I just wanted to bounce this issue off you guys and see if there was a glaringly obvious answer or fresh perspective that I've been unable to see.

Thanks so much for your help!

[SmallTownDA]

If you are seriously considering taking the third year, I think it would be bad to turn down the potential of $20,000 in free money to get out of debt at most a year or so earlier. That 6.55% interest is only costing you $1,310 a year on that $20,000, so any interest savings you may get through fast repayment are a lot less than the $20,000 you could be giving up.

Figure out what it will take to get your loans to $20,001 (or as reasonably close as possible) on the day you become eligible for that tax free $20,000 and use that as your repayment guide.

As to what to do with your money, putting the full $18,000 into your 401k is probably the best bet. You can borrow from it for a home purchase. If you have a 457 plan, that's another option and you can contribute to both that and your 401k. You can access the 457 penalty (but not tax) free once you terminate employment. You could stick it in a taxable brokerage account if accessibility is very important to you. The plus side of that is if you decide not to take the 3rd year, you should have more than enough to wipe out the remaining debt in one payment.

[NoStacheOhio]

To me, it comes down to whether you want to stay where you are.

If you're making 120k in an under-served location, you can probably make at least 20k more somewhere less under-served (COL not withstanding). If you're happy with your current situation, and would likely stay anyway, then try to get as close to 20k without going under, and take the federal money.

[Drifterrider]

If you are seriously considering taking the third year, I think it would be bad to turn down the potential of $20,000 in free(other people's money) money to get out of debt at most a year or so earlier. That 6.55% interest is only costing you $1,310 a year on that $20,000, so any interest savings you may get through fast repayment are a lot less than the $20,000 you could be giving up.

Figure out what it will take to get your loans to $20,001 (or as reasonably close as possible) on the day you become eligible for that tax free $20,000 and use that as your repayment guide.

As to what to do with your money, putting the full $18,000 into your 401k is probably the best bet. You can borrow from it for a home purchase. If you have a 457 plan, that's another option and you can contribute to both that and your 401k. You can access the 457 penalty (but not tax) free once you terminate employment. You could stick it in a taxable brokerage account if accessibility is very important to you. The plus side of that is if you decide not to take the 3rd year, you should have more than enough to wipe out the remaining debt in one payment.

Having edited above in red, I'd take the free money :)

[nereo]

As others have said, the question you should first answer is: Do I want to do a third year of this program?

You have the means (income) and opportunity ($50k payout) to rid yourself of these loans for good and go on your merry way towards FI-hood. Angling for the extra $20k only makes sens if you want to do a third year.

You've admitted you are uncertain right now - that's fine.  In the mean time I would pay off ~$10k to keep your loans well above the $20k threshold and then keep $30k liquid until you make your decision.  Inflation won't have a huge impact on $30k sitting in a bank account for just six months (about $200).

[Metric Mouse]

As others have said, the question you should first answer is: Do I want to do a third year of this program?

I would argue the opposite: that is the last question that needs to be answered.

Since a large payout is an option, don't pay down the loans faster than you have to. Wait to see how you feel in a year. Take the extra money you would have been throwing at the loans and save it; if you don't go for year 3, you've got a nice chunk of change to toss at them.  If you do go for year 3, you get that chunk PLUS $20k to toss at them.  No complicated math; just save like hell and plan to be as debt free as possible either way.

[charis]

That is a substantial loan forgiveness offer for a three year commitment.  Unless you really hate it or plan on making more than 20K above your salary elsewhere in 3 years, I would pay it down to 25K while waiting for the 20K.

[scott44]

Thanks so much, everyone!

I truly appreciate the great advice.

I don't hate my job at all, so doing that third year seems like a strong possibility.

As others mentioned, I'll pay down my debt without falling under the $20k threshold. Thanks again!