Author Topic: New MDs paying back student loans  (Read 9130 times)

Hairless

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New MDs paying back student loans
« on: November 12, 2012, 06:57:15 PM »
Hello Mustachians! 

My husband and I just graduated from medical school, and we have a ton of student loan debt (fortunately no other debt).  We're in our late 20s and will have 4-5 years of residency at our current salaries.  I'm feeling pulled in a few different directions financially, and I'm hoping that some of you can weigh in with some advice. 

Here's our situation:
Our combined monthly income: $5750
His student loans: $125,000 @ 6.8%
My student loans: $108,000 @ 6.8%
Cash savings: about $8,000
Roth IRAs: about $3,000 each   

We are currently signed up for income-based repayment, which means that for the next year our student loan payments are $0 because we made no income last year.  Next year the payments will be based on our current salaries (so about $1000 total for both of us), and those payments still won't even be enough to cover the interest. 

My husband thinks that the loans are not really worth worrying about during residency because our debt is so big that anything that we could manage to do would have very little impact on the total.  He thinks that we should focus on establishing our retirement accounts, pay the minimum income-based payment, and then get really aggressive when we finish residency and have a jump in our salaries. 

On the other hand, I hate having debt.  I want to get rid of it as soon as possible, but I also want to invest in a Roth (we won't be able to do that when we finish residency and our salaries triple).   Starting next summer I can start moonlighting, which could potentially add about a grand to my income per month, and I would put all of that money toward my loans. 

The last wrinkle is that there's a possibility that we could get jobs that have some kind of loan repayment option after residency. 

What do you think?  Is it worth stressing the loans in the long run? 

Karl

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Re: New MDs paying back student loans
« Reply #1 on: November 12, 2012, 07:34:40 PM »
I would strongly recommend maxing out retirement savings now and going for positions with loan repayments after your residencies are finished.  Having professional school debt over your head sucks, but not as much as having no retirement/emergency funds if your own health goes south.

When you go for positions with loan repayment, I encourage you to make certain that the loan repayment monies actually exist. You can certainly arrange for loan repayments/forgiveness in under served areas.  On the other hand, the VA offers the possibility of loan repayment/forgiveness, but often lacks the money to put the program into place at the end of the fiscal year (based on my own direct observations).

In any case, national health service corps (http://nhsc.hrsa.gov/loanrepayment/index.html) has an option for removing $35K/year and other options also exist.

I should also mention that, at least up until a couple of years ago, certain training positions (e.g., working with homeless vets) could qualify some individuals for a certain amount of loan forgiveness during residency.  You may want to spend a couple minutes to see if this, or any similar programs, apply to your current situations.

I wish you good experience with your new training.

James

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Re: New MDs paying back student loans
« Reply #2 on: November 12, 2012, 07:58:39 PM »
I think the focus should be on living frugally, I don't think it matters a hill of beans where your excess money goes.  You can't predict the return on your investments, nor can you predict for sure what will happen with loan repayment, etc.  So just discuss it together and come down on either or a little bit of both, and then buckle down and live FRUGALLY.  As long as you aren't digging deeper you will do well, just make a commitment to live well under your means until your debt is paid, and make long term goals for what you expect to spend.

Rangifer

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Re: New MDs paying back student loans
« Reply #3 on: November 12, 2012, 08:05:57 PM »
Hi there,

How much of your student loan balance is from subsidized loans?

mushroom

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Re: New MDs paying back student loans
« Reply #4 on: November 13, 2012, 02:07:41 AM »
I don't know if the rules have changed (I finished residency last year), but the spring after I started residency I applied for economic hardship deferment using my income tax form from the previous year - since you presumably only worked half the year for the first year. Deferment is better than income-based repayment because your subsidized loans won't accrue interest for the year. After the year of deferment, it might be worth then going into forbearance (I assume they let you still do that for being in residency?) because your interest doesn't capitalize until the end of the period of forbearance and it gives you more flexibility about how much/when you pay rather than being required to pay a monthly amount unless you think that just means you won't pay anything (at least get enough for your student loan interest deduction!).

While in residency, I agree with staying frugal in general. Does your program offer a 401K match? That's the first place I would put any extra money up to getting the full match. Then I would fully fund the Roth IRAs since you probably won't be able to do that in the future. After that, unless you're sure that you want to work with populations/in areas that would provide loan forgiveness (and even then, would those programs cover all your loans anyway? I'm guessing there's a limit below your total loans), I would repay the debt aggressively as much as you can. Every dollar you pay towards that debt now is a guaranteed 6.8% return. While it's likely that once your salaries increase, the debt becomes easier to repay, the more you pay off now, the more interest you save, and the more choices you have later - you can make career choices without feeling as burdened by your debt, you can think about buying a house earlier (since you currently essentially have a mortgage), etc. And what if you end up hating medicine or one of you decides to be a stay-at-home parent or develops a health problem or whatever? You just never know exactly what the future holds - that future salary is not guaranteed and it's best to keep your options open by having as little debt as possible. Student loans will stay with you even through bankruptcy.

The other thing I would say is that your salaries now probably seem low in terms of your actual hourly wage and in comparison to future earnings. But the key is to realize that you two actually have a pretty nice income even now (take a look at median household income in the U.S.). I ended up saving more than half my income in residency even while traveling often, but most of my fellow residents ate out frequently, went shopping often, etc. and I can totally understand because we work long hours, we need to de-stress, and we will likely make plenty of money in the future. But if you can get into more of a MMM mindset (http://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/), you'll realize that your huge debt is a chain that can weigh you down enough to not go for that fellowship you're interested in, or not to move to that city you've always loved, or whatever. And if you're interested in early retirement/financial independence, the sooner you'll attain that by paying off your debts. I know plenty of older physicians in good-paying jobs who are still paying off student loans decades later because they don't know how to save money.

Oh, and I know I've already written a novel, but this just caught my eye:

My husband thinks that the loans are not really worth worrying about during residency because our debt is so big that anything that we could manage to do would have very little impact on the total. 

That just doesn't make any sense. Think of it this way: let's take just $1000 of that debt so it's easier to think about. If you pay it off now, it's gone. If you don't pay any of it, it will accrue $403.60 extra in interest by the end of 5 years of residency (assuming capitalization in interest every month). Even if you go into forbearance and the interest capitalizes at the end, that's still $340 of interest. Every $1000 extra you can throw at your debt right now will save you over $400 by the end of your residency! The more you can throw at your debt, the better off you are. It's hard to get that kind of guaranteed return in the stock market. The fact that your debt is so big should make you *more* motivated to pay it off, not *less*! If you paid nothing towards your debt during 5 years of residency, your debt would go from $233,000 to $327,000 at the end of 5 years (nope, not a typo).

Oh, and even if you disagree with me about all of the above, it's at least worth looking into possibly making some student loan payments by the end of this year to get at least a student loan interest deduction on your taxes for this year, depending on your tax situation (your income may be low enough for this year that it may not matter though).
« Last Edit: November 13, 2012, 02:10:24 AM by mushroom »

happy

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Re: New MDs paying back student loans
« Reply #5 on: November 13, 2012, 03:59:14 AM »
[

My husband thinks that the loans are not really worth worrying about during residency because our debt is so big that anything that we could manage to do would have very little impact on the total. 

That just doesn't make any sense. Think of it this way: let's take just $1000 of that debt so it's easier to think about. If you pay it off now, it's gone. If you don't pay any of it, it will accrue $403.60 extra in interest by the end of 5 years of residency (assuming capitalization in interest every month). Even if you go into forbearance and the interest capitalizes at the end, that's still $340 of interest. Every $1000 extra you can throw at your debt right now will save you over $400 by the end of your residency! The more you can throw at your debt, the better off you are. It's hard to get that kind of guaranteed return in the stock market. The fact that your debt is so big should make you *more* motivated to pay it off, not *less*! If you paid nothing towards your debt during 5 years of residency, your debt would go from $233,000 to $327,000 at the end of 5 years (nope, not a typo).


+1.

Whether or not you decide to invest in your 401ks/roth planny things or not, realise that unless you can get the debt wiped out someway or unless the interest is zero:  (http://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/), Your LARGE debt is an emergency and you should both be fleeing from the killer bees threatening to sting you to death OR being running around like your hair is on fire OR both.  Get hubby to keep reading the linked blog  post until he gets it.  The interest on 233k compounded over 5 years @6.8% = $94000.

If $94,000 dollars interest "won't make any difference", what will?

simonsez

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Re: New MDs paying back student loans
« Reply #6 on: November 13, 2012, 09:08:32 AM »
Sounds like no matter what route you take, you will be fine either way after several years barring any major change.  Knowing that, relax and know it'll be alright regardless of your plan of attack provided you implement one and stick to it.  You seem more debt/risk averse than your husband.  Maybe you should put payments toward your own loans as to at least avoid interest capitalizing.  That would help you sleep at night plus you can think of it as a guaranteed 6.55% investment vehicle (6.55% instead of 6.8% because I assume they're federal loans and you would link them to your debit card/bank account for the quarter percent discount).  Where else are you going to do better than 6.55% guaranteed? 

Many more employers are offering Roth 401k's now as well.  Remember you can always rollover your Roth 401k to a Roth IRA after you separate down the road.  Optimally, I mean this in conjunction with your tax-deductible plans (i.e. contribute to both).  If not possible, realize you are excluded because you are a high-earner.  You should be able to make your life financially sound in other ways besides the Roth IRA.

Zaga

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Re: New MDs paying back student loans
« Reply #7 on: November 13, 2012, 02:15:13 PM »
Remember that compound interest can work against you as well as for you.  Been there, done that with student loans.  They can quickly balloon out of proportion if you don't at least pay the interest on them.

Hairless

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Re: New MDs paying back student loans
« Reply #8 on: November 14, 2012, 04:54:07 AM »
Thanks for all of the comments.  Just to respond to a few questions that were raised:

-Deferment doesn't exist anymore for new med school grads, unfortunately.  You can do forbearance but then you are still accruing interest. 
-About $85,000 of our combined loan total is subsidized, though now that we're entering repayment it's no longer interest free.  (Starting this year there are no more subsidized loans for professional students at all, which really sucks for them.) 
-We've definitely already applied for direct deposit to get the tiny interest deduction.
-No 403b match for residents at our jobs. 
-Mushroom-you are absolutely right.  We feel rich compared to where we were six months ago, especially because we haven't changed our lifestyle at all.  We did move out of a basement apartment to a slightly bigger place, but otherwise nothing has changed. 

mushroom

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Re: New MDs paying back student loans
« Reply #9 on: November 14, 2012, 01:38:22 PM »
That's too bad not qualifying for the economic hardship deferment.

But forbearance may still be worth looking into - most loans automatically qualify for a residency forbearance, and many loans have better interest capitalization during a forbearance period. For example, they might capitalize the interest at the end of a forbearance period rather than every month (which means you'll ultimately pay less interest on interest). Plus you can still make payments during the forbearance period whenever/however much you want so if you're just planning on contributing to interest anyway, you could just wait to make the payment until right before the interest would capitalize and invest it in the meantime. But this all depends on what exactly your specific lenders' policies are. Plus it sounds like a big chunk of your loans are unsubsidized, where it probably wouldn't make a difference.

Rangifer

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Re: New MDs paying back student loans
« Reply #10 on: November 14, 2012, 10:25:49 PM »
Thanks for all of the comments.  Just to respond to a few questions that were raised:
 
-About $85,000 of our combined loan total is subsidized, though now that we're entering repayment it's no longer interest free.  (Starting this year there are no more subsidized loans for professional students at all, which really sucks for them.) 


Great! A little known fact about IBR is that if the payment you make is not enough to cover the interest on subsidized loans, the government waives what you don't cover!

So you'd want to make the minimum payment on those subsidized loans, and at least cover the interest on the unsubsidized portion.