What to do with Sign-on "loan" ?

[Raj]

I would really appreciate if the members of the forum could provide their input on the following:

I recently signed up for my first job. I start in July 2016, my contract is for 2 years. There is no sign on "bonus" but i have been offered a 150k $ sign-on "loan". I can take 75k now and get another 75k on the first day of work. Every year that i work for the hospital, 30k gets written off. So in 5 years the loan would be written off completely if i continued to work at the hospital. If i were to leave, i would need to pay back the remaining loan (pro-rated for the length of time worked) with an interest rest 1% more than Wall street journal prime rate at the time of leaving (currently 3.5%).

I currently do not have any major savings (few years worth of roth IRAs for me and wife) or loans.

My plan: I am planning on taking the loan and investing it. If i do not take it i leave free money on the table (60k for two years of contract i have signed). However, I am not sure yet what i would invest it in. Probably start off by keep part of it in online banks savings account and some invested in indexed funds in a taxable account (need to start one). I plan on living frugally and contributing to 401k, 457b, HSA etc once i start my job. I have an asset allocation in mind but do not know what kind of investment options i would have with employer's plans. After a few paychecks, as i see some savings, i could invest more of the "loan" money in the taxable account. I plan on renting a place for the first year atleast. If things work out i could think about buying a house and may be use some of the "loan" as downpayment for mortgage.

What would the members of the forum do? Any other ideas?

[jfoxcpacfp]

Investing is for the long term (stock market). Safety and liquidity are priorities in the short term (savings accounts, CD's, bonds - none of which I consider investments). Do not invest any of the loan that you might need in the short term (the next 5 years). There is just too much risk that you would have to repay $90k and you would have lost money. If you are sure (or really close to it) that you will finish out your 2-year contract and you can allocate the $60k for retirement (i.e. "long term"), go ahead and invest in a well-diversified portfolio. My choice would be equity funds, others here will have differing opinions.

So my advice would be, given that you can allocate the $60k for the long term, to invest that much and put the $90k in a CD or high-quality bond timed to mature at date of need or at the point you plan to make your decision about whether to stay (buy a house) or leave (pay it back) - 2 years unless you may buy a house in 1 year, which I wouldn't recommend unless you are sure you will stay there.

[VagabondMD]

I do not like the idea of the loan, unless you really need the money to relocate, buy a home, pay down other debt that has a higher interest, etc.

What I do not like is that the two year contract locks you into a five year commitment (the loan). After the two year contract is up, the employer has leverage to get you to sign a deal that you might regret.

[Zaphod]

Raj wrote:

I would really appreciate if the members of the forum could provide their input on the following:

I recently signed up for my first job. I start in July 2016, my contract is for 2 years. There is no sign on “bonus” but i have been offered a 150k $ sign-on “loan”. I can take 75k now and get another 75k on the first day of work. Every year that i work for the hospital, 30k gets written off. So in 5 years the loan would be written off completely if i continued to work at the hospital. If i were to leave, i would need to pay back the remaining loan (pro-rated for the length of time worked) with an interest rest 1% more than Wall street journal prime rate at the time of leaving (currently 3.5%).

I currently do not have any major savings (few years worth of roth IRAs for me and wife) or loans.

My plan: I am planning on taking the loan and investing it. If i do not take it i leave free money on the table (60k for two years of contract i have signed). However, I am not sure yet what i would invest it in. Probably start off by keep part of it in online banks savings account and some invested in indexed funds in a taxable account (need to start one). I plan on living frugally and contributing to 401k, 457b, HSA etc once i start my job. I have an asset allocation in mind but do not know what kind of investment options i would have with employer’s plans. After a few paychecks, as i see some savings, i could invest more of the “loan” money in the taxable account. I plan on renting a place for the first year atleast. If things work out i could think about buying a house and may be use some of the “loan” as downpayment for mortgage.

What would the members of the forum do? Any other ideas?

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I've known lots of people that received stipends or "loans" from their jobs in return for some amount of time to stay. I have never seen such a rate however, its always been 1-2%. I would not take the loan for more than is written off per year right now, you just do not know what you'll think of this place, its impossible. Maybe after being there a year or so and being very confident, of course take it, the rates simply not good. I can get the same rate for a personal loan at SoFi, and for margin from my brokerage I can get 1.86%.

Basically, it simply comes down to fit. If the job is good and you like it and see a future, of course take it (this assumes being there some time). But before then seems really risky. The fact they want to get you to take it now and on the first day is simply a way to make you literally indebted to them, and totally agree with Vagabond, it will be used against you to your detriment. Best case scenario you can negotiate to take it every year for five years in month 11 of 12. Thats my first thought. They likely would not do so as that defeats the purpose of having a huge upper hand on you.

[Raj]

Thanks Johanna, Vagabond MD and Zaphod.

I forgot to mention, I have spent 3 years of my subspecialty fellowship at this hospital, so i have a good idea as to how the place work. But you are all right, there is no way to predict if i am really going to like the place as an attending. Personally i do not like the idea of being indebted either. I will try to negotiate with the employer if it would be possible to just take the 75k loan for now (which will be payed off by working for 2.5 years) and decide about other 75k at a later point (1-2 years down the line).

[VagabondMD]

Raj wrote:

Thanks Johanna, Vagabond MD and Zaphod.

I forgot to mention, I have spent 3 years of my subspecialty fellowship at this hospital, so i have a good idea as to how the place work. But you are all right, there is no way to predict if i am really going to like the place as an attending. Personally i do not like the idea of being indebted either. I will try to negotiate with the employer if it would be possible to just take the 75k loan for now (which will be payed off by working for 2.5 years) and decide about other 75k at a later point (1-2 years down the line).

Click to expand...

It's not so much about whether you like the hospital or job as an attending...you do, or you would not take the job.

If you owe them money, even if you can pay them back, they have leverage over you. They are very smart, IMO, in how they are structuring it.

Imagine if in an NFL contract negotiation, a recently drafted player was offered a signing bonus for a two year contract rather than the customary four or five. But the signing bonus had to be paid back (in part, with interest) if the player did not play for the team for all five years. There are a million reasons why the player may not be playing for the team in years three, four, and five, and only one of those reasons is that the player did not like the team.

 

[Hatton]

Why is the hospital doing this? Is it possible to talk to others who were offered this deal? The hospital in my area that offers stuff like this is the inferior one and most people relocate once their contract is up. Always remember that hospital administrators have a different agenda from you. They may wine and dine you but don't mistake that for friendship

[Raj]

Thanks Vagabond MD. I agree there are many other factors that may decide if i stay or not at the place.

If i can pay them all their money back i am not sure how they have leverage over me. My decision to stay or move from this place would not be influenced by the loan. Infact, my signing at the place was not influenced by this loan either. At one point i did consider not taking the loan at all, but then i am leaving atleast 60K on the table. I think the middle route would be to take 75k only for now and think about the 75k down the line.

[jfoxcpacfp]

Vagabond MD wrote:

Raj wrote:

Thanks Johanna, Vagabond MD and Zaphod.

I forgot to mention, I have spent 3 years of my subspecialty fellowship at this hospital, so i have a good idea as to how the place work. But you are all right, there is no way to predict if i am really going to like the place as an attending. Personally i do not like the idea of being indebted either. I will try to negotiate with the employer if it would be possible to just take the 75k loan for now (which will be payed off by working for 2.5 years) and decide about other 75k at a later point (1-2 years down the line).

Click to expand…

It’s not so much about whether you like the hospital or job as an attending…you do, or you would not take the job.

If you owe them money, even if you can pay them back, they have leverage over you. They are very smart, IMO, in how they are structuring it.

Imagine if in an NFL contract negotiation, a recently drafted player was offered a signing bonus for a two year contract rather than the customary four or five. But the signing bonus had to be paid back (in part, with interest) if the player did not play for the team for all five years. There are a million reasons why the player may not be playing for the team in years three, four, and five, and only one of those reasons is that the player did not like the team.

 

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What am I missing? This is free money and everybody is suspicious. Even if he buys a portfolio of 5- $30k laddered bonds at 3.5% (current interest rate) and cashes a rung to invest $30k in the stock market after each year he stays, what has he got to lose? It just seems so obvious to me - please tell me what is wrong with my line of reasoning.

[Hatton]

I think it shows the basic distrust that most docs develop for hospital administrators.

[jfoxcpacfp]

hatton1 wrote:

I think it shows the basic distrust that most docs develop for hospital administrators.

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Yes, I understand that but the emotion should not affect a practical decision, imho.

[MrsIMDoc]

Out of curiosity, what are the tax implications for this?  I assume you are not taxed for the $150,000 loan because it is a loan and not a bonus.  So is the $30,000 written off each year considered taxable as 1099 income?

[Zaphod]

jfoxcpacfp wrote:

hatton1 wrote:

I think it shows the basic distrust that most docs develop for hospital administrators.

Click to expand…

Yes, I understand that but the emotion should not affect a practical decision, imho.

Click to expand...

I agree it is basically free money, and Im usually the first to accept such money. Usually, these tend to come from crappy places who seem to restructure their contracts not in your favor quite frequently. Of all the deals I've seen, many of which are larger/better, none have been structured in such a take/leave it, long term pay back kind of thing thats less in your favor.

I'd take it in one year and as a salary deferral, win x2 considering taxes, i'd take it structured differently, etc...I just am not a huge fan of the set up. However, given he's worked there a while already its less concerning than if this was a whole new place for sure. I mean I have several friends who got 100k sign on bonuses and 25k/yr they stayed loan pay backs, and never was the term more than 2 years or the percentage more than 2%.

[VagabondMD]

Ms. Fox,
There is no such thing as a free lunch. Maybe that did not teach you that where you got all those letters after your name. They did teach me that lesson, time and again, during my training.

Hospitals know how to manipulate physicians, and "free money" is a tool for doing so. The emotional move is to take the "free money".

18 months into the contract, you will be presented with a new contract, with 20% less pay and new responsibilities. Sure, you could walk away (unless your non-compete is tight, then you will have to fly away, 100 miles away...). You will put up some resistance, and they will remind you how well they treated you by giving you "free money" and show you some bogus metrics that prove you did not live up to expectations. They will smile while having discussion.

Then, you will remember the "free money"that is tied up in CD ladders (a hassle to redeem them), or in your house, or in your Vanguard account. You are not going to gut your nest egg, pay cap gains tax AND disappoint these nice, smiling people that are offering you a new contract.

Free money, my ******************!

[retinadoc]

I was halfway through writing something, then realized that I agree completely with Johanna.