Invest in Roth? Pay back loans?

[cjh03]

Hello,

I'm going to be an upcoming intern and was just wondering about whether I should be investing into a Roth in the context of a rather large loan burden ($340k). My wife and I will be making a combined $130K in a low cost of living state without state taxes. This is a preliminary monthly budget that I've roughly made based on our area:

Rent	1550
Car payments	520
Food	1200
Gas	160
Utilities	250
Insurance	200
Roth IRA contribution	920
Loan repayment	2000
Emergency/enjoyment	1200
Total	8000

 

Is contributing to the Roth a good idea? Or should I just be throwing all that money at my loans?

 

One other consideration is that I'm going to attempt to take advantage of the public service loan forgiveness (PSLF). Should I go with the PAYE or REPAYE currently? Assuming I'm paying very little, should I have a contingency fund in the event that PSLF does not end up working out? Thanks everyone.

[DMFA]

$1200/week on food? Wow. That's $40/day.

You shouldn't be lumping emergency fund money with enjoyment money. Do you currently have any emergency fund?

What is the interest rate on your car loans? How much is left over how long?

Do both of you have loans, or just one? RePAYE will probably benefit you more with the 50% unpaid interest subsidy. Will you be starting with zero income (2016 AGI)?

...not enough info to recommend. You need to knock out your car notes, though, unless they're at like 2% or some tiny rate. Then you need some sort of emergency fund, based on those numbers, about 15-30k (3-6 mo expenses).

After that it's debatable. I'd say to invest in retirement for long-term compound gains over the shorter-term simple amortized loss to finance charges on the loan. However, that depends on several factors and opinions, such as how much having debt is hurting you at any given moment (e.g. getting a home loan), if you can get a PSLF job you want, how much you'll earn out of training, and so on.

[Craigy]

What loans are you talking about?  If you are pursuing forgiveness, then throwing extra money at student loans that would be forgiven anyway doesn't make a lot of sense.  But if some loans are not forgivable then sure pay those down.

With your budget, it looks like you'd have the cash to do it, so why not.  For Roth contributions, you can wait until the end of the year to decide how much to throw in.  If you think you might need the money, wait and see.  The hardcore guys on here will say you're missing out on a year of appreciation, but during your intern year you have bigger worries.

I was in a similar situation to you and chose to forego making Roth contributions for a couple of years since we had other uses for the money at the time, and chose to keep extra cash on hand for things unforeseen.  Home repairs, trips, medical bills, gifts, weddings, etc. were all no big deal since we had cash in the bank.  Sure we got a couple year late start in making contributions but money is never a problem since again we have cash in the bank.

[cjh03]

DMFA: Yea I'll probably change food to 2k/month. Had a brain fart there. As for the car loans, they are both at 2.14% with 4 and 5 years left and around 24k left on the loans.  We currently have about 10k for emergencies. I'm the only one with the loans. We had an AGI of about 80k last year.

Craigy: Student loans. I'm not assuming they'll be forgiven because the program may not exist by the time I'm eligible, or I may have another job opportunity in the future that may be much more lucrative than a PSLF job would be.

[Hank]

Refi and/or pay off any loans not eligible for PSLF.  If you have a job that's eligible for PSLF, put money aside in a taxable account to pay off those loans if PSLF goes away or you change jobs.

All of this presumes that you're not carrying consumer debt, getting all available matching contributions, and then maximizing other qualified contributions.

[Miss Bonnie MD]

That's a huge food budget for just two people in LCOL. Ours is smaller and we live in NYC and eat out a decent amount. I personally wouldn't do Roth with that kind of loan debt if you're not pursuing PSLF.

[DMFA]

cjh03 wrote:

DMFA: Yea I’ll probably change food to 2k/month. Had a brain fart there. As for the car loans, they are both at 2.14% with 4 and 5 years left and around 24k left on the loans.  We currently have about 10k for emergencies. I’m the only one with the loans. We had an AGI of about 80k last year.

Craigy: Student loans. I’m not assuming they’ll be forgiven because the program may not exist by the time I’m eligible, or I may have another job opportunity in the future that may be much more lucrative than a PSLF job would be.

Click to expand...

With my massive appetite, my wife's normal-sized one, and our toddler, we spend *maybe* $200/week on food.  So I think that's particularly overbudgeted, unless you've got a soft spot for Ruth's Chris or something.

Your income-driven repayment will not be too great at reducing your payment at an AGI of 80k...

• at $340k at 6.8% (guessing your rate) $1,926 of interest will accrue each month


• your RePAYE payment (AGI - 1.5pov) / 120 is (80,000 - [1.5 * 16,250]) / 120 = $464


• so you'll have $731 of unpaid interest subsidized, meaning that same amount accrues (but doesn't capitalize, so you don't pay interest-on-interest) each month.  That's $8,778 in a year.


• if you put $2,000/mo of your low resident income toward them while in RePAYE, the interest subsidy is on the calculated payment (not actual payment), so you can make additional payments after your scheduled one in order to reduce the principal.  If you pay another $1,536 ($2000 - calc'd pmt of $464), then you'll knock out $805 of principal each month ($1,536 - 731).


• Also, you can only deduct $2,500 of student loan interest paid each year if your AGI < $150,000 MFJ...however, that does reduce your MAGI which therefore reduces your income-driven payment.

A consideration is to file taxes separately.  If your incomes are similar, the increase in taxes may not be that much, and your loan payment will be significantly lower if you do PAYE (RePAYE always includes spouse's income).  However, this might not be advisable since there is no unpaid interest subsidy, so if you're still on the hook for all that interest (i.e. not doing PSLF) then that's not a good long-term decision; it's best done if you just plain can't swing your loan payment at all.  That's not you, so I'd advise against doing that.  RePAYE is probably your best bet while in training, then refi to the lowest rate (prob a 5-yr variable) when you're an attending and knock it out.

...so yes, this is tough.  Thank you for not trying to buy a house. :-)

A usual strategy is to divvy up your debts by the rate.  I do mine like this:

• 0-2%: let it ride, just pay minimum


• 2-4%: should prob prioritize investing, but could reasonably pay off if you need to reduce debt, e.g. D/I ratio for buying house


• 4-6%: toss-up, but prob should pay down debt


• 6-8%: pay it off over investing (I don't put student loans here since they act differently and won't be this high when they're a "normal" loan)


• 8+%: why would you ever have this? e.g. credit card debt, high personal loans

How long is your training period, and how much will you make out of training?  I'm almost always in favor of retirement investments to prioritize years of compound gains vs a shorter period of simple interest, amortizing debt, but the gains of $11,000 vs the massive (though simple) interest of $340,000 is a tough argument for me.  I might actually go for loans first in this scenario.

[adventure]

What is covered by insurance? Automobile? Disability? Renters? Life? Other?

Are you saving for a house?

DMFA had a better thought process, but to answer your question, I'd first increase the 10k emergency fund. Then I'd hit the loans.

Any 401(k)/403(b) or other retirement contributions?

 

[Craigy]

cjh03 wrote:

Craigy: Student loans. I’m not assuming they’ll be forgiven because the program may not exist by the time I’m eligible, or I may have another job opportunity in the future that may be much more lucrative than a PSLF job would be.

Click to expand...

I am not a forgiveness expert, but from what I gather, your best options are either to pursue maximum forgiveness (get that payment as low as possible, get to your 10 years as quick as possible), or to refinance to as good a rate as you can and pay as aggressively as you can.  Pursuing forgiveness while also paying extra is counterproductive. However with that debt-to-income you might not be able to refinance to a better rate, so perhaps it cost you nothing to check the boxes for forgiveness while you pay the debt more aggressively.

Hedging your bet against future existence of the program is a tough one.  Employment wise, though, how many jobs are there in your specialty that would qualify?  Some specialties are close to 100%, some more like 50/50.

[cjh03]

Craigy: I'm going into psych, which has a good amount of jobs that would qualify.

DMFA: Thanks so much for the detailed response! I really appreciate it. We were considering buying a house, but thankfully decided not to and reading WCI has only solidified that decision. I'm definitely leaning towards C&A psych, which will likely take 5 years, and my guess is I'll be making ~300k for the metro area I plan to be working in. Along with the higher salary comes higher COL, so that might make things more difficult in the long run but I think I'll be fine.

adventure: Insurance would be auto and renters.  My program covers life and disability. Not currently saving for a house. We have a 403(b) from my wife's old job that we are planning to roll into some other account.

Another general question to all: What should we roll this 403(b) account into? She has about 24k in it.

 

[cjh03]

 

Edit: double post

[jfoxcpacfp]

Don't forget to budget for taxes and other random things like haircuts, clothing, gifts, travel, medical bills...

Agree with others that food is out of whack. Rent appears to be high for a LCOL area, unless you have kids, but maybe I'm just behind the times.

Roths are nice, but I might have trouble recommending them in this scenario. Still too much unknown but I like DMFA's interest rate schedule.

Roll the 403b into a Roth while you're poor. You can do 1/2 this year and 1/2 next so you won't get clobbered with taxes all at once.

[cjh03]

Sorry to bump this thread again, but one last question: Assuming I'm going to utilize PSLF, should I set up a taxable account to invest and deposit our extra money there in the case that I cannot utilize PSLF and just make the minimum REPAYE payments? Or should I be aggressively paying off my loans? Thanks!

[adventure]

Rough estimate of when you'd know if PSLF is a go/no go?

At least keep the cash in an interest bearing account online at Barclay's at 1.05%, or Ally, etc.

I'd still consider it a house or emergency fund until that's 3-6 months of expenses.

[HopingForFIRE]

At 130k/yr you really should be able to contribute and max a Roth and be able to build your emergency fund. After that I'd start a taxable account and put any extra in there. Your food budget seems way out of whack unless you are including a whole bunch of bar hopping in it or doing those blue apron services for 5 nights a week. If you limited yourself to a whopping $300 per week. You could still have an extra 800 a month (9600 a year!!) to save or whatever you like. Just my 2 cents.