Part time work - Pay student loans or stay the course?

[silverpaw54]

Hello guys,

Long time lurker here.

I’m in Emergency Medicine and leaving a W-2 job with benefits with one of the large groups. I’ll be doing part-time at multiple places with a mix of W-2 and 1099 income and plan to work at least 120 hours a month. There will be no benefits from any of them. I guess I won’t really know how much work will be available but being credentialed at 5-6 places should allow for plenty of work each month. I am debating on dipping into the down payment/emergency fund to make a bigger dent in student loans.

I’m a new grad in 2016 with about 142k in student loans that are refinanced at 3.5%. I initially graduated with just under 200k. I pay extra every month as my paycheck varies every month.

We have an affordable mortgage for a townhouse we bought before residency. We’ve been here for about 4 years now. We have a little over 40k in an online savings account that I combined as an emergency fund/down payment fund. We have about 12k in a taxable account. HSA and 401k will be maxed out with July’s paycheck. I have not backdoored a Roth this year yet. However, only funded a Roth for my wife and I for only two years.

I am not sure if I should continue to aggressively pay the loans off due to income stream varying month to month. I think there is plenty of work out there but you never know. The $40k sits in an ING/Capital One 360 account making < 1%. My wife is finally on board with moving in two years (kid #1 will start kindergarten in 2019). I sort of want to take $20k from the account and put it towards loans. Is this dumb right now given my work situation? I guess I can wait and see how the next few months ago before touching the emergency fund and figure out exactly how much health insurance premiums will be (Costco website shows about $1200/mo for high deductible plan). I think if I do put the $20k to student loans, I would refinance with SoFi to a variable rate as the goal is to pay it off by July 2019.

What do you guys think? Thanks!

 

[q-school]

Stay the course. Save money for bigger down payment and emergencies. You are doing great already but imo in your situation of uncertain income and planning to move in two years need a bigger emergency /downpayment fund.

Good luck!
With your saving habits you will be fine in several years. Really that is probably the biggest risk for you--if you start to spend more rather than whether you can further optimize your net worth in the next few years by paying loans versus saving cash.

[silverpaw54]

Think it would be a bad idea to do a variable loan?

[DMFA]

What is the loan term? If you loan is appropriately structured, as in lowest rate available for as low a term as you can afford (like 5 years), it shouldn't benefit you much to pay over the minimum. Interest rate risk decreases with time, and since the principal is steadily decreasing with a 5-year term, you would likely pay less over the life of the loan with the lower variable rate in the beginning when the principal is highest, even if the rate climbs to over the original fixed rate eventually.

[Dr. Mom]

I would not touch your $40k, but neither would I be in a rush to add to it.  You need to really think about your liquidity needs with such a variable income.  Only 20K seems low to me.  You have a great rate on those student loans and are paying them off quickly.  Stay the course.  Beef up retirement (fund those Backdoor Roths) before adding any more to taxable investing.  Once you have maxed out retirement, send all the rest to loans or divide it between loans and saving for a higher down payment.

[shantster]

Agree with the plan to stay the course. There's so many uncertainties with your finances as you transition in job between monthly pay and health insurance premiums that I wouldn't do anything big with the money to take away from the liquidity. You also indicate that you want to move in two years so you'll need to beef up the downpayment. I'd sit back until the end of the year and pay the minimum on the student loans. That will give you a few months to figure out what your "average" monthly income and expenses are. Set-up a Solo 401K for the 1099 income and max that out at the end of the year once you have a good idea of your total 1099 income. Reassess where you are in December/January on the invest vs pay down student loans.

[silverpaw54]

I appreciate the responses. Thank you for your time to respond.

A few questions:

1) Can I have a Solo 401K and employee 401k? How much of my 1099 income can go to a Solo 401k?

2) We owe roughly $215k on the townhouse. Similar townhouses are being at $315-$340k range. Do people traditionally use the sale of their current home as a down payment? This would obviously make it much easier to get a 20% down payment prepared. I know one unit has been on the market for awhile in our complex. Hopefully we sell fast like some of the other homes though!

3) Loan term is 3.5% for 5 years.

 

[DMFA]

silverpaw54 wrote:

I appreciate the responses. Thank you for your time to respond.

A few questions:

1) Can I have a Solo 401K and employee 401k? How much of my 1099 income can go to a Solo 401k?

2) We owe roughly $215k on the townhouse. Similar townhouses are being at $315-$340k range. Do people traditionally use the sale of their current home as a down payment? This would obviously make it much easier to get a 20% down payment prepared. I know one unit has been on the market for awhile in our complex. Hopefully we sell fast like some of the other homes though!

3) Loan term is 3.5% for 5 years.

 

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1. Yes, short answer is 20% of net profits as an employer contribution (income, minus expenses, minus half self-employment tax; usually comes out to about 18.5% of income minus expenses). Y

2. Yes, assuming your equity minus transaction costs is 20% of the new loan.

3. Not much benefit from paying over the minimum from that tbh.  Once you give yourself as favorable as amortization schedule as possible - lowest rate for lowest time you can/want to afford - you've generally done enough to reduce the interest burden, causing it likely to be more advantageous to put the money elsewhere.  For $142,000 at 3.5% over 5 years, you'd pay at *most* $12,993.67 in interest, 9.15% of total principal, annualized over 5 years is 1.77% compound "equivalent," that is, you'd have to earn more than 1.77% on money invested as opposed to paying down that debt.  This is, of course, assuming you actually invest what you didn't put towards the loan.  So, putting that $20,000 would "earn" you $1,830.09 in reduced finance charges over those 5 years.

Could you, and would you want to try to, earn more than that by risking it in the market...or do you want to take the low-gain guarantee while improving your credit status and further reducing any uncertainty if you were to lose income?  Low-rate guaranteed gains *do* have a place in a portfolio...

[adventure]

Dr. Mom wrote:

I would not touch your $40k, but neither would I be in a rush to add to it.  You need to really think about your liquidity needs with such a variable income.  Only 20K seems low to me.  You have a great rate on those student loans and are paying them off quickly.  Stay the course.  Beef up retirement (fund those Backdoor Roths) before adding any more to taxable investing.  Once you have maxed out retirement, send all the rest to loans or divide it between loans and saving for a higher down payment.

Click to expand...

I'd say make sure the 40k covers ~6 months of expenses, if 40k isn't enough, then add to it.

 

 

silverpaw54 wrote:

...Costco website shows about $1200/mo for high deductible plan)...

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I also think you need a budget spreadsheet to make sure everything adds up. That'll help you decide how many shifts to pick up too.

And with a pile of 1099 income, and backdoor roth potential, make sure you double check the income tax you'll be paying, so you don't get to next April and say oops! (its just more complicated than a boring W2 job that has changed much from last year and the year before, etc).