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All loans <3.5%. Invest or pay them off?

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  • All loans <3.5%. Invest or pay them off?

    With inflation being so high, does it make sense to hold on to debt given my loan interest rate are quite low?

    To give some numbers:

    - Wife and I are both physicians, combined salary of about 500k.
    - My student loans: 150K at 0% variable rate currently, but paying 5k a month for the privilege, and will have them paid off in another 50-52 months.
    - Her student loans are around 270K at 2.6% fixed for then next 15 years (recently refinanced).
    - Recent home loan of $637k at 3.37% fixed for 30 years. Physician loan at 0% down, no PMI.
    - We are in our mid 30's, no kids yet but likely to have them within the next 2 years.
    - No other loans.
    - We are maxing out all of our retirement accounts: 401k, HSAs,

    Of note, am considering refinancing my own loans to a 5year fixed, and received a prequalification quote for 1.9% fixed rate, which would drive my payment down to about $2500 a month. My total interest payment would be around $7k (compared to $0 if my variable rate rate holds for the remainder of my loan). Other rates I received:

    10year: 2.3%
    15year: 2.6%
    20year: 2.9%

    So in a sense, given that these are all fairly low interest rates, would it make more sense to refinance my loan and invest the difference, vs paying off student loans/mortgage?
    Last edited by newdoc2016; 02-17-2022, 04:22 PM.

  • #2
    Mathematically it usually makes sense to pay the minimum and invest the difference but that’s assuming you’ll actually invest the difference. Some people are debt adverse and don’t like that hanging over their heads. Neither answer is wrong and you could always do a bit of both.

    Comment


    • #3
      Looks like a good student loan to income ratio and income to house ratio.

      Save 20% for retirement, invest the equivalent of paying off the loans in 2 years over the next few years, choose the 10 yr refinance. I think that'll be just fine.

      Comment


      • #4
        I would only extend out the payment if the interest you are paying is less then what you could be getting after taxes by purchasing a bond. You probably would come out ahead if you invested all into the market, but if you have any amount in bonds and they are paying less then what you are paying in interest, I would probably treat the loans as a negative bond and try to pay them off earlier. The way I see it, the markets could be up 10% on average for the next 10-20 years, but we could also have another lost decade or two in which case your losses are compounded by the interest you are paying in your loans. Another way to look at it is 3% in interest payments on your over 1 million dollars in debt you are servicing is over $30,000 a year you are paying to the bank that could be spent on something else. I don't like getting my student loan interest statement every year showing how much I am "wasting". I made the decision not to pay off my student loans though and am paying them off over 30 years. My consolidated interest rate is 1.65%, I have some $35,000 left but is being auto-deducted from my bank account with an interest rate of 1.625% (consolidated many years ago).

        Comment


        • #5
          With potential kids on the horizon, I'd clear out the SL so when they arrive that money can go to childcare and 529 accounts. Otherwise when they come things could start to feel a lot tighter and I doubt you'd actually keep investing the difference.

          Comment


          • #6
            You have ~1.1 million in debt on a 500k salary, which is prob 325-350k take home.

            If it were me, I’d be living like a resident for the next 5 years.
            Save at least 20% retirement (120k), then pay the rest of your debt off.

            Comment


            • #7
              Originally posted by newdoc2016 View Post
              With inflation being so high, does it make sense to hold on to debt given my loan interest rate are quite low?

              To give some numbers:

              - Wife and I are both physicians, combined salary of about 500k.
              - My student loans: 150K at 0% variable rate currently, but paying 5k a month for the privilege, and will have them paid off in another 50-52 months.
              - Her student loans are around 270K at 2.6% fixed for then next 15 years (recently refinanced).
              - Recent home loan of $637k at 3.37% fixed for 30 years. Physician loan at 0% down, no PMI.
              - We are in our mid 30's, no kids yet but likely to have them within the next 2 years.
              - No other loans.
              - We are maxing out all of our retirement accounts: 401k, HSAs,

              Of note, am considering refinancing my own loans to a 5year fixed, and received a prequalification quote for 1.9% fixed rate, which would drive my payment down to about $2500 a month. My total interest payment would be around $7k (compared to $0 if my variable rate rate holds for the remainder of my loan). Other rates I received:

              10year: 2.3%
              15year: 2.6%
              20year: 2.9%

              So in a sense, given that these are all fairly low interest rates, would it make more sense to refinance my loan and invest the difference, vs paying off student loans/mortgage?
              It didnt, but now it makes even less

              Comment


              • #8
                The "right answer" is to invest instead of paying off low interest debt - assuming perfect behavioral finance and time horizon of at least 15 years.

                What is your portfolio allocation? Do you hold any bonds? If so, that probably doesn't make any sense to hold bonds and debt of your own. If you don't hold bonds, realize that right now you are holding a highly leveraged portfolio.

                Due to imperfect knowledge of the future and the tendencies of human behavior, I'd move to at least pay off student loans in the next few years.

                Comment


                • #9
                  With kids on the horizon, I personally would feel uncomfortable with loans (regardless of mortgage or SL) greater than 2x comp. I would refi yours to 2.6% just to be the same as hers. Then I would pay down the mortgage to get the debt down to 1.5x.
                  Then invest.
                  Make sure your retirement rate is 20%, not just employer plans.

                  I differ on the debt. Don’t care if it was SL or mortgage. These are all long term, rate counts.
                  The goal is keep it under 2x comp and work it down.

                  Comment


                  • #10
                    How's your emergency fund? If you need to beef that up, then keep the lower payments and put extra towards that. You never know what the future holds -- my wife and I spent $50K on IVF over the past 2 years, and we were able to pay cash without compromising our lifestyle (in part because I'm making the minimum payment on my $100K student loans at 1.9%).

                    Most student loan consolidation companies will cancel the debt if the borrower dies. Be sure to check that in the paperwork. Because of this, I don't mind still having some of that debt even with a kid. I know my wife won't be stuck paying it if something happens.

                    Comment


                    • #11
                      Originally posted by newdoc2016 View Post
                      With inflation being so high, does it make sense to hold on to debt given my loan interest rate are quite low?

                      To give some numbers:

                      - Wife and I are both physicians, combined salary of about 500k.
                      - My student loans: 150K at 0% variable rate currently, but paying 5k a month for the privilege, and will have them paid off in another 50-52 months.
                      - Her student loans are around 270K at 2.6% fixed for then next 15 years (recently refinanced).
                      - Recent home loan of $637k at 3.37% fixed for 30 years. Physician loan at 0% down, no PMI.
                      - We are in our mid 30's, no kids yet but likely to have them within the next 2 years.
                      - No other loans.
                      - We are maxing out all of our retirement accounts: 401k, HSAs,

                      Of note, am considering refinancing my own loans to a 5year fixed, and received a prequalification quote for 1.9% fixed rate, which would drive my payment down to about $2500 a month. My total interest payment would be around $7k (compared to $0 if my variable rate rate holds for the remainder of my loan). Other rates I received:

                      10year: 2.3%
                      15year: 2.6%
                      20year: 2.9%

                      So in a sense, given that these are all fairly low interest rates, would it make more sense to refinance my loan and invest the difference, vs paying off student loans/mortgage?
                      I don't think you're thinking deeply enough about this. Read this post here and then decide on if/how you will use debt in your wealth building process:

                      https://www.whitecoatinvestor.com/ho...nk-about-debt/
                      Helping those who wear the white coat get a fair shake on Wall Street since 2011

                      Comment


                      • #12
                        Originally posted by The White Coat Investor View Post

                        I don't think you're thinking deeply enough about this. Read this post here and then decide on if/how you will use debt in your wealth building process:

                        https://www.whitecoatinvestor.com/ho...nk-about-debt/
                        I loved this blog posting. Not related to OP's question but your #3 Access to good quality debt needs some refinement. You state categorically that a retired person will not have access to high quality debt. Really depends on the lender. The retirement accounts can be used for debt/income qualification and favorable rates and social security as well. It makes no sense to withdraw taxable income in a lump sum to pay for a house or whatever. You do need to "prove it" and document the income. Which might actually be a smart tax move. Sell the old house, claim the exemption and finance a new house with "good debt" is preferable to a lump sum withdrawal. Avoiding a high marginal tax rate is a smart move.

                        "Retirement, government, annuity and pension income
                        If your retirement includes savings in an IRA, 401(k) or other retirement accounts, you can use it as income to qualify for a mortgage. First, underwriters start with 70 percent of your investment balances, to account for fluctuations in the values of stocks and bonds (cash deposits are not subject to this).
                        They then divide your total by the number of months in your mortgage. So if you take a 30–year loan, they divide by 360. If you want a 15–year loan, they divide by 180. That number is your income for the month from what lenders call “asset depletion.”
                        Social Security
                        If you’re getting retirement or long–term disability benefits from the government, those should normally be accepted as income for mortgage purposes. It’s a bit more complicated when you’re receiving benefits on behalf of a family member. Then, you’ll have to show the income will flow for at least the next three years.

                        Comment


                        • #13
                          I am going to go against the grain a bit, in that I am a little more comfortable with debt.

                          1. Put aside enough for your primary savings goal. 20% or a fixed dollar amount. (My income has always fluctuated, so I like to have a dollar amount minimum target savings)
                          2. Then split then rest between more saving and debt reduction. You can do 50/50 or whatever makes you happy. Your 5 year payoff plan is fast enough.

                          Comment


                          • #14
                            Thanks for all the replies. To clarify:

                            - My wife and I have about 100k in emergency funds combined.
                            - Rough allocations: 10% bonds, 10% stocks, 80% index funds
                            - We're saving a little more than 20% at the moment into our retirement funds, ie 401k, HSA, backdoor Roth, and then brokerage. No 529 (yet).

                            It seems majority are recommending I pay off the student loans. I am going to see if I can get SoFi or Earnest to match/beat the 5 year 1.9% rate, and then use the amount saved towards my wife's loans. That way, we'll have both of our loans paid off in 5 years time. Thanks again all!

                            Comment


                            • #15
                              Originally posted by CordMcNally View Post
                              ... you could always do a bit of both.
                              Yes, I would create a plan to water both gardens a fair amount. The main thing you need is a large EF given your situation... surprised nobody mentioned that yet. I am glad you have realized that, but I still see a lot of caution flags in your situation.

                              Paying the debt is like buying bonds... the return seems low and boring, but is also virtually guaranteed (virtually guaranteed for bonds... it is completely guaranteed with paying your debt).

                              I would certainly do some of both... and overpay house debt if it's higher interest than student debts. The market climate is as rocky right now as it has been in awhile. So yeah, your debt is guaranteed 3.5% returns and the market "averages 7 or 8% annually" (yet always could be +20% or could be -10% in any given year). Doing some invest and some debt overpay is the smart choice. That "low" mortgage interest is still substantial on such a large principal. EF would be your top goal, but you have enough or probably close... just keep in mind credit dries very fast in a bad economy and there won't be much work available for your wife in that recession situ (if she even was available to go back).

                              That home purchase in combo that you will soon gain expenses (kids/medical) and lose your wife's income for at least some timespan is likely going to be a killer in terms of attaining true stability. I hope you don't have auto loan/lease or other consumer debt. The house buy could've easily waited a few years until you had a down payment at the very least, but what's done is done. I hope your income is the lion's share of the 500k?

                              I assume you will be trying for kids very soon given her age, so pick up as much overtime as you can, get in good with the boss/owner, and keep grinding away. If having kids is "optional," you could have a serious chat about that it will set retirement back a decade or more to buy that house and then lose her income. You have enough coming in the front door to do ok, knock down debt, and pack retirement accounts right now and once she is back to work, but you bit off a very large bite with the house. Things could very well get dicey in the near term once she goes on leave. I would maintain a very sizable EF right now... otherwise you seriously risk losing the house, having to sell for a loss and move, or even much more if your employment falters in any bad economy with her off work and young kids. Unlikely? Yeah, probably... but when it rains it pours. Have a few mortgage payments and 6mo living in the bank at all times until the kids are all into school age or whatever mark she will return back to work.

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