Defer retirement for student loans?

[Wings3496]

Hello all -

I'm currently a Family Med PGY2, working on planning my financial future.  My biggest hurdle is $350k in student loan debt, sitting at 6.8%. I set up myself up on PSLF when I started as an intern, but the more I learn about the program and the more I read, the more worried I become about a likely cap in the future on forgiveness (especially for high-income earners). Previously I had run the numbers on my future (given my likely income based on what recent graduates with jobs in my area are earning, combined with my wife's income, etc) and it seemed like PSLF was the clear winner. Although it made me nervous.

However, yesterday I realized I had always run those numbers while assuming we'd be maxing out both our 403b's and roths before anything else. So I redid the math - refinance the loans at say ~4%, then assuming we just continue our current lifestyle, and only contribute to 403b up to the match (don't want to give away 'free' money), and then basically put every other dollar toward loans (plus some urgent care work on occasion) - I think we can pay down all  my loans about 4.5 years.

I like the sound of entirely paid off in 4.5 years with no risky PSLF much, much better. I think we could catch up on the lost retirement savings fairly quickly after the loans are paid off.

Am I crazy to put so little away for retirement over those years?  I was a bit late to start med school, so I'll be 38 by the time the loans are paid off, but I'm not looking for early retirement so I think we could still easily have a comfortable retirement fund by my 67th'ish birthday.

[Dicast]

I think paying off your student loans instead of funding retirement is limiting your ability to get a pretty big deduction on income taxes and you can't go back in time to make up for lost contributions to your 403b.  Over long stretches of time it seems as though compound interest wins out.  If you can refinance and have reasonable options within a 403b I would probably max the retirement accounts.  I think the old list on student loans vs investing still applies here.

[Dru]

I'm in a somewhat similar situation: 350+k school debt in a relatively lower paying primary care field. We decided to max my 401k + spouses 403b (not in medicine, makes a "middle class" salary). I get an additional contribution (set, not a match) that comes to about 15k yearly. So we're putting about 50k/yr currently toward retirement and more toward loans. I plan to refinance again next year: did not get a very big interest rate deduction the first time around related to pretty ugly debt to income ratio.

[RocDoc]

I agree with Dicast above and would max out all your annual retirement space as the highest priority.  There is no need to work until age 67!  Read Mr Money Mustache " The Shockingly Simple Math Behind Early Retirement" posted in his blog in January 2012. If you're able to pay off the student loans by age 38 or 39 or even 40 you could still retire by age 55 if you save a high percentage of income as MMM describes. If you're still loving work at 55, you can choose to soldier on. But speaking as a financially independent 53 year old, it sure is nice to have the choice! Working as a doctor is a lot more fun once you don't need to do it for the money.

[Wings3496]

Thanks for the comments, guys!  I certainly plan on looking for/negotiating for jobs with some loan repayment contributions, which would make things go quicker.

A couple thoughts. If we max our retirement accounts rather than aggressively paying off the loan, we would have to pay it off over 10 years rather than 5. That would make me 44 by the time my loans are paid off. Also means I'd be paying for my daughters college while still paying the loan off, not being able to save much for a house which actually fits our family, etc. And I'd be paying an additional 30k in interest.

But...doing some basic compound interest calculations - assuming retiring at the same age, the loss of those years of retirement savings seems to be a loss of about $500k down the road. However, these are pretty basic calculations - ignoring increasing income/savings overtime, future backdoor IRAs, HSAs, etc - all of which we'd be able to fund more aggressively after having the loan paid off early.

It seems like I could make a financial argument for choosing either strategy.

 

[PhysicianOnFIRE]

It's not necessarily an either / or proposition. If I were in your shoes, I'd get all the tax deferment I could, and if your job qualifies you for PSLF, continue on with the program. A cap on forgiveness might be instituted, but it might not. Even if it is, you may be grandfathered in, having enrolled prior to the proposed cap.

[The White Coat Investor]

Wings3496 wrote:

Hello all –

I’m currently a Family Med PGY2, working on planning my financial future.  My biggest hurdle is $350k in student loan debt, sitting at 6.8%. I set up myself up on PSLF when I started as an intern, but the more I learn about the program and the more I read, the more worried I become about a likely cap in the future on forgiveness (especially for high-income earners). Previously I had run the numbers on my future (given my likely income based on what recent graduates with jobs in my area are earning, combined with my wife’s income, etc) and it seemed like PSLF was the clear winner. Although it made me nervous.

However, yesterday I realized I had always run those numbers while assuming we’d be maxing out both our 403b’s and roths before anything else. So I redid the math – refinance the loans at say ~4%, then assuming we just continue our current lifestyle, and only contribute to 403b up to the match (don’t want to give away ‘free’ money), and then basically put every other dollar toward loans (plus some urgent care work on occasion) – I think we can pay down all  my loans about 4.5 years.

I like the sound of entirely paid off in 4.5 years with no risky PSLF much, much better. I think we could catch up on the lost retirement savings fairly quickly after the loans are paid off.

Am I crazy to put so little away for retirement over those years?  I was a bit late to start med school, so I’ll be 38 by the time the loans are paid off, but I’m not looking for early retirement so I think we could still easily have a comfortable retirement fund by my 67th’ish birthday.

Click to expand...

I have a hard time convincing people to do this, but I'm also convinced this isn't an either/or proposition.

Basically, in general, if you live like a resident until the loans are gone there is enough income left over to max out the retirement accounts AND pay off the loans within 2-5 years.

You, however, are a bit of a special case in that your attending debt to income ratio is borderline ridiculous. (I consider more than 2X student loans to income ridiculous and generally recommend people keep it to no more than 1X whenever possible.) So whether you can both max out retirement accounts AND have loans paid off within 5 years even if you live like a resident is an open question. Probably comes down to the retirement account limits.

At any rate, the place to start is with a plan for the loans- either go for PSLF (in which case you'd obviously have them for 7 years) or refinance and pay off. If you refinance to a 5 year variable, that drops the accumulating interest quite a bit. I guess I'd set the amount paid so the loans would be gone in 5 years, then try to do the best I could with the retirement accounts if I had to choose, but reasonable people could disagree without being crazy.

At any rate, if you go for PSLF, don't pay extra on the loans, just max out the retirement accounts AND start a side fund in taxable in case something happens to PSLF/your career such that it is not an option for you, but either way, the percentage of your income going toward wealth building (paying down debt or investing) should be the same.

[Wings3496]

I absolutely agree on the "ridiculous" label for my attending debt-to-income ratio, and it's partially of my own doing. I work with medical students now, and I bring up the WCI site/book frequently - because if I had read it as a MS1 or premed, I know I would have made different choices.

The PSLF + side fund was the plan my wife and I had come up with when I started as an intern, and is what we're currently doing. We're both just made nervous with the uncertainty of the program going forward (I'm not certain there would be a "grandfathering in" since you don't really 'apply' for the program, you simply send them a periodic form to verify you're making payments). We'll wait until I sign for a job next year to make any final decisions, but I think we're both leaning toward refinance + aggressive repayment simply to get the "$350k + PSLF uncertainly" elephant off our proverbial shoulders.

Having both options available opens my job prospects up as well - not necessarily having to choose a non-profit employed position. There are many private groups in my area, and the idea of becoming a partner and owning part of the business is an attractive long-term option as well.