Comprehensive advice needed

[bobby995]

Hey all, just recently discovered this website and am so thankful I did. As someone who made very poor financial decisions up until the last year or so, it has been a godsend. Here is my current situation (I apologize in advance for length)

32 years old and single. Just finishing a chief resident year in internal medicine and have accepted a job as a hospitalist at the current hospital I work at. Starting guaranteed salary for year 1 is $256,000 but with the ability to pick up extra shifts, I anticipate my gross will be close to $330,000 - $350,000 as I plan to be aggressive my first few years. I contribute $18000 to my employee sponsored 401K with fidelity this last year and have a balance of $45000 right now after the 4 years of my residency. I only just learned about Roth IRAs so 2016 was the first year that I contributed $5500.

Stupidly, I took out several private loans in undergrad and medical school which were incredibly high interest and only just recently refinanced $74,000 with SoFi for 2.4% over 5 years. I already have this down to $64,000 and anticipate paying it off in the next 6-7 month as I am able to pick up a lot of extra shifts moonlighting these next few months and just want to be done with it.

Recently consolidated my federal student loans into REPAYE, and these amount to $294,000 at an average of 6.6% interest. I have made ~36 qualifying payments (of 120) to qualify for PSLF. I am questioning if I want to go through with this though. With various calculations if the program is still around I figure over the next 7 years of payments, I will likely pay ~$200,000 or so towards this, with the remainder being forgiven. The alternative to that is refinancing with SoFi at either a variable or fixed interest rate (2.5 - 3.5%) and put as much money as possible (7k-10k) monthly to pay these off in 3-4 years and then just be done with it all.

I know decided whether or not to pursue PSLF is a crapshoot. If I do, with an average payment of $2300 a month, I will essentially have in excess of $5000-7000 of money each month that I wouldn't be putting towards my loan. Clearly I understand that I need to decide whether or not to do PSLF and if I do, accept that it may not be there in 7 years when I'd apply (or be capped) and I'd have a very sizeable amount of interest that accumulated during that time. However, I was hoping the get the advice of those on these message boards who are much more financially savvy than myself. If I choose not do PSLF what should I be doing with that excess 5k-7k/month?

 

Thanks all!

[The White Coat Investor]

Wow! My work has been called a "godsend" twice in 24 hours. I'm flattered.

If you need comprehensive advice, you can hire a financial advisor from my vetted list here: https://www.whitecoatinvestor.com/financial-advisors/

If you just need professional advice on student loan management, try these resources: https://www.whitecoatinvestor.com/student-loan-advice/

Otherwise, you can take your chances with us.

$45K in a 401(k) as a resident? I think you're doing pretty darn well. Nothing to be ashamed of there.

Here's the deal with PSLF. If you are going to work for a 501(c)3 anyway, you should go for it. Just save up the amount you'd pay the loans off over 2-5 years in a separate account in case you aren't grandfathered in to any changes. If you are not going to work for a 501(c)3, refinance and get those loans paid off.

In that scenario, the worst case (you don't refinance and then PSLF goes away before you get anything forgiven) is you paid a little more in interest than you otherwise would have. Hopefully your investing side account made up for it. If that possibility seems terrible to you, then refinance and pay them off. It's not like you can't do it. You'll clearly have the income and the discipline to pay those loans off in a lot less than 7 years.

 

[bobby995]

Thank you for the advice WCI! I have a financial advisor but I only recently was able to fully grasp how much his fees would cost me in the long run and as a result, will no longer be working with him. He's also mentioned whole life insurance to me multiple times which is another red flag.

You mention "investing side account" that I would place my excess income in. What types of side accounts do you recommend?

Finally, as staff I will have the opportunity to contribute to a 457(b) and have read quite a bit on this website about both the pros and cons with this. I don't know the full details of this plan but the overview states that the balance will be paid in a lump sum 60 days following my last day of employment unless I defer the payment up to age 70 1/2. Will be in the 33% tax bracket and 9.85% state taxes so I anticipate I will be in a lower tax bracket at retirement. I am not concerned with the financials of the healthcare system that I work with as they are the largest in the Twin Cities area so I'm not overly concerned with my being subject to creditors. However, just wondering if I should utilize the 457(b) while I still have outstanding loans or wait to contribute until these are paid off. Thanks again! The money would be invested with Fidelity and similar to my 401k have very low fees associated with it. From what I can tell, it seems like a smart decision? I will be calling Fidelity to discuss more details of it but what questions should I ask?

[The White Coat Investor]

Assuming you're maxing out all your tax-advantaged accounts, the side account could just be a taxable brokerage account. If you're not maxing out your tax-protected account options, that's probably a better use for your money than funding the side account. But living like a resident for 2-5 years should allow you to do both just like it allows someone to max out their retirement accounts and pay off their loans.

Get the full details of your 457 account. Read more here: https://www.whitecoatinvestor.com/should-you-use-your-457b/

I don't like the terms on your 457 as you state them, but kind of doubt they're correct. I probably wouldn't use the plan you describe because of them. You certainly don't want a lump sum 60 days after quitting. Nor do you want to wait until age 70 to get to the money. Are you sure that's not 59 1/2?

Again, if you live like a resident for 2-5 years after residency, you can pay off the loans and max out the retirement accounts. That is the key to building wealth as a physician. I know many docs who have done it and it worked. I know many who did not do it and guess what...they're 40 with a net worth of zero instead of $1 Million.

[nachos31]

The White Coat Investor wrote:

I don’t like the terms on your 457 as you state them, but kind of doubt they’re correct.

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My 457b has the same super restrictive distribution options. Since I think OP and I work for the same employer, I think he/she is, in fact, correct.

[bobby995]

nachos31 - given the restrictive distribution options, I take it you are not contributing to the 457? At this point, it doesn't seem like a great idea for me to contribute to it.

WCI - it's pretty awesome that you reply to these message boards. Thank you very much for your advice. As soon as I finish paying my private loans (around August/September) I will likely refinance my Federal loans with a 5 year term and just flood as much money into them as I can, while also maxing out my tax advantaged accounts. It's amazing how empowered it feels to be able to take charge of my debt.

Thank you all again.

[nachos31]

Correct, I'm not contributing to the 457b. I'll consider it if I can get the distribution options changed but not until then. Hypothetically, if I spend my entire career here and have a retirement date in mind, I would consider contributing toward the last few years such that the lump sum wouldn't be huge and I could get a few years of tax-deferred growth.

I sent you a private message about what I've done about our 457b and to see if you want to help

Your debt plan sounds reasonable. I would echo WCI's PSLF plan with side account fund in case it falls through. Our employer is eligible for PSLF as I confirmed recently via FedLoan Servicing employer certification. Although as a hospitalist you may be hired by a separate physician group? if that's the case, you'd have to check to see if they're eligible for PSLF.

On a side note, I'm not sure we are the largest health group anymore (I've heard mixed things on this, surprisingly) and size does not always portend safety (financial). Recent events last summer and fall out us on slightly shakier footing and made the admin more conservative so be mindful of all these things.

[Travis @ Student Loan Planner]

I ran your numbers through my calculator that I built and here's what I got.  Total cost of repayment on PSLF: $205,000

Total forgiven in 2024 when I estimate you'd be eligible based on what you've written: $224,000. First year payment as an attending until they ask you to verify your income: $350/mo if you're on REPAYE. After they figure out your new income: about $2500 a month on REPAYE which grows to about $3100 in the final year or repayment.

Here's the alternative option, you refinance and cut the $294,000 down to a similar interest rate that your Sofi loans are currently at and pay it back say in 3 years time. That option costs you about $311,000 assuming a 3% avg interest rate.

So would you take an 80% to 90% chance at saving $106,000? That's the real question here. Almost everyone would say yes, so then of course you need to pursue PSLF.

There's a caveat to this. If you get married or are already married and your spouse has an income, then REPAYE could cease to be as attractive and PSLF could be totally derailed because you'd blow through the cap and pay everything back early. That's the nightmare scenario in this situation bc then you'd be paying 6.6% interest totally unnecessarily

[DMFA]

Travis @ Student Loan Planner wrote:

I ran your numbers through my calculator that I built and here’s what I got.  Total cost of repayment on PSLF: $205,000

Total forgiven in 2024 when I estimate you’d be eligible based on what you’ve written: $224,000. First year payment as an attending until they ask you to verify your income: $350/mo if you’re on REPAYE. After they figure out your new income: about $2500 a month on REPAYE which grows to about $3100 in the final year or repayment.

Here’s the alternative option, you refinance and cut the $294,000 down to a similar interest rate that your Sofi loans are currently at and pay it back say in 3 years time. That option costs you about $311,000 assuming a 3% avg interest rate.

So would you take an 80% to 90% chance at saving $106,000? That’s the real question here. Almost everyone would say yes, so then of course you need to pursue PSLF.

There’s a caveat to this. If you get married or are already married and your spouse has an income, then REPAYE could cease to be as attractive and PSLF could be totally derailed because you’d blow through the cap and pay everything back early. That’s the nightmare scenario in this situation bc then you’d be paying 6.6% interest totally unnecessarily

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He'll only get an interest subsidy the first year in RePAYE anyway since his payment will be higher than the accruing interest.

"Chief year" in internal medicine residency is actually an attending year, but they get paid like a resident (with some extra opportunity).  I estimated he'd make about $100,000, minus $18,000 from elective 403b deferrals and whatever from student loan interest deductions, leaving about $80,000.

PSLF still wins out, though, since you prob won't exceed the 10-yr standard amount.  If you do, such is if you're RePAYE and get married (since there is no 10-yr std cap and it always includes spouse income), it could be harmful like Travis says since you could end up paying your balance before the forgiveness hits (at double the interest you could have).

You won't stop having a PFH until your income exceeds $400,000 since your 10-yr std is at least $3,350 (idk what your initial principal at time of repayment was; that's how it's calculated), so if you wanted to, you could switch to PAYE.  You won't get an interest subsidy after the first year anyway, since your monthly payment ($2,451.50 assuming last year's poverty line and $312,000 AGI) will be greater than the interest that will accrue on that amount anyway.  For that purpose, PAYE *might* actually be better, since if you do get married, it's still capped at 10-yr standard rate.  Plus, if you're not paying the amount anyway, do you *need* the interest subsidy from RePAYE?

[Travis @ Student Loan Planner]

DMFA wrote:

Travis @ Student Loan Planner wrote:

He’ll only get an interest subsidy the first year in RePAYE anyway since his payment will be higher than the accruing interest.

“Chief year” in internal medicine residency is actually an attending year, but they get paid like a resident (with some extra opportunity).  I estimated he’d make about $100,000, minus $18,000 from elective 403b deferrals and whatever from student loan interest deductions, leaving about $80,000.

PSLF still wins out, though, since you prob won’t exceed the 10-yr standard amount.  If you do, such is if you’re RePAYE and get married (since there is no 10-yr std cap and it always includes spouse income), it could be harmful like Travis says since you could end up paying your balance before the forgiveness hits (at double the interest you could have).

You won’t stop having a PFH until your income exceeds $400,000 since your 10-yr std is at least $3,350 (idk what your initial principal at time of repayment was; that’s how it’s calculated), so if you wanted to, you could switch to PAYE.  You won’t get an interest subsidy after the first year anyway, since your monthly payment ($2,451.50 assuming last year’s poverty line and $312,000 AGI) will be greater than the interest that will accrue on that amount anyway.  For that purpose, PAYE *might* actually be better, since if you do get married, it’s still capped at 10-yr standard rate.  Plus, if you’re not paying the amount anyway, do you *need* the interest subsidy from RePAYE?

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Good points. The only thing I'd say is that in this case bc of the lower attending salary and the high degree of debt relative to income the REPAYE interest subsidy persists for the duration of the loan life on PSLF. Interest charge about $20,000 on PAYE, contrast that to 1st year $13,000, then gradually grows to $19,000 in year 2024 at forgiveness. Not much but I'd rather be on that just to have the slower balance growth

[bobby995]

 

Travis @ Student Loan Planner wrote:

So would you take an 80% to 90% chance at saving $106,000? That’s the real question here. Almost everyone would say yes, so then of course you need to pursue PSLF.

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How are you arriving at the conclusion that it is an 80-90% chance? I don't think any of us can be certain that PSLF will still be around in 7 years when I apply however, I think I am willing to take the risk that it is.

[Travis @ Student Loan Planner]

bobby995 wrote:

 

Travis @ Student Loan Planner wrote:

So would you take an 80% to 90% chance at saving $106,000? That’s the real question here. Almost everyone would say yes, so then of course you need to pursue PSLF. 

Click to expand…

How are you arriving at the conclusion that it is an 80-90% chance? I don’t think any of us can be certain that PSLF will still be around in 7 years when I apply however, I think I am willing to take the risk that it is.

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Every repeal proposal, possibly excepting the one from Democrats that means tested it, grandfathered in current borrowers. Also looking back at major overhauls in the past, they've all made exceptions for folks currently under the policy. I don't think that means it's safe to assume it isn't going away for folks who will use it in 7 years, but I do believe the probability is certainly above 50%, and realistically maybe something like 75% but then you have to assume there will be tons of lawsuits that block any proposal to hit current borrowers bc thousands of lawyers need PSLF in a way that doctors do not. That is, lawyers are going to be relying on it to survive as in Georgetown with $350,000 in loans and a $70,000 public interest lawyer salary.

Hence, the best solution is to set everything up for PSLF with a side account to hedge against repeal just in case it happens. If it's close to being a wash maybe just refinance and pay it off. But really so few people besides private practice attendings should even think about refinancing their loans right now. I wish my urogyn fiancee had consolidated right out of med school and done IBR for her 4 year residency and 3 year fellowship. But alas, someone told her to consolidate at the end of residency and she used forbearance for several months bc she didn't know about PSLF and had a lower total debt load, hence PSLF and private refinancing was a wash for us. It's also what led me to get into student loan consulting to try and be a part of the solution to make sure fewer people make the same mistakes we did

[Craigy]

The probability of being grandfathered in is one thing, but the bigger concern IMO is career wise you are limiting your options.  If you are very certain that you will be employed by an eligible employer for the full term and by doing so you are not giving up any substantially better opportunities, then it makes sense.