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Loan Repayment Question

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  • Loan Repayment Question


    I am a new attending physician fresh out of residency and my income is structured such that I get paid biweekly on a base of $200k, but stand to make around $150k gross as a bonus in August. My first two years will be structured this way, with large bonuses once per year. For me, this complicates my loan repayment a little because almost 50% of my income is lumped to be distributed once per year.

    I am currently sitting at around $320k in student loan debt ranging from 6.8-7.4% interest. This first year out, my PAYE model has my monthly payments at only $650, based on my last tax year income and my spouses debt, etc. This doesn't even cover the interest, but it has allowed me to put it on the backburner while making other financial decisions with my life (i.e. we have a home, mortgage, a newborn on the way, and will likely be relocating to the town of my new practice).

    My question:  reading the blog, it sounds like my best bet is to refinance with one of the private lenders and try to get a rate <4% with an aggressive 5yr or 10yr repayment plan. I understand this will put me at monthly payments of $6000-$8000 if I am doing the math correct. With the way I am paid via these large bonuses, would I be wise to just dump my full bonus into loan repayments come August? If I do this, I probably couldn't afford a monthly payment of $6000-8000 on top of that. Would I be smarter just to tuck the bonus away in a separate account and leave it aside just for loan repayment throughout the year?

    Would love some feedback or any other suggestions regarding getting that debt paid down.

    Thanks, MDMD


  • #2
    it depends. do you plan for the 10 year loan forgiveness pathway? if yes, then carry on, and set up a settlement fund for the tax you will owe.

    if not, then yes, refinance, and attack.




    • #3
      There is no tax obligation with forgiveness from PSLF.


      • #4
        A lot of this depends on what your other expenses are per month. If your plan is to refinance them and to pay them off as fast as you can, I would look into a longer term loan to give yourself a little more cushion month to month and then throw whatever extra money you have at them every month and then again when you get your annual bonus. Here's what I get plugging a $320k loan into calculators assuming a 4% interest rate (remember that with a variable interest rate, this can and will likely rise):

        5 years: $5893/month (total interest paid: ~$33,600)

        10 years: $3240/month (total interest paid: ~$68,800)

        20 years: $1939/month (total interest paid: ~$145,400)


        Given your base salary, you'll be taking home somewhere around $5000 with each check. Again, If I were you, I would get the 20 year term for a bit more monthly cash flow cushion and then I would put extra towards my loan every month and then make another big payment around annual bonus time.


        • #5
          I would set up the repayment where you can afford it without squeezing your cash flow.  After that I'd just take the bonus and pay it to the loans as a lump sum.  Of course you'll want to eliminate any big ticket recurring expenses if it is possible, and since you are going to be moving anyway it is an important time to make sure your living situation fits with your financial goals.

          Knowing you'll have enough money each month to meet obligations is the most important.  After that, if you're getting a lump sum of 150K, assume 30% of that disappears to taxes, so 100k bonus a should be less than 3 years to be paid off.

          My wife is burdened with my tax rate but she makes about 180k a year.  After benefits, maxing retirement accounts she brings home about $5900 a month.  You'll hopefully be doing a bit better on that month to month but I think a 6k a month bill is probably out of the realm of possibility unless you have other income coming in.

          Setting your bonus aside to pay it on a loan throughout the year seems like a waste to me.  You can't invest it aggressively, so at best you're looking at 1% return and during that time you are still paying 4% on the loan.  If you lump sum I'd think you'd come out a little bit ahead depending on the interest rate difference between terms.  (sofi rates)

          So I'd say either lump sum knock down the loan or invest it aggressively and take longer to pay off the loan...don't take the middle road.


          • #6
            WCICON24 EarlyBird
            This is great advice. A refi on a 10-20 year term is still going to reduce the interest, but at a more affordable monthly rate. I can then still try to get them paid off in 3-5 years with aggressive lump sums.

            I will have to see what rates I can get. Thanks everyone for the tips.