Student loan & retirement strategy

[legobikes]

Hello folks, I found this website through the student doctor forums and I've been reading several articles a day for the past week. I wish I had come across WCI a lot sooner, because I have never had anyone knowledgeable to go to for financial advice and for years I have ignored everything having to do with long-term finances, but I'm optimistic that my situation is quite salvageable.

The quick version is that I'm a pediatrician in my 2nd year out of residency, working at a 501c3 with 375k of debt on IBR at 6.8% (with Fedloans) and only about 2 years of payments under my belt. My wife and I are reasonably frugal and we live on roughly the same amount of money that we needed in residency, which is about 3k/month. We have a baby. I make $200k with the usual ~4% increase/year. We have ~60k saved up.

I have family who would be willing to lend me ~100k. The plan is to take that money, and 50k of our own savings, pay down the debt to 225k, refinance, and pay it off in 5 years. Unfortunately I do not live near a First Republic branch because they have a very attractive offer of 2.35%; I am only getting rates of about 4% fixed although my credit is excellent.

I would end up paying 150k up front + 250k for the refinanced loan including interest, for a total of 400k. This is in comparison to dragging the loan out for an additional 23 years on IBR and paying more than 700k (plus the 'tax bomb' at the end).

My question is if this is the best plan, or are there any tweaks to this plan? I want to get rid of this albatross, but at the same time there is the nagging question of whether PSLF will remain (Fedloans has verified my payments) and whether even IBR long-term would be better if I can then turn around and dump far more money into retirement accounts.

If I am paying 48k/year for my loans and 36k/year are my expenses, then I still have roughly 36k/year that I can take out pre-tax. I have never put in money for retirement before. My workplace offers a 403b and 457 that has to go through a financial advisor at Edward Jones. I am going to meet with him to find out what exactly are the options with regards to these accounts. Are these the next best place to put in money?

[Frenchy1011]

Is there a reason why you aren't planning on doing PSLF? It seems that you are in the perfect situation for it (High loan burden and relatively low paying specialty). You are already in a 501(c)3 corporation. Any changes to PSLF will be for future loans and from what it appears, even if they do away with the program you will be grandfathered in. In my opinion, I would not take out that family loan, I would not refinance. I would continue under paying the minimum on your loans via PAYE and keep working for the 501 corporation for another 8 years. You can come out wayyyyy ahead when they forgive that amount, and I don't really see them cancelling the program without grandfathering people in.

 

Then try to fill up the 403b, 457, and Roth IRA, along with Spousal Roth IRA if you can. Maxing those accounts out gets you to $47,000 contribution yearly before any company match (if they do that). Any extra would go to HSA (If you have HDHP) or taxable account.

 

I am in almost the exact same position (FM doc, 1 year out of residency, $175K yearly, with $325K of loans), and that's exactly what I'm doing.

[ITEngineer]

You still need to pay back the ~$100k personal loan so you are only putting $50k of your own money towards it. What interest rate is the personal loan being offered at? The IRS will not let it be 0%. It may be wiser to just refi your existing loans @ 4% and not complicate your life with a loan from family. The reduction in interest from 6.8% to 4% will immediately save you $10k/year which helps get your debt snowball moving much faster.

Is the interest deductible on your taxes? I'm guessing it's not so I would put enough money in retirement for your company match (if there is one) and probably not put anymore towards retirement unless it got me out of the 33% tax bracket and into the 28% bracket.  Put most of your leftover money towards the student loan debt (and you probably want an emergency fund so maybe only put $30k towards the loans?)

Am I missing something on the income/expenses side?

Income $200k - $48k (Loans) - $36k (expenses....impressive!) = $116k - (unknown tax bill) - (retirement savings) = Lots of free cash left over for debt!

If I take some guesses on your tax bill ($30k) and 403b savings (10% or $20k) I get $66k left over. $66k + $48k = $114k each year to service the debt!

Is it possible you could put $100k a year towards this debt and be done in 4 years or less? Imagine the freedom you would have then....You wouldn't even have to pull from your existing savings (or could use it to get done in 3 years)

[legobikes]

Frenchy101: Are you so sure that changes to PSLF will not be applied retroactively?

 

ITEngineer:

If my family directly throws 100k at my fedloan account, how does this pop up on the IRS's radar? (Serious question, I don't know how that works.)

I suppose I was using the actual amount of post-tax money I see monthly (around 10.5k) and our actual monthly expenses (3k) to do the yearly calculations. Which I realize is not accurate because at least the retirement savings would be pre-tax, but the loan payments and regular expenses would be, which is why I thought it would give me a bit of fudge factor.

I do not have a company match as far as I can tell. They have some sort of benefits account that gives us 3% towards retirement. The 25% tax bracket for married filing jointly is <153k: 36k towards 403b/457 would not hit that, and actually I just got a 4% raise applied retroactively to the beginning of this year and the new salary is 208k. (Also I have to find out if our 457 is governmental or non-governmental). I do not yet understand what are my options regarding other TSAs.

[Frenchy1011]

legobikes wrote:

Are you so sure that changes to PSLF will not be applied retroactively?

Click to expand...

Trump's proposal specifically stated that it would apply to loans being borrowed after July 1, 2018. So as of right now, yes. But obviously, nothing is 100%.

[ITEngineer]

Frenchy1011 wrote:

Is there a reason why you aren’t planning on doing PSLF? It seems that you are in the perfect situation for it (High loan burden and relatively low paying specialty). You are already in a 501(c)3 corporation. Any changes to PSLF will be for future loans and from what it appears, even if they do away with the program you will be grandfathered in. In my opinion, I would not take out that family loan, I would not refinance. I would continue under paying the minimum on your loans via PAYE and keep working for the 501 corporation for another 8 years. You can come out wayyyyy ahead when they forgive that amount, and I don’t really see them cancelling the program without grandfathering people in.

Click to expand...

See...this is what happens when an IT guy tries to help a Dr. It shows you how little I know about your world and your options.

If you qualify for PSLF - I might consider running down that route instead and start maxing out your 403b now. Though as I do my 'back of the napkin' calculations $48k * 8 years = $384k paid in total. If he paid off the loans in 3-4 years he would pay ~$400k. We're not talking about a huge price difference here and he gets the 'freedom' to do whatever he wants sooner (I have no idea if he would want to change jobs, move cities, etc). There would be other benefits like a potentially larger retirement account as he can start maxing them out sooner (immediately) lowering his federal tax bill in the process.

What else am I missing?

BTW - I would be very cautious when meeting with Edward Jones. Please meet with them and do another post on what investment options they want for you and let us throw in our $0.02.

[legobikes]

ITEngineer wrote:

What else am I missing?

BTW – I would be very cautious when meeting with Edward Jones. Please meet with them and do another post on what investment options they want for you and let us throw in our $0.02.

Click to expand...

Haha, actually my yearly payments on IBR are currently ~20k/year. Once I start putting money towards retirement it will be even less. So I would be out <200k in 8 years time vs 400k now. But in that time the loan would continue to balloon at 6.8%, and if PSLF falls through, then one dead albatross becomes three hanging around my neck, and I have to pay >700k at the end of 25 years of IBR.

And thank you, yes I read very dismissive comments about Edward Jones so I plan to do precisely that; just get information and not commit to anything until you guys and my reading helps me to understand it thoroughly.

[ITEngineer]

legobikes wrote:

ITEngineer:

If my family directly throws 100k at my fedloan account, how does this pop up on the IRS’s radar? (Serious question, I don’t know how that works.)

Click to expand...

Here is a basic intro into family loans. If you are moving $100k around legally the IRS will know about it and if you get audited you won't have a leg to stand on. At least write up some basic loan papers and charge the minimal interest rate. You do not want to run afoul of gift tax rules! Those tax rates approach 50%.

I just realized you have 'Lego' in your userid! I'm a huge Lego fan. Maybe it doesn't stand for Lego but for something else.....(more Dr acronyms I don't know?)

[ITEngineer]

Haha, actually my yearly payments on IBR are currently ~20k/year. Once I start putting money towards retirement it will be even less. So I would be out <200k in 8 years time vs 400k now. But in that time the loan would continue to balloon at 6.8%, and if PSLF falls through, then one dead albatross becomes three hanging around my neck, and I have to pay >700k at the end of 25 years of IBR.

Click to expand...

Click to expand...

Given that you only have to pay $20k/year and once you start contributing to retirement that payment drops even more the question I now start asking is:

1. Do I really want to stay at this job for another 8 years?

2. Can I get (or do I want) a higher paying job? I'd hate for you to turn down a $400k job b/c you are 7 years into PSLF.

Paying $160k to get rid of a $375k debt......it's worth a role of the dice. It would be difficult (but not impossible) to make PSLF end retroactively. If you are that worried, save extra in case that day comes.

Obama proposed ending 529's and capping Roth IRA limits. Neither got far and both were really good ideas.

[DMFA]

If you are actually on the hook for it, i.e. aren't doing PSLF, then every day at 6.8% interest on that exorbitant sum is money wasted. At $375,000, that's $70 every day. One hour of work is spent just covering interest on what you've borrowed before you even start covering principal.

Why only two years of payments? Did you forbear in residency? That would have added thousands onto what you owe...and that's 3 years that could have counted towards PSLF. Oh well. Here we are, now, I guess...

You need to minimize your losses to interest, like, yesterday. You need to reduce the principal - make a big payment out of a portion of that emergency fund, because this debt is your emergency - and refinance that to the lowest interest rate and shortest term on which you can afford making payments.

If you can commit to paying off the debt in five years, or even faster, then you should *consider* a variable rate. Interest hurts the most when principal is highest (the beginning), and interest rate risk is less with a shorter term. SoFi's 5-yr are 3.375% fixed or 2.575% variable. Even if the rate ends up higher than the initial fixed would be by the time you finish payments, which is unlikely, it's having been lowest in the beginning would likely have saved you payments over the life of the loan. That does create risk, so that's a personal decision.

IBR forgiveness is horrible. Don't even consider it. You're better off with a 10 or 15-year fixed.

With debt that high, and this sounds crazy coming from me because with appropriately-managed debts I almost always recommend the opposite, but you should probably focus on eliminating those massive loans before retirement investing.

So you have 48+36 = $84k to deal with? Wow. That gives some flexibility.

Say you were to do a five-year fixed at 3.375% and you put $40,000 down from your current cash. That would be a monthly payment of $6,075 ($72,906 annually). You'd pay a total of $29,529.98 of interest over those five years, 8.81% of the initial principal, an annualized 1.70% loss. Not bad. That gives you an additional $11,094 to divvy up between the rest of the year, just over $900/month on top of current expenses.

Now run the 7-year fixed at 4%, same amount down (debt prin $335,000). $4,579.05 monthly, $54,948.60 annually. You pay $49,640.21 of interest over seven years, 14.82% of initial principal, 1.99% annualized loss.

However, you'd have $29,051.40 left over each year, which comes out to maxing a 403(b) at $18,000 and two IRAs ($5,500 each), and is also more tax-efficient with the tax break from the 403(b) contribution. Investing that amount ($2,416.67/mo dollar-cost avg) over that time period (84 mo) assuming conservative 6% rate of gain is $252,770 in retirement accounts, $49,770 gain on $203,000 prin...

Both of the above involve no family loans and keeping expenses at $3,000/month. There are obviously far more options than that.

Bottom lines:
- minimize amount lost to debt
- compound gains are usually superior to simple amortized loss, but again, invites risk
- Allow some cushion for unforseen expenses or for enjoying life (take a vacation every now and then)
- ...can you, or do you want to, make more money?

[DMFA]

Oh, and if you don't *have* to pay it back, and can do smaller payments like RePAYE or PAYE (RePAYE esp if spouse doesn't earn), then try PSLF.

Given $182,000 AGI (if you max 403(b)) and family of 3 (poverty level $20,420), your RePAYE would be $1,261.42 and IBR would be $1,892.13. Again, if you're not paying the loan back (PSLF), then you need to minimize what you pay back.

[legobikes]

DMFA wrote:

e $29,051.40 left over each year, which comes out to maxing a 403(b) at $18,000 and two IRAs ($5,500 each), and is also more tax-efficient with the tax break from the 403(b) contribution. Investing that amount ($2,416.67/mo dollar-cost avg) over that time period (84 mo) assuming conservative 6% rate of gain is $252,770 in retirement accounts, $49,770 gain on $203,000 prin… Both of the above involve no

Click to expand...

So can we just say that 5 year (possibly variable or fixed) may be my best option, with everything that does not go into pretax annuity going to the loan? I don't know if anyone can make more of a case for PSLF in my situation.

Time is far more valuable to me than money, but by that I do not mean deferred retirement time; therefore I am perfectly happy at my current 35h/week job without any other obligations, so I can spend time with my family and other favorite pasttimes (reading, hiking, and perhaps in the future, homeschooling the kid). I am not very interested in pursuing increased income, as far as that goes, if what I currently make will still give me a 5 year escape plan. I mean, 4.1k/month fixed over 5 years does not seem like such a bitter pill to swallow given my past stupidity in terms of loan management (I did indeed defer a year). And I would STILL be able to maximize a 403 and 457. And have a little money left over.

What is the minimum interest that I would be charged for receiving a 100k loan from family? As you said, hitting that principal is very important, that's why I wanted to start with 150k right off the bat.

ITEngineer: I have a massive amount of legos from my childhood, really an engineer at heart. Optimizing processes is my favorite thing.

[DMFA]

Idk anything about family loans, but I don't like mixing family/friends with money matters (just personally). But obv they're likely to give to a better deal. Idk what they need to do to demonstrate that it's a) not a gift and b) complies with whatever rules the gov't wants. If they charge you like 2% or something ridiculous, then sure, obv that's superior to what you'd get from a lender.

[Frenchy1011]

I still think PSLF is the way to go in your situation, especially if you've made 2 years of payments, have that amount of debt, plan on staying at your job. Your PAYE payment will be relatively low, and you can use extra money for retirement, etc. For me, the money that I would save in forgiveness more than beats the anxiety/fear of the program going away without grandfathering. That being said, I was able to get 3 years of residency payments for essentially $200 monthly under my belt for PSLF, and am making a low salary compared to my loans. So with my wife (who doesn't work), and two children, my PAYE will continue to be low so I can contribute a larger amount to retirement savings, and will have a large amount forgiven. I am trusting that the government will grandfather us in.

 

Although trusting the government may be the thoughts of a doomed man ...

[legobikes]

DMFA wrote:

Idk anything about family loans, but I don’t like mixing family/friends with money matters (just personally). But obv they’re likely to give to a better deal. Idk what they need to do to demonstrate that it’s a) not a gift and b) complies with whatever rules the gov’t wants. If they charge you like 2% or something ridiculous, then sure, obv that’s superior to what you’d get from a lender.

Click to expand...

Current AFR for mid-term loans (up to 9 year term) is 2.04%. They would have to report that income (roughly 2k/yr) on their taxes. Doesn't sound so bad.