Pay down student loans vs taxable account investing for student loan repayment

[DMFA]

TotallyBroke wrote:

DMFA wrote:

You’re EM. Why should it take you longer than 5 years to pay $430,000 in loans?

EM makes about $300k at least, right? 5-year fixed at 3.375% through SoFi would be $93,580/year, and assuming you’re tax-efficient (maxing pretax retirement) leave you with about $10,000/month after tax and loans to live off.

That being said, purely from a mathematical perspective, student loans are simple amortizing debts; the only “gain” you get from paying them early is avoidance of finance charges.

$430k at 4.4% over 10 years, assuming a normal amortization schedule, would cost you at most $102,290 over that span, or 23.8% of the principal, which annualized over 10 years (1.238 ^ [1/10]) would be 2.16%. So any money that you would invest as opposed to paying your loan would have to beat that number. A shoot-from-the-hip estimate of what it would take in compounding gains to beat the loss in finance charges of a simple amortizing debt is *half* the debt’s interest rate, because the principal which bears interest is getting smaller at a near-linear rate. It grinds my gears when people say an X% simple amortizing debt is a “guaranteed X% gain.” That’s bad math.

…back to a 2.16% compound gain…not a lot, is it? Seems like a no-brainer to let the loans go, right? I wouldn’t jump to that. That assumes that every dollar you’re not putting into your loans is going into an investment account that *will* beat it. Yes, it’s likely to beat the low 2s, but if your loans are being left to linger, are you *really* going to use every single dollar to invest? That complacency leads a lot of debtors to take their eye off the ball and end up spending money otherwise, including on depreciating and consumable expenses like cars, while still being in the hook for the interest, defeating the leverage argument. This is why Dave Ramsey, as often as he is wrong about several mathematical concepts, is relevant: the mindset around the ubiquity of debt is one of the hardest things to overcome.

And even aside from debtor psychology, having very large debt is a financial problem that goes beyond simple net worth calculation. You have to take into account more than just what’s going to result in the highest percent gain over time. Do you want a mortgage? What about a business loan? Maybe a car? (blasphemy, lol) Having debt in the hundreds of thousands is a big obstacle to those, even if you’ve got a big brokerage account. It also doesn’t account for the risk of losing income while in debt, in which case you can really get screwed, especially if you’re not properly insured…

So yes, if you are truly using leverage and investing every dollar which could otherwise go to eliminating debt, and only focused on overall net worth, then your mathematical argument is correct. There are other factors that cause that to be a suboptimal idea, though, which is why most veterans of a financial board like this one would caution you against letting large debts linger.

Click to expand…

Thank you and thanks to everyone for your thoughts on this so far.  I really do appreciate it a lot!

A little more background: Married with 3 kids (10, 8, 5).  We bought a house right after fellowship (before I started learning about finance).  I actually only started my educated financial journey 6-7 months ago after I realized I was getting ripped off by a whole life insurance policy.  I’m squeezing our fixed monthly costs as much as I can now but I don’t think I can push the wife any further.

Part of my current problem is my employment.  I’m half way through 2 years to partnership that is a sweat equity buy in.  Income right now is good, but not close to what is quoted above for EM.  I know income will increase, and I have a general idea, but not great projections on that yet.  At my current income and situation, I’m not sure I could get rid of all loans in less than 7-8 yrs.  I certainly hope that will change when I become partner.

Anyway, I have our family on a specific budget that is below my take home every month.  Everything above that level goes towards student loans.  The taxable account, in my mind and my wife’s mind, is an extension of student loans.  I consider that money spent towards student loans.  If the total is getting close to payoff amounts and the market crashes, I’ll just keep making minimums and continue putting all excess cash into the taxable (buying low).  I can hold off until the market recovers and the balance in taxable account has recovered enough to pay them off.

I realize it is not without risk.  Of the last 5 years I’ve had (small) retirement accounts, 3 of them were negative years for me.  But, here 5 years later, they annualize to about 8% pre-inflation (which has averaged 1.4% over the same period).  6-7 months ago, I changed my investment strategy (thank you for the posts WCI which REALLY helped!).  My thinking is that if I do a more aggressive fund to pay off student loans, it doesn’t matter much to me about the volatility because I can afford to wait for a Bull market.

Again, I really appreciate the discourse so far in this thread!

Click to expand...

I do not think there is a universally *right* answer, and any agreement/disagreement based on your ultimate choice is simply a matter of opinion.  All I really want is for people to ensure their opinions are based on the appropriate concepts.

You will find out that, quite often, the answer which produces the greatest mathematical net worth may not be the optimal answer for your and your family's lives from a holistic perspective.

So as long as you understand the nuts and bolts and how they fit vis-a-vis your individual and family situation, no one gets to tell you you're unequivocally wrong.

[TotallyBroke]

DMFA wrote:

You’re EM. Why should it take you longer than 5 years to pay $430,000 in loans?

EM makes about $300k at least, right? 5-year fixed at 3.375% through SoFi would be $93,580/year, and assuming you’re tax-efficient (maxing pretax retirement) leave you with about $10,000/month after tax and loans to live off.

That being said, purely from a mathematical perspective, student loans are simple amortizing debts; the only “gain” you get from paying them early is avoidance of finance charges.

$430k at 4.4% over 10 years, assuming a normal amortization schedule, would cost you at most $102,290 over that span, or 23.8% of the principal, which annualized over 10 years (1.238 ^ [1/10]) would be 2.16%. So any money that you would invest as opposed to paying your loan would have to beat that number. A shoot-from-the-hip estimate of what it would take in compounding gains to beat the loss in finance charges of a simple amortizing debt is *half* the debt’s interest rate, because the principal which bears interest is getting smaller at a near-linear rate. It grinds my gears when people say an X% simple amortizing debt is a “guaranteed X% gain.” That’s bad math.

…back to a 2.16% compound gain…not a lot, is it? Seems like a no-brainer to let the loans go, right? I wouldn’t jump to that. That assumes that every dollar you’re not putting into your loans is going into an investment account that *will* beat it. Yes, it’s likely to beat the low 2s, but if your loans are being left to linger, are you *really* going to use every single dollar to invest? That complacency leads a lot of debtors to take their eye off the ball and end up spending money otherwise, including on depreciating and consumable expenses like cars, while still being in the hook for the interest, defeating the leverage argument. This is why Dave Ramsey, as often as he is wrong about several mathematical concepts, is relevant: the mindset around the ubiquity of debt is one of the hardest things to overcome.

And even aside from debtor psychology, having very large debt is a financial problem that goes beyond simple net worth calculation. You have to take into account more than just what’s going to result in the highest percent gain over time. Do you want a mortgage? What about a business loan? Maybe a car? (blasphemy, lol) Having debt in the hundreds of thousands is a big obstacle to those, even if you’ve got a big brokerage account. It also doesn’t account for the risk of losing income while in debt, in which case you can really get screwed, especially if you’re not properly insured…

So yes, if you are truly using leverage and investing every dollar which could otherwise go to eliminating debt, and only focused on overall net worth, then your mathematical argument is correct. There are other factors that cause that to be a suboptimal idea, though, which is why most veterans of a financial board like this one would caution you against letting large debts linger.

Click to expand...

Thank you and thanks to everyone for your thoughts on this so far.  I really do appreciate it a lot!

A little more background: Married with 3 kids (10, 8, 5).  We bought a house right after fellowship (before I started learning about finance).  I actually only started my educated financial journey 6-7 months ago after I realized I was getting ripped off by a whole life insurance policy.  I'm squeezing our fixed monthly costs as much as I can now but I don't think I can push the wife any further.

Part of my current problem is my employment.  I'm half way through 2 years to partnership that is a sweat equity buy in.  Income right now is good, but not close to what is quoted above for EM.  I know income will increase, and I have a general idea, but not great projections on that yet.  At my current income and situation, I'm not sure I could get rid of all loans in less than 7-8 yrs.  I certainly hope that will change when I become partner.

Anyway, I have our family on a specific budget that is below my take home every month.  Everything above that level goes towards student loans.  The taxable account, in my mind and my wife's mind, is an extension of student loans.  I consider that money spent towards student loans.  If the total is getting close to payoff amounts and the market crashes, I'll just keep making minimums and continue putting all excess cash into the taxable (buying low).  I can hold off until the market recovers and the balance in taxable account has recovered enough to pay them off.

I realize it is not without risk.  Of the last 5 years I've had (small) retirement accounts, 3 of them were negative years for me.  But, here 5 years later, they annualize to about 8% pre-inflation (which has averaged 1.4% over the same period).  6-7 months ago, I changed my investment strategy (thank you for the posts WCI which REALLY helped!).  My thinking is that if I do a more aggressive fund to pay off student loans, it doesn't matter much to me about the volatility because I can afford to wait for a Bull market.

Again, I really appreciate the discourse so far in this thread!

[Zaphod]

hightower wrote:

Zaphod wrote:

Here is a slide from a presentation I gave once. It regards the paths your dollar can take to illustrate the above points.

 

Click to expand…

Thanks, I see what you’re saying.  Putting 100k away asap and having it grow for the next 20-30 years will likely far outweigh the 100k in interest he’ll pay on the life of the student loans.  Right?  Simple enough.  You’re right that I confused simple and compound interest.  Thx

FCP wrote:

hightower wrote:

FCP wrote:

DMFA wrote:

FCP wrote:

I have 301k in loans (I paid about 50k of this during residency), and am graduating fellowship in a few weeks.  Starting next mo, I will be investing 35k/mo in taxable and 5k/mo in tax deferred accounts, and continuing to pay 5.4k/mo on my loans (5 yr repayment plan).  So, I am doing something similar to what you propose, but not to quite the extent you are envisioning.

Click to expand…

You mean to tell me you’re investing $420,000 of after-tax dollars every year, while putting another $65,000 of after-tax dollars to loans? Half a million after-tax dollars not dedicated to living, right out of fellowship?

…I went into the wrong field.

Click to expand…

If I told you I was a psychiatrist, would that boggle your mind further?  Because I am.  lol.

 

 

Click to expand…

Ok, you need to do a post explaining your situation because yes you have boggled all of our minds with your numbers and specialty

Click to expand…

1. Locum tenens job starting in July: M-F for 6-8 hrs a day, 1 wknd a month.  I negotiated for it to last 1 year and for payment to hit 40k+/mo, rental car/house all taken care of by locums agency, and the house I am going to live at will be 5 min from my parents house, so I will just eat there.

2. High volume inpt coverage for docs that don’t want to work on weekends, plus an outpt practice that I’ve built up over 7 mo that is located within the hospital, so minimal time lost for travel between hospital/clinic: 10-15k/wknd.

Should make over 7 figures first year out of fellowship, with very minimal expenses.  Though, I will be working hard, 7 days a week, with no vacation other than a 2 week international one coming up.

I anticipate hitting a 1 mill net worth by age 32.  If everything works out (and I don’t get a hit by a truck 3 mo from now), I plan on writing a book on how I went from 300k+ in high interest debt as a med school grad, to millionaire 6 yrs later.

Click to expand…

That’s pretty incredible!  Sounds like a killer plan.  Good luck and remember to have some fun while you’re working too

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Exactly. That 100K in fees wont even be worth 100k as you keep paying it down with less and less valuable dollars, 50% discount (2% inflation) in cost after 30 years (though longer than most loans obviously). Otoh, money that was put instead into the market will with near certainty have increased your real return/purchasing power quite handsomely. I do not recall exactly but beleive the worst rolling 30 year return is 850% or 8.5x the initial invested amount. Also, lets remember OP will never avoid all the interest, just a portion of it even if he knocks it out in 2 yrs, and its likewise not a lump sum investment. That further lessens the hurdle.

Thats how I look at things (though on a rolling 20 year myself), do I pay down maniacally to prevent the atrocity of getting an 20-50% discount in the future on that same payment if I wait, or throw it into the market and risk growing my money at likely worst 2.5x @ 3% but more likely 8-10 times, 800-1000%.

For someone young in their career and nest egg age, its really important to get saving while your dollars are their most valuable. This argument makes less sense when you have less time to compound naturally.

If you sleep soundly at night knowing full well you're burning up cash to slay one side of the net worth equation at an opportunity cost of 900+%, well more power to you because that kind of thing keeps me up at night. This is where your "risk" is. The risk is you paid very valuable dollars to avoid the chance the gods of inflation forgive 50% of your bill, while you miss out on real market returns that can never be recouped.

And to all the, "well how much would you take at x rate?" types...I would take A LOT at a sub 3% interest rate with good terms (like 30 years, etc...). However, I have not come across anyone willing to fund such an endeavor. A lot means likely whatever nest egg goal I have for retirement, and then I'd never put money into retirement again, essentially front loading it which again makes mathematical sense as well but isnt practical in reality (because no one offers it for obvious reasons).

[hightower]

DMFA wrote:

You’re EM. Why should it take you longer than 5 years to pay $430,000 in loans?

EM makes about $300k at least, right? 5-year fixed at 3.375% through SoFi would be $93,580/year, and assuming you’re tax-efficient (maxing pretax retirement) leave you with about $10,000/month after tax and loans to live off.

That being said, purely from a mathematical perspective, student loans are simple amortizing debts; the only “gain” you get from paying them early is avoidance of finance charges.

$430k at 4.4% over 10 years, assuming a normal amortization schedule, would cost you at most $102,290 over that span, or 23.8% of the principal, which annualized over 10 years (1.238 ^ [1/10]) would be 2.16%. So any money that you would invest as opposed to paying your loan would have to beat that number. A shoot-from-the-hip estimate of what it would take in compounding gains to beat the loss in finance charges of a simple amortizing debt is *half* the debt’s interest rate, because the principal which bears interest is getting smaller at a near-linear rate. It grinds my gears when people say an X% simple amortizing debt is a “guaranteed X% gain.” That’s bad math.

…back to a 2.16% compound gain…not a lot, is it? Seems like a no-brainer to let the loans go, right? I wouldn’t jump to that. That assumes that every dollar you’re not putting into your loans is going into an investment account that *will* beat it. Yes, it’s likely to beat the low 2s, but if your loans are being left to linger, are you *really* going to use every single dollar to invest? That complacency leads a lot of debtors to take their eye off the ball and end up spending money otherwise, including on depreciating and consumable expenses like cars, while still being in the hook for the interest, defeating the leverage argument. This is why Dave Ramsey, as often as he is wrong about several mathematical concepts, is relevant: the mindset around the ubiquity of debt is one of the hardest things to overcome.

And even aside from debtor psychology, having very large debt is a financial problem that goes beyond simple net worth calculation. You have to take into account more than just what’s going to result in the highest percent gain over time. Do you want a mortgage? What about a business loan? Maybe a car? (blasphemy, lol) Having debt in the hundreds of thousands is a big obstacle to those, even if you’ve got a big brokerage account. It also doesn’t account for the risk of losing income while in debt, in which case you can really get screwed, especially if you’re not properly insured…

So yes, if you are truly using leverage and investing every dollar which could otherwise go to eliminating debt, and only focused on overall net worth, then your mathematical argument is correct. There are other factors that cause that to be a suboptimal idea, though, which is why most veterans of a financial board like this one would caution you against letting large debts linger.

Click to expand...

Thx, I missed this post the first time around.  Thanks to Zaphod for pointing it out to me.  I have to admit I wasn't thinking of the concepts of simple interest and compounding gains.  Makes sense now.

[hightower]

Zaphod wrote:

Here is a slide from a presentation I gave once. It regards the paths your dollar can take to illustrate the above points.

 

Click to expand...

Thanks, I see what you're saying.  Putting 100k away asap and having it grow for the next 20-30 years will likely far outweigh the 100k in interest he'll pay on the life of the student loans.  Right?  Simple enough.  You're right that I confused simple and compound interest.  Thx

FCP wrote:

hightower wrote:

FCP wrote:

DMFA wrote:

FCP wrote:

I have 301k in loans (I paid about 50k of this during residency), and am graduating fellowship in a few weeks.  Starting next mo, I will be investing 35k/mo in taxable and 5k/mo in tax deferred accounts, and continuing to pay 5.4k/mo on my loans (5 yr repayment plan).  So, I am doing something similar to what you propose, but not to quite the extent you are envisioning.

Click to expand…

You mean to tell me you’re investing $420,000 of after-tax dollars every year, while putting another $65,000 of after-tax dollars to loans? Half a million after-tax dollars not dedicated to living, right out of fellowship?

…I went into the wrong field.

Click to expand…

If I told you I was a psychiatrist, would that boggle your mind further?  Because I am.  lol.

 

 

Click to expand…

Ok, you need to do a post explaining your situation because yes you have boggled all of our minds with your numbers and specialty

Click to expand…

1. Locum tenens job starting in July: M-F for 6-8 hrs a day, 1 wknd a month.  I negotiated for it to last 1 year and for payment to hit 40k+/mo, rental car/house all taken care of by locums agency, and the house I am going to live at will be 5 min from my parents house, so I will just eat there.

2. High volume inpt coverage for docs that don’t want to work on weekends, plus an outpt practice that I’ve built up over 7 mo that is located within the hospital, so minimal time lost for travel between hospital/clinic: 10-15k/wknd.

Should make over 7 figures first year out of fellowship, with very minimal expenses.  Though, I will be working hard, 7 days a week, with no vacation other than a 2 week international one coming up.

I anticipate hitting a 1 mill net worth by age 32.  If everything works out (and I don’t get a hit by a truck 3 mo from now), I plan on writing a book on how I went from 300k+ in high interest debt as a med school grad, to millionaire 6 yrs later.

Click to expand...

That's pretty incredible!  Sounds like a killer plan.  Good luck and remember to have some fun while you're working too

[Zaphod]

Here is a slide from a presentation I gave once. It regards the paths your dollar can take to illustrate the above points.

 

[Zaphod]

hightower wrote:

Zaphod wrote:

hightower wrote:

FCP wrote:

I have 301k in loans (I paid about 50k of this during residency), and am graduating fellowship in a few weeks.  Starting next mo, I will be investing 35k/mo in taxable and 5k/mo in tax deferred accounts, and continuing to pay 5.4k/mo on my loans (5 yr repayment plan).  So, I am doing something similar to what you propose, but not to quite the extent you are envisioning.

I have many good reasons for why I am doing things this way:

 

1. It is my understanding that loans are forgiven upon death or disability; so if you spend 1 yr diverting all your income to pay them off, and get disabled/die, then you’ll have zero in the bank/investments to give to yourself/heirs if you paid them off.

2. Historically, investing in the S&P500 will provide greater returns than what the interest rate on your loan is; so if that remains consistent in the future, then you will end up better off.

3. I like the freedom that hundreds of thousands in cash/investments provides.

 

Summary:  As long as you plan to pay off your loans in 5 years or less, and as long as you continue to live like a resident until you pay off your loans, use as much excess cash as you want toward your taxable account.  Stretching the loans further than 5 years isn’t worth it to me; but you may win out on such a plan; it’s a small gamble.

Click to expand…

With the kind of money you’ll be making/saving, these are probably moot points, but…

1. That’s what life insurance/disability insurance is for

2. Yes, you are correct, but over 20-30 years or more and there would be a LOT of volatility during that time span.  The OP was talking about paying off his student loans that were probably on a 5-10 year repayment plan.  It’s less likely to beat 4.4% guaranteed in a short time span.  Plus, the likelihood of volatility hitting at the exact moment that you need the money is high.  That’s why if you’re going to invest, its best to buy and hold for the long haul

3. Of course, everyone likes the freedom of being wealthy

Click to expand…

I dont get why you have to “beat” them on the same time frame? Makes no sense.

If you’re not retiring at that time or otherwise drawing them down then it doesnt matter. The loan is still gone and the extra payments are still in the market and compounding for years and decades to come. This is exactly the reason the differential is so powerful. The disparate terms, types of interest and inflation are so solidly in your favor.

Click to expand…

 

I see what you’re arguing.  That if he just leaves the extra payments in the market long enough they will eventually return handsomely in his favor (assuming the market behaves as it has in the past).  Fair enough.  I guess we could calculate out a lot of different scenarios.  But no matter what, for his plan to make sense he would eventually have to beat 4.4%.

The only thing that is certain is that he owes $430k right now.  If he stretches those payments out, that figure would actually be closer to $530k or more.  If he pays that off sooner it is guaranteed that he will pay less than $530k total. If he invests his extra money instead of paying the loans off sooner, there is no guarantee he’ll get any return at all on that money or it may end up being less of a return than the 4.4% even after a very long time.  I guess my point was that the shorter the time span you look at the less like it is to be better than 4.4% because of the inherent risk of volatility in the market, especially in an aggressive fund like a small value or emerging markets.  Yes over time it could theoretically still perform better than 4.4%, but again, that’s not a guarantee.

We could calculate out a million different scenarios.  The one I would worry about though is that his investments perform poorly and he ends up profiting a lot less or actually losing some of his hard earned cash.  It’s likely a pretty low probability that it would happen that way, but it still could happen.  And as much as I agree that a physician’s job is pretty darn stable in comparison to the rest of the population, it’s still not 100% stable nor is the pay we receive for what we do.  Maybe this is a glass 1/2 empty vs 1/2 full debate?  I’m definitely more a pessimist and the pessimist in me says pay off the loans asap.

 

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Did you miss DMFA's post (or the 3 million of mine railing against comparing simple vs. compound interest)? He doesnt even have to come close to 4.4%. The cost of the loan is all he ever has to beat which is a nominal known amount. It will likely at some point over their career beat that whole amount in a single year (same for loss), cumulatively it will be much better. In your example the difference was 100k for example. The principal doesnt matter whatsoever, all of that has to be paid back regardless. The amount of that 100k avoided is all that matters for the comparison.

We dont need a million different scenarios, just the couple most probable. That is that the market will continue a volatile but eventual trudge higher, and inflation will be a positive nonzero number (this is actually the weakest proposition). As long as thats true, it makes sense. Doesn't mean it works out, but it certainly makes sense.

The time value of money is one of the most important concepts in all of finance, yet so many are unaware of it. Like sunk costs, etc....everyone should look it up and then integrate into how they assess propositions. You do not have to change your choices of course, thats your business. However, until there is evidence people understand these things I'll always just take the other side for educational purposes.

For example, the  "needs 4.4% to make worthwhile" and "gain", etc...comments made by people show a lack of understanding whats going on. So until everyone just gets it, DMFA and I will keep playing devils advocate until it isnt necessary anymore.

Again, doesnt mean one shouldnt just crush their loans, but it should be done with a true appraisal of the situation and what one is really charging themselves in opportunity costs.

[FCP]

hightower wrote:

FCP wrote:

DMFA wrote:

FCP wrote:

I have 301k in loans (I paid about 50k of this during residency), and am graduating fellowship in a few weeks.  Starting next mo, I will be investing 35k/mo in taxable and 5k/mo in tax deferred accounts, and continuing to pay 5.4k/mo on my loans (5 yr repayment plan).  So, I am doing something similar to what you propose, but not to quite the extent you are envisioning.

Click to expand…

You mean to tell me you’re investing $420,000 of after-tax dollars every year, while putting another $65,000 of after-tax dollars to loans? Half a million after-tax dollars not dedicated to living, right out of fellowship?

…I went into the wrong field.

Click to expand…

If I told you I was a psychiatrist, would that boggle your mind further?  Because I am.  lol.

 

 

Click to expand…

Ok, you need to do a post explaining your situation because yes you have boggled all of our minds with your numbers and specialty

Click to expand...

1. Locum tenens job starting in July: M-F for 6-8 hrs a day, 1 wknd a month.  I negotiated for it to last 1 year and for payment to hit 40k+/mo, rental car/house all taken care of by locums agency, and the house I am going to live at will be 5 min from my parents house, so I will just eat there.

2. High volume inpt coverage for docs that don't want to work on weekends, plus an outpt practice that I've built up over 7 mo that is located within the hospital, so minimal time lost for travel between hospital/clinic: 10-15k/wknd.

Should make over 7 figures first year out of fellowship, with very minimal expenses.  Though, I will be working hard, 7 days a week, with no vacation other than a 2 week international one coming up.

I anticipate hitting a 1 mill net worth by age 32.  If everything works out (and I don't get a hit by a truck 3 mo from now), I plan on writing a book on how I went from 300k+ in high interest debt as a med school grad, to millionaire 6 yrs later.

[hightower]

Zaphod wrote:

hightower wrote:

FCP wrote:

I have 301k in loans (I paid about 50k of this during residency), and am graduating fellowship in a few weeks.  Starting next mo, I will be investing 35k/mo in taxable and 5k/mo in tax deferred accounts, and continuing to pay 5.4k/mo on my loans (5 yr repayment plan).  So, I am doing something similar to what you propose, but not to quite the extent you are envisioning.

I have many good reasons for why I am doing things this way:

 

1. It is my understanding that loans are forgiven upon death or disability; so if you spend 1 yr diverting all your income to pay them off, and get disabled/die, then you’ll have zero in the bank/investments to give to yourself/heirs if you paid them off.

2. Historically, investing in the S&P500 will provide greater returns than what the interest rate on your loan is; so if that remains consistent in the future, then you will end up better off.

3. I like the freedom that hundreds of thousands in cash/investments provides.

 

Summary:  As long as you plan to pay off your loans in 5 years or less, and as long as you continue to live like a resident until you pay off your loans, use as much excess cash as you want toward your taxable account.  Stretching the loans further than 5 years isn’t worth it to me; but you may win out on such a plan; it’s a small gamble.

Click to expand…

With the kind of money you’ll be making/saving, these are probably moot points, but…

1. That’s what life insurance/disability insurance is for

2. Yes, you are correct, but over 20-30 years or more and there would be a LOT of volatility during that time span.  The OP was talking about paying off his student loans that were probably on a 5-10 year repayment plan.  It’s less likely to beat 4.4% guaranteed in a short time span.  Plus, the likelihood of volatility hitting at the exact moment that you need the money is high.  That’s why if you’re going to invest, its best to buy and hold for the long haul

3. Of course, everyone likes the freedom of being wealthy

Click to expand…

I dont get why you have to “beat” them on the same time frame? Makes no sense.

If you’re not retiring at that time or otherwise drawing them down then it doesnt matter. The loan is still gone and the extra payments are still in the market and compounding for years and decades to come. This is exactly the reason the differential is so powerful. The disparate terms, types of interest and inflation are so solidly in your favor.

Click to expand...

 

I see what you're arguing.  That if he just leaves the extra payments in the market long enough they will eventually return handsomely in his favor (assuming the market behaves as it has in the past).  Fair enough.  I guess we could calculate out a lot of different scenarios.  But no matter what, for his plan to make sense he would eventually have to beat 4.4%.

The only thing that is certain is that he owes $430k right now.  If he stretches those payments out, that figure would actually be closer to $530k or more.  If he pays that off sooner it is guaranteed that he will pay less than $530k total. If he invests his extra money instead of paying the loans off sooner, there is no guarantee he'll get any return at all on that money or it may end up being less of a return than the 4.4% even after a very long time.  I guess my point was that the shorter the time span you look at the less like it is to be better than 4.4% because of the inherent risk of volatility in the market, especially in an aggressive fund like a small value or emerging markets.  Yes over time it could theoretically still perform better than 4.4%, but again, that's not a guarantee.

We could calculate out a million different scenarios.  The one I would worry about though is that his investments perform poorly and he ends up profiting a lot less or actually losing some of his hard earned cash.  It's likely a pretty low probability that it would happen that way, but it still could happen.  And as much as I agree that a physician's job is pretty darn stable in comparison to the rest of the population, it's still not 100% stable nor is the pay we receive for what we do.  Maybe this is a glass 1/2 empty vs 1/2 full debate?  I'm definitely more a pessimist and the pessimist in me says pay off the loans asap.

 

[Zaphod]

hightower wrote:

FCP wrote:

I have 301k in loans (I paid about 50k of this during residency), and am graduating fellowship in a few weeks.  Starting next mo, I will be investing 35k/mo in taxable and 5k/mo in tax deferred accounts, and continuing to pay 5.4k/mo on my loans (5 yr repayment plan).  So, I am doing something similar to what you propose, but not to quite the extent you are envisioning.

I have many good reasons for why I am doing things this way:

 

1. It is my understanding that loans are forgiven upon death or disability; so if you spend 1 yr diverting all your income to pay them off, and get disabled/die, then you’ll have zero in the bank/investments to give to yourself/heirs if you paid them off.

2. Historically, investing in the S&P500 will provide greater returns than what the interest rate on your loan is; so if that remains consistent in the future, then you will end up better off.

3. I like the freedom that hundreds of thousands in cash/investments provides.

 

Summary:  As long as you plan to pay off your loans in 5 years or less, and as long as you continue to live like a resident until you pay off your loans, use as much excess cash as you want toward your taxable account.  Stretching the loans further than 5 years isn’t worth it to me; but you may win out on such a plan; it’s a small gamble.

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With the kind of money you’ll be making/saving, these are probably moot points, but…

1. That’s what life insurance/disability insurance is for

2. Yes, you are correct, but over 20-30 years or more and there would be a LOT of volatility during that time span.  The OP was talking about paying off his student loans that were probably on a 5-10 year repayment plan.  It’s less likely to beat 4.4% guaranteed in a short time span.  Plus, the likelihood of volatility hitting at the exact moment that you need the money is high.  That’s why if you’re going to invest, its best to buy and hold for the long haul

3. Of course, everyone likes the freedom of being wealthy

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I dont get why you have to "beat" them on the same time frame? Makes no sense.

If you're not retiring at that time or otherwise drawing them down then it doesnt matter. The loan is still gone and the extra payments are still in the market and compounding for years and decades to come. This is exactly the reason the differential is so powerful. The disparate terms, types of interest and inflation are so solidly in your favor.

[Zaphod]

I think its okay primarily for a few reasons. However, you actually have to invest and not spend that "extra" money. I would also refinance any time that you could for a materially better rate/term. Have a decent e fund.

1- as dmfa mentions, the odds are ever in your favor and the rates will take care of themselves after some years (simple/compound). Any inflation will also help.

2- you have flexibility to change tactics at any time, if you want to pay them you just move it from taxable to loans, no big deal at all. People talking about taxes as a negative, but that assumes a profitable gain, which is by definition positive and any payment will be higher than what you could have done with the original money anyway. Not true of the opposite path.

3- Our job stability and probability of keeping or getting a new position is very high and should go into the calcs as such. Not how its usually taken, that its a remote possibility and therefore your life should be arranged around it. Its akin to making your lifestyle decisions based on risk of death by terrorism vs. cardiovascular disease. Doesnt make a lot of sense. Also, you have that taxable to throw at any debts you dont want to cover at the time something like that happens, or to bridge you.

What is a terrible idea is to put it into some super aggressive and volatile product like EM or small caps. You want something stable like a whole market fund.

As an aside I've had no issues getting mortgages or other things because of student loan debt and mine was more than yours. Not a great idea to load up on all possible debt anyway. As an ED physician you should be able to pick up extra shifts and at differentials if you wanted to so you should be able in reality to do this in a shorter time frame than you think.

This is not an endorsement of the strategy for yourself, only you know if you'll really do it, but just a different look at it.

[hightower]

FCP wrote:

I have 301k in loans (I paid about 50k of this during residency), and am graduating fellowship in a few weeks.  Starting next mo, I will be investing 35k/mo in taxable and 5k/mo in tax deferred accounts, and continuing to pay 5.4k/mo on my loans (5 yr repayment plan).  So, I am doing something similar to what you propose, but not to quite the extent you are envisioning.

I have many good reasons for why I am doing things this way:

 

1. It is my understanding that loans are forgiven upon death or disability; so if you spend 1 yr diverting all your income to pay them off, and get disabled/die, then you’ll have zero in the bank/investments to give to yourself/heirs if you paid them off.

2. Historically, investing in the S&P500 will provide greater returns than what the interest rate on your loan is; so if that remains consistent in the future, then you will end up better off.

3. I like the freedom that hundreds of thousands in cash/investments provides.

 

Summary:  As long as you plan to pay off your loans in 5 years or less, and as long as you continue to live like a resident until you pay off your loans, use as much excess cash as you want toward your taxable account.  Stretching the loans further than 5 years isn’t worth it to me; but you may win out on such a plan; it’s a small gamble.

Click to expand...

With the kind of money you'll be making/saving, these are probably moot points, but...

1. That's what life insurance/disability insurance is for

2. Yes, you are correct, but over 20-30 years or more and there would be a LOT of volatility during that time span.  The OP was talking about paying off his student loans that were probably on a 5-10 year repayment plan.  It's less likely to beat 4.4% guaranteed in a short time span.  Plus, the likelihood of volatility hitting at the exact moment that you need the money is high.  That's why if you're going to invest, its best to buy and hold for the long haul

3. Of course, everyone likes the freedom of being wealthy

[hightower]

FCP wrote:

DMFA wrote:

FCP wrote:

I have 301k in loans (I paid about 50k of this during residency), and am graduating fellowship in a few weeks.  Starting next mo, I will be investing 35k/mo in taxable and 5k/mo in tax deferred accounts, and continuing to pay 5.4k/mo on my loans (5 yr repayment plan).  So, I am doing something similar to what you propose, but not to quite the extent you are envisioning. 

Click to expand…

You mean to tell me you’re investing $420,000 of after-tax dollars every year, while putting another $65,000 of after-tax dollars to loans? Half a million after-tax dollars not dedicated to living, right out of fellowship?

…I went into the wrong field.

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If I told you I was a psychiatrist, would that boggle your mind further?  Because I am.  lol.

 

 

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Ok, you need to do a post explaining your situation because yes you have boggled all of our minds with your numbers and specialty

[hightower]

DMFA wrote:

FCP wrote:

I have 301k in loans (I paid about 50k of this during residency), and am graduating fellowship in a few weeks.  Starting next mo, I will be investing 35k/mo in taxable and 5k/mo in tax deferred accounts, and continuing to pay 5.4k/mo on my loans (5 yr repayment plan).  So, I am doing something similar to what you propose, but not to quite the extent you are envisioning.

Click to expand…

You mean to tell me you’re investing $420,000 of after-tax dollars every year, while putting another $65,000 of after-tax dollars to loans? Half a million after-tax dollars not dedicated to living, right out of fellowship?

…I went into the wrong field.

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That's exactly what I was thinking.

[jhwkr542]

Pay the loans.  4% simple interest with ZERO risk is a nice return.