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Pay off student loans prior to starting solo practice?

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  • Pay off student loans prior to starting solo practice?

    I have $159k of student loans remaining @ 2.750% (technically it's a personal loan since originating student loan was bought out by bank) with maturation by end of 2025. Monthly principal is $2800, plus additional $360 in interest, so total of about ~$3.2k / month going to student loans.

    With my current income, I can pay off the loans in 12-15 months. However I've been holding off due to the low interest rate on the loan and putting extra money towards a taxable brokerage account (after maxing out my tax advantage accounts).

    Recently, I've decided that I will enter solo practice in 3 years time, and will likely need to take out a small business loan then. I wonder if my existing loan will be a liability to getting a business loan approval, and am thinking about just knocking out the student loan.

    Is this a prudent choice to crush my current debt in 1-1.5 years, use the remaining 1.5-2 years to build up funding for a practice? I'm on the fence about missing out on 1.5 year of taxable brokerage growth, especially since my loan interest is on the lower side.


    Any advice?

  • #2
    In general, I would not recommend a client reduce their savings in anticipation of opening a practice in 3 years. You are going to need more buffer than you realize when you start - never seen anyone who didn’t and that’s one stress you don’t need. How about putting that $159k in a HY savings account (NOT a taxable account) in preparation for opening up.

    I do not know how the bank will treat the SL debt when you are applying for an SBA loan. Maybe someone else will, but I just checked the debt load of one of our planning clients who opened a practice after leaving a very successful hospital-employed position practice last year and they still have 6 figures of SL debt after being out of training for ~10 yrs or so and it didn’t seem to be an issue with SBA. Having a significant nest egg was helpful, I know, but they had more than $159k, and it has been a lifesaver. Of course, I have no idea how much you already have stashed or where you’re located.

    Please be sure to work with experienced, appropriate professionals to prepare for this huge step. Financial planning could be critical to help you prepare.
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      When you look to secure financing on a loan they will look at your:
      • Income
      • Job history
      • Savings
      • Credit score
      • Debt
      You shouldn't use up all your money to payoff the loans if it'll make you broke for the moment. Make sure you have an emergency fund in place.

      Would probably opt for loan payoff in 12-15 months and then start saving for your solo practice and SBA loan. And as jfoxcpacfp mentioned above, putting it in a safe investment like a HY savings account (HYSA) would help give you certainty the money you put in there will still be there when you need it since you want to have that readily available in 2-3 years. It takes the risk out of you losing significant money if the market tanks when you apply for an SBA loan.

      If you had a longer horizon 7-10+ before your solo practice then considering the taxable account could put you in a better position with higher returns than a HYSA.
      Helping student loan borrowers manage their student loans. StudentLoanAdvice.com. [email protected]

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      • #4
        The Efund mentioned is also more than your personal needs. The lender will be looking for the savings working capital and cash reserves for the practice.

        option 1:
        cash $160k
        loan. -$160
        Net. $0

        option 2:
        Net $0

        Option 1: Is much more favorable from a lender standpoint. Money available to buffer, a safety net. Your loan payment still needs to be covered in the business plan .The student loan will only impact the monthly payment amount. If your debt to income ratio won’t support that, zero cushion is not the problem. How you get there (cushion) is your choice.


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        • #5
          Thank you everyone above for the very helpful insight.

          It seems the perception of a larger saving account would be more favorable for the purpose of a small business loan. A net sum of 0 looks better if there's income / buffer coming in despite the debt. I think it's a valid point to continue putting money away for the practice instead of paying off the debt right away. In 3 years time, my student loan debt will be reduced essentially to 50k, but hopefully I'll be able to stash away the other 100k into my small business saving that I otherwise wouldn't have.

          Regarding a HYSA, I have a joint account with my wife. For the purpose of loan approval, would it be better off for me to move the savings to one in my name only?



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          • #6
            Originally posted by CarabinerWCI View Post
            Thank you everyone above for the very helpful insight.

            It seems the perception of a larger saving account would be more favorable for the purpose of a small business loan. A net sum of 0 looks better if there's income / buffer coming in despite the debt. I think it's a valid point to continue putting money away for the practice instead of paying off the debt right away. In 3 years time, my student loan debt will be reduced essentially to 50k, but hopefully I'll be able to stash away the other 100k into my small business saving that I otherwise wouldn't have.

            Regarding a HYSA, I have a joint account with my wife. For the purpose of loan approval, would it be better off for me to move the savings to one in my name only?
            99% chance your wife is going to have to sign for the loan, too.
            Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

            Comment


            • #7
              Originally posted by jfoxcpacfp View Post

              99% chance your wife is going to have to sign for the loan, too.
              Interesting I did not know that! I'm sure my wife won't be thrilled about co-signing but it helps that she has a physician income to back me up.

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