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  • Pay student loans off slowly

    I know the general advice given on this forum/by WCI is to pay student loans off within 2-5 years after residency. There is both a behavioral aspect and a psychological aspect in favor of paying off debt quickly. However, I am drawn to paying it off slowly over time. Here is my thinking. Please don't throw tomatoes at me!

    Background: 36 y/o. Married with 4 kids. Annual income ~$400k. Student loan debt : $465k.

    Each paycheck I immediately transfer 40% of the gross amount into my savings account which is then used to either pay student loans or for investment (retirement, brokerage, etc.). I do not spend this money for non-student loans or non-investments. I just refinanced my loans to a 20 yr term at an interest rate of 2.45% after discounts. At this rate (which is possibly around the rate of inflation) it makes much more sense to me to put the extra money into investment accounts rather than student loans. Other than the behavioral aspect which I believe I overcome by paying myself off, is this really such a bad idea??

  • #2
    You will get beat up here for this
    but I did the same as you and dragged them out (3.3%) for maybe 15 years
    it worked out great for me
    the future may not be the same, but I would still do what you propose
    admittedly, my loan burden was less.

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    • #3
      Many would argue that, mathematically, investing any extra money is likely to be the best move.

      I think that the behavioral aspect is huge though. Having a $465k anchor hanging around your neck is no joke.

      My wife and I left medical school with significant student loans at a very low rate (2.82%). At first, we basically did what you're suggesting - paid minimum payments on student loans and mortgage and invested heavily, but over the past 5 ish years we've been much more aggressive allocating extra money to pay off student loans and mortgage. Would we have a higher net worth if we'd just dumped that money in the stock market? Yes. Do I regret paying down debt much faster? No.

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      • #4
        If you follow this and practice until you are 56, it’s not that bad. It’s an arbitrage play, 2.65% fixed vs real returns on the investments.
        Monthly zero impact on NW.
        You are leveraging and you are exposed to other different risks. Divorce, lawsuits, disability, or just don’t want to practice.
        20% for retirement and 20% on top for a wealth accumulation rate of 40% is fine. Risk aversion is your choice, the reason for paying it off. Returns aren’t guaranteed and none of the investments are later used before the loans are paid.

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        • #5
          Is it possible to do that and pay off the loans in 5 years? If it’s possible while still living on a resident-ish salary, it’s better than what you propose. It just won’t be as fun…

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          • #6
            I went against the math and paid the loans off about 2 years out of training. Ill likely retire with a slightly smaller nest egg because of it, but the marginal utility there (decades down the road) is nothing compared to the psychological benefit Ive been getting since the loans have been gone. My heirs will just get less.

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            • #7
              Originally posted by 8arclay View Post
              I went against the math and paid the loans off about 2 years out of training. Ill likely retire with a slightly smaller nest egg because of it, but the marginal utility there (decades down the road) is nothing compared to the psychological benefit Ive been getting since the loans have been gone. My heirs will just get less.
              This.

              Not to mention you skipped the most important behavioral aspect - when you start seeing that balance decline, you push harder and harder to make it go to zero. I have not felt that same push to make our taxable account go up.

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              • #8
                If you decide to pay your loans off slower, then I would make sure you save a larger portion of your salary. Recommended amount is 20%, since you are starting later with 4 kids , I would look towards saving close to 30% of your salary

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                • #9
                  Will your income increase over time? I think this will be difficult to sustain over 20 years, especially as the kids get older and more expensive. You have more flexibility if the loans are paid off. If you do choose this, just make sure you have good disability ( and of course life) insurance in place. And that you can really work full-time for 20 years.

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                  • #10
                    In theory investing the difference is the better financial move, however, many times that doesn't happen. There is no wrong decision. I've still yet to meet someone who regrets paying off their student loans quickly. I paid mine off the first 18 months out of residency and I've almost forgotten student loans exist and it has been fantastic. Plus, my finances are no worse for the wear.

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                    • #11
                      Originally posted by CordMcNally View Post
                      I've still yet to meet someone who regrets paying off their student loans quickly.
                      Does meeting online count? I 100% don't regret paying mine off slowly. Confirmation and survivorship bias play a large role here, too. We are wired to rationalize past decisions and those who pay them off quickly are the same who feel constricted by the debt. That shouldn't affect OP.

                      I'm 17 years into a 30 year note on my loans. Initial balance was something like $100k. Still sitting on $45k. 1.6% rate. $363 a month.

                      These loans cause me no mental stress, and the rate is less than inflation. My guess is that I won't make the full 30 years. Some day in the future I'll get tired of tracking one more account and stroke a check to pay them off, but until then I'm letting them ride.

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                      • #12
                        That balance, even at the low interest rate, is still costing you a bunch of money each year. We threw extra payments at our loans until the balance got to a point that the monthly interest charge wasn't so bad. For us that was about 125k. Now we make minimum payments (occasionally will put extra in) and the additional funds go to other priorities, like retirement and Disney+ subscription.

                        Point being there is a middle ground. Get after the debt hard for 12-18 months then reassess.

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                        • #13
                          I think a lot of this comes down to DTI ration, risk tolerance, and desire/ability to work.

                          My DTI was 2x loans. I have a working husband, who helped lower that ratio, but his job market is more volatile. I HATED my first job and was counting down the days until I could leave. However, with my debt hanging over my head, it made things more challenging.

                          We pushed hard and paid off all student loans in less than 5 years. I don't regret it one bit. Knowing that I could technically quit my job tomorrow and we would be "ok" (assuming my husband kept working) is a nice freedom to have. Granted, I love my current job and am doing pretty well here. Did we lose out on some investment growth? Absolutely. However, given our situation, I think it was 100% worth it.

                          I think your case is challenging, as you do have a high debt amount. If your debt were much less, I think I'd be more comfortable splitting. You just, again, have to be willing and able to work for that long.

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                          • #14
                            sounds like you'll be fine doing this.
                            $465k would be too much for me to sleep.
                            make sure you have a plan in place for death, disability, divorce.
                            also the first time you take a month off from the plan and buy a Tahoe instead of sticking w the plan as you have it you need to abandon ship and pay off the loans.
                            you need to emotionally prepare for how you will manage things if we enter a long bear in the next few years (unlikely but possible).
                            consider splitting the difference-- aggressively pay down to a more manageable figure ($200k?) and then work your plan.

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                            • #15
                              Tax arbitrage, you will get less benefit from the interest expense and pay taxes on your dividends and gains. Taxes favor paying it off.

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