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Does it make sense to pay off medical school outright, or take out loans?

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  • Does it make sense to pay off medical school outright, or take out loans?

    I'm a nontrad going back to medical school next year.

     

    I'm very fortunate to have a nice career right now, and I have the following assets:

     

    * House with about 110k equity - by next year I could probably sell and walk away, after fees, with ~80k.

    * Taxable investments: 145k, projected to be worth ~160k by the start of the 2018 school year

    * Retirement accounts (mix of current 401k, trad IRA, roth IRA): 91k, currently contributing to 401k and projected to be worth ~103k by next year

     

    My wife will also be just starting her career as I'm returning to school, so her income will cover my COL expenses.

     

    My plan initially was to take out loans as I didn't realize I had enough to cover tuition. I will be selling my home when we relocate, so I'll have about ~240k in taxable investments at that time. I was also going to slowly convert my traditional IRA/401k (which is approx 50k of my retirement accounts) into a roth during my time in school while I had no income, though I'm not sure that will work if my wife is earning.

     

    Now that I'm seeing I can feasibly pay my tuition each year out of investments, I'm wondering if that is the more financially prudent approach. Would I be giving up any perks of loans that I'm not aware of? My fear is that I'll graduate, and then I'll get a job offer that includes a hefty loan repayment perk that I'm not longer able to capitalize on or something. Thoughts?

  • #2
    Why take out loans if you do not have to?  If you are not crushed with debt you can be flexible on speciality and location when you graduate. You are in a great position.

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    • #3
      For sure don't take out loans for M1 year.  Reassess after that.  If you do decide to take out any, only go for Federal Direct which max at $40,500 per year.

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      • #4
        A loan repayment program can be negotiated into something else, like a higher starting salary. It's taxable income either way.

        You need to either:

        • liquidate any investments you will have to have for tuition, or

        • plan to borrow for tuition should the stock market enter a correction or bear when you need funds, then pay back the loans once your account recovers.


        I'd probably go with plan B.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          "Would I be giving up any perks of loans that I’m not aware of?"

           

          not a single one.

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          • #6
            Agree with the others.  I suspect that you can convert debt payoff into an equivalent signing bonus, salary, etc., so I wouldn't factor that into any analysis.  I would definitely use the proceeds from the home sale to cover tuition.  Student debt sucks, and it is the worst of the three acceptable types of debt to take on.  The other two being home and car debt (car debt is only acceptable if you could otherwise pay cash, but don't want to liquidate taxable investments and the rate is low).

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            • #7
              Well if you die, student loans can be cancelled. Or at least they could when I had them. If you had invested the money you might have greater net worth.

              I'm not sure that's a reason to do anything different but since you asked if you gave up any perks.

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              • #8
                I guess you'd be giving up on the possibility of loan forgiveness via PSLF, but the odds of that program lasting may not be all that great, and it's only a good option for certain specialties / professional tracks. I'd cash flow as much as possible, and take no more loans than necessary. If that's Zero, more power to you.

                 

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                • #9
                  It may be worthwhile to take out the subsidized loans since they're interest free during medical school but otherwise I'd cash flow with your taxable account. I wouldn't give up tax advantaged space. Would be a good time for Roth conversions but maybe also try to balance not having paying capital gains, if possible.

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                  • #10




                    It may be worthwhile to take out the subsidized loans since they’re interest free during medical school but otherwise I’d cash flow with your taxable account. I wouldn’t give up tax advantaged space. Would be a good time for Roth conversions but maybe also try to balance not having paying capital gains, if possible.
                    Click to expand...


                    Unfortunately Federal Direct Loans for med school are no longer subsidized.  You do not have to pay interest on the unsubsidized loans while in school but interest will be accruing.  Therefore, put off taking them out as long as possible.

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                    • #11
                      If I could go back and do it all again and I had the option of avoiding school debt...Absolutely I'd pay cash for school.   You will be miles ahead of your peers financially speaking when you start working.  I'm 6 years out of residency and only 1/2 way through paying off my school debt.

                      Don't touch your tax advantaged retirement accounts though.  Your taxable account and your home equity are great candidates for paying tuition.  That's easily enough to get you through 4 years of school if you're careful with your living expenses.  Do it and don't look back  Try to convince your school to let you pay with a rewards credit card and then pay it off immediately. You could rack up some serious bonus points doing that, lol.

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                      • #12
                        Agree with others above. Use the subsidized loans since they'll be interest-free during school, and then use your taxable account. If you need anything more to cover the cost of your education, take out loans. I wouldn't touch your tax-advantaged accounts. Good luck!

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                        • #13
                          I echo the other comments to self pay your med school as much as possible. There are no downsides to not having massive educational debt when you graduate. One hidden upside to graduating with small/no debt is that you will not be tempted into taking a job that offers debt repayment. My experience with these offers is that they will pay back X amount of loans over y years, and if you decide to leave the practice before y years are up, you have to pay back with interest a percentage of the loan. It is FAR better to negotiate a higher income up front and pay off debt yourself without the handcuffs.

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