Paying interest on loans vs. paying more into a retirement account (during residency)

[inkling]

Hello all, current MS4 here starting residency in July. I have a question about using excess money during residency to pay the interest (and maybe even a bit of the principal) on my federal loans each month but putting very little in a retirement account vs. doubling or tripling the amount I could put into a retirement account but allowing the interest on my loans that is not subsidized under REPAYE to accrue and capitalize.

My gut is telling me that I ought to keep my loans down, but I don't have much financial knowledge (really, all I have is from poring over the WCI website and blog), and my family is not in a position to be able to give me advice on this, so I want to make sure I'm not making a stupid mistake by not putting more into a 401k or 403b during residency.

I think I could manage to put 5% of my gross annual income into a retirement account while still preventing my $240,000 in loans from accruing ANY interest thanks to REPAYE's subsidy. (They are all direct federal loans, most from med school but some from undergrad [stupid me].) But 5% of a resident salary is hardly anything. (For what it's worth, I will submit PSLF eligible payments and keep track of them, but don't want to count on being able to pursue it. Debt freaks me out and I would much rather pay more but be rid of my loans within 3-4 years of having an attending salary rather than waiting for PSLF to kick in.)

TLDR: Am I shooting myself in the foot if I put barely anything into retirement during residency, BUT by doing so am able to prevent my student loans from accruing any capitalized interest at all? (And might even be able to pay them down a tiny bit?).

Thanks in advance. This website has truly been a Godsend for me.

[CordMcNally]

Besides an emergency fund and putting any money into your 401k/403b that gets an employer match, I’d probably be putting the rest of my money into a Roth at your stage.

Also, if they’re all federal, aren’t you getting 0% interest at this time?

[inkling]

Thanks. Yes, currently interest is at 0% but I wanted to have a plan for when the payment/interest pause ends this August.

[pierre]

Thanks. Yes, currently interest is at 0% but I wanted to have a plan for when the payment/interest pause ends this August.

There’s close to 0% chance it actually ends in August.

I’d leave the loans alone and put everything you can in retirement. At least that’s whet I did.

[CordMcNally]

Interest will be at 0% for the foreseeable future and will certainly extend way past August for multiple reasons.

[medicoFIRE]

I used to be certain 0% would extend past August, but now not so sure with all this talk of forgiveness of 10k-50k. If they actually go for the forgiveness route, they could potentially end the 0% forbearance on 8/31/2022. I guess now I'm thinking 1 in 3 chance it ends in August vs. what I thought would be zero chance before. With that said, I still like the odds and I am not refinancing because I've committed to this path. If I were going to refinance, I should have done it in March before the rate rises. Now it's almost not worth refinancing because of the current rates. I think I'll just keep my loans federal and pay them off as quickly as possible if the forbearance ends. There are other benefits of having federal loans, namely that they are discharged in the setting of total and permanent disability and also the fact that they are discharged in death. So it kind of has a disability/life insurance benefit attached to it. I believe private student loans do not die with you unless you have zero net worth. Otherwise they are offset by your estate.

[CordMcNally]

I used to be certain 0% would extend past August, but now not so sure with all this talk of forgiveness of 10k-50k. If they actually go for the forgiveness route, they could potentially end the 0% forbearance on 8/31/2022. I guess now I'm thinking 1 in 3 chance it ends in August vs. what I thought would be zero chance before.

From a purely political standpoint, there could not be a worse time to end the 0% forbearance than in August. There's just no way they'd purposefully do that. They've forced their own hand to extending it past the mid-terms at the very least.

[Andrew StudentLoanAdvice]

I wouldn't make any payments on your federal loans while it is 0%. Then, if you're positive you're going to pay them down, I would recommend refinancing with a private lender after the loan holiday ends. A number of private lenders will offer you 100 monthly payments during training. This would allow you to save for retirement and make payments on your student loans.

The reason why most physicians who aren't doing PSLF private refinance their loans is due to the lower interest rate they'd receive.

[inkling]

Thank you all so much for your advice. If the 0% interest rate continues, that would be amazing. When it ends, I was planning to use the WCI method of comparing private loan rates vs effective interest rate on fed loans (with the 50% REPAYE subsidy and $2500 yearly tax deduction), and to refinance privately once the effective federal interest rate rises above the going private rates. I also didn't want to jump the gun on refinancing until it seemed pretty certain that 10-50k will not end up being forgiven by the current administration.

Followup question re how to allocate my extra money should the 0% continue for a while - my program offers a voluntary 403(b) and 457(b), but does not offer an employer match for either one. Should I just use a Roth instead in that case? Or try to put into a Roth and the 403(b) or 457(b) if I can?

[bovie]

Max out your match.

Then max out your Roth IRA.

Then if there is anything left, put more into your 403(b)—Roth if possible. If nothing left, fine.

Don’t worry about the loans while they are 0%. Make minimum payments once they no longer are. Keep the PSLF option.

Pay off in big chunks as an attending later if necessary.

[inkling]

Thank you all!