Two physician student loan questions - one private practice, one academic

[Simcoe]

Hello! I am new to the forum. I have been absorbing all things in the WCI universe (book, blog, podcast, partner websites, etc) over the past few months but this is my first time posting on the forum. I am in my final year of residency and trying to get my finances in order before becoming a real doctor. I have learned a ton of stuff that nobody has taught us in medical school or residency.

My current question is regarding student loan repayment options. Briefly, I will be going into a private practice surgical specialty and my wife is continuing training with a couple fellowships with the goal of staying in academic medicine long-term. Separately, it is pretty clear that I would be best served by private refinancing and paying off quickly (3 yrs?), while my wife should do one form of Income Driven Repayment and go for PSLF. My question is given that I will soon have a much higher income but she won’t, will this still be the best option? Given she has another 6 years of payments before PSLF, I am not sure if it would be best to just pay both off on privately refinanced loans? And taxes - MFS vs MFJ? I have searched the forum and there are only a couple similar posts that I found, and none with this exact scenario as far as I can tell.

Quick bios:

Me: current last year resident, soon-to-be hospital-employed surgeon (not 501c3) starting Aug 2018; expected income ~$400K; federal student loan debt $220K @6.8% currently on REPAYE

Wife: current fellow, will be a fellow for another 2-3 years at ~$65K annual income (+/- another 30K if she moonlights), and then likely academic medicine in a specialty playing ~170K. Federal student loan debt 190K @6.8% currently on PAYE. She has about 45 months of eligible PSLF payments at this point (certified annually), so need about six more years of payments.

Us: Mortgage ~$200K @2.9%, car ~$10K @2%, no other debt, no kids yet. We have been filing our taxes jointly, but can do separate if better. My goal is to get out of debt as quickly as possible, but will obviously take the PSLF for her if we are eligible and it is still around in six years. I will get a decent ‘signing bonus’ in the form of a loan forgiven after one year which will go to paying down some loans, but no formal student loan repayment from my employer. We are both on board with the live like a resident for a few more years lifestyle to get out from under this debt, but are looking for guidance on the most efficient repayment options. Are there any other two physician couples out there with a gap in income & PSFL eligibility?

Thank you for your input.

[Zaphod]

Hmm...your wife could go for some kind of forgiveness, but I'd lean towards just not worrying about it at all. Especially given its on the chopping block every time, one of these times theyll just take it away.

Also, relative to your dual doctor incomes and no kids, your loans are minimal. I'd refinance them asap and just start knocking them out. Live on a whole lot less than your income and have your wife (after filling all tax deferred accounts) just knock her own loans out as much as possible in residency even. Lots of options with two great incomes and limited liabilities.

[cgossage]

Your wife could still pursue PSLF but the issue you run into is you basically have to file Jointly on your tax return at your income levels.  Otherwise you will be paying ~30,000-$50,000 more per year on your taxes which makes this strategy very unattractive.  So if we assume married filing jointly, your income will push you out of getting any benefit from PAYE and you will end up paying getting capped at the standard payment instead.  I'm ballparking your Standard Payment would be around $2,186 per month.  If you used this payment for the rest of your payment term you would have made $166,000 of payments and had $84,000 of loans forgiven.

Let's compare this to refinancing at 4.25% over 10 year.  If you refinanced the loans you would make $233,557 payments.  So your potential PSLF savings would really be the difference between $233k and $166k of payments, or about $67,000.

There of course is the risk the PSLF program is modified before your are eligible to take advantage of it.  Since you know your wife is going into an academic job, I think it's worth pursuing PSLF as long as you remain eligible.

[DMFA]

Yeah, filing separately will be a tax bomb.  I'd refi yours to lowest rate/term you can afford and have her stick with PAYE.  Once your combined income goes over the tipping point so that the calc'd PAYE payment (AGI-[1.5*pov])/120 > the 10-yr standard rate (calc'd from time of initially entering repayment), she'd just pay the 10-yr standard.  10-yr payments for 6 years is a decent deal.  Now, if they take PSLF away from us, you'll still be in a decent spot to refi and kill since your combined income will be pretty high.

I would maximize all your tax-advantaged retirement accounts before getting *too* aggressive with student loans.  The tax benefit and years of higher compound growth than the simple loss on your debts are worth it.  You can't get time back for missing contribution years.  Once you maximize those, then put remaining investable funds toward your loans that you want to get rid of, and then once that's done in a few years, put that into other investments (mutual funds in a taxable brokerage account, buy rental property, etc).

You really don't seem to have too much to gain from paying down your mortgage, which is a $200k near-inflation (esp if you still have a mortgage interest deduction, though you might not get it) debt backed by an insured asset, at this point; there are way better uses for your money at the moment.  Your car loan I could take or leave - sure, obv it'd be better not to have it, and you don't want to develop debt complacency, but it's small potatoes and a small rate (assuming 3 years left, there are only $311 in finance charges on it) and constitutes a far lower priority than your other needs at the moment.

[hightower]

Zaphod wrote:

Hmm…your wife could go for some kind of forgiveness, but I’d lean towards just not worrying about it at all. Especially given its on the chopping block every time, one of these times theyll just take it away.

Also, relative to your dual doctor incomes and no kids, your loans are minimal. I’d refinance them asap and just start knocking them out. Live on a whole lot less than your income and have your wife (after filling all tax deferred accounts) just knock her own loans out as much as possible in residency even. Lots of options with two great incomes and limited liabilities.

Click to expand...

I agree with this.  I personally think it's too much of a risk to to go for the loan forgiveness program, especially with interest rates that high (6.8% is nuts).  If after 6 years she's been paying the minimum payments and she doesn't qualify for forgiveness or the program gets the axe, you'll end up paying a lot more for the loan than if you were to just pay it back sooner with a refinance.

I would refinance both of your loans and spend the next few years focusing on getting rid of them.  Agree with DMFA to max all retirement accounts too.

You guys are going to be making easily 600k a year when you're both attendings.  There's no reason to hold on to any debt with that kind of income.  Even after maxing all retirement accounts and paying taxes, you guys will have a LOT of money left over to work with (probably somewhere in the neighborhood of 300k after subtracting ~40% for taxes which is obviously a bit overly conservative, contributing full amounts to 401k, Backdoor Roth, and HSAs).   After living expenses you should easily be able to get away with putting ~220-240k/year towards loans!  That could eliminate your loans in just 2 years once you're both working full time.  Get rid of it while you're still early in your career and you'll be very glad you did later on.  Just my 2 cents.  It's way too easy to let lifestyle creep happen when you're early in your career and have all that new money rolling in.  Do yourself a favor and get rid of the debt fast so you can really enjoy that money when the debt is gone.

[Simcoe]

Thank you very much for your well thought out responses.

That's great info to forgo filing taxes separately to reduce PAYE payments for my wife. That knocks out one complicated scenario. I will discuss with her the remaining to options of refinancing privately to a lower rate vs continuing with the federal loan programs to try for PSLF.

Big picture, I agree and am planning on maximizing tax-advantaged accounts, then taxable accounts, then maybe slightly overpay the mortgage, then other investments/savings etc. Thanks so much. I am sure I will have more questions coming.

[DMFA]

Simcoe wrote:

Thank you very much for your well thought out responses.

That’s great info to forgo filing taxes separately to reduce PAYE payments for my wife. That knocks out one complicated scenario. I will discuss with her the remaining to options of refinancing privately to a lower rate vs continuing with the federal loan programs to try for PSLF.

Big picture, I agree and am planning on maximizing tax-advantaged accounts, then taxable accounts, then maybe slightly overpay the mortgage, then other investments/savings etc. Thanks so much. I am sure I will have more questions coming.

Click to expand...

I like to round my mortgage up to the next hundred and then add a hundred...but my prin/int/tax/ins is only about $1840, so I pay about $2000/mo on it.  So you might want to up it to the next nice round number.  Makes snap budget decisions (assuming they're not already automated or on a spreadsheet) easier, too.  This doesn't seem like much, and sure, I could use that $160 on other stuff, though I'm not even sure if that'd trigger the minimum buy limit on some of my funds...but it helps me allocate money to various ways other than my brokerage account.  I do this with my wife's student loans, too.