Loans over Retriment?

[Kevinhen16]

So I wanted to bounce this off a few people in this forum:

I'm about to start intern year of residency. Assume I refinance my medical student loans (close to $300K) at a fixed interest rate of ~5-6%. Wouldn't "investing" all of my savings into paying off student loans be equivalent to a 5-6% tax-free rate of return (a difficult rate of return to find elsewhere)? Not only is the rate of return tax-free, but the interest payments are tax deductible. Therefore, would it not make the most sense to place my monthly savings into paying off student loans as opposed to saving for retirement? The exception would be if my employer matches any 401(k) contributions, in which case, I'd contribute up to the maximum match because that is essentially free money.

I also want to save toward starting a private practice upon graduating from residency. I figure between saving for that and paying into student loans, there really won't be anything left to put toward a Roth IRA or unmatched 401(k).

Thoughts?

[Zaphod]

Kevinhen16 wrote:

So I wanted to bounce this off a few people in this forum:

I’m about to start intern year of residency. Assume I refinance my medical student loans (close to $300K) at a fixed interest rate of ~5-6%. Wouldn’t “investing” all of my savings into paying off student loans be equivalent to a 5-6% tax-free rate of return (a difficult rate of return to find elsewhere)? Not only is the rate of return tax-free, but the interest payments are tax deductible. Therefore, would it not make the most sense to place my monthly savings into paying off student loans as opposed to saving for retirement? The exception would be if my employer matches any 401(k) contributions, in which case, I’d contribute up to the maximum match because that is essentially free money.

I also want to save toward starting a private practice upon graduating from residency. I figure between saving for that and paying into student loans, there really won’t be anything left to put toward a Roth IRA or unmatched 401(k).

Thoughts?

Click to expand...

How is it tax free? You'll be paying with after tax dollars will you not? Run the numbers to get the most money at the best effective tax rate cash flow wise, and obviously take any match possible. I dont know how you will be able to save enough money for starting a practice in residency though, that will be exceedingly difficult no matter how you cut it. Might make your options for obtaining a business loan better if you have little overall debt when you apply.

[jfoxcpacfp]

Kevinhen16 wrote:

So I wanted to bounce this off a few people in this forum:

I’m about to start intern year of residency. Assume I refinance my medical student loans (close to $300K) at a fixed interest rate of ~5-6%. Wouldn’t “investing” all of my savings into paying off student loans be equivalent to a 5-6% tax-free rate of return (a difficult rate of return to find elsewhere)? Not only is the rate of return tax-free, but the interest payments are tax deductible. Therefore, would it not make the most sense to place my monthly savings into paying off student loans as opposed to saving for retirement? The exception would be if my employer matches any 401(k) contributions, in which case, I’d contribute up to the maximum match because that is essentially free money.

I also want to save toward starting a private practice upon graduating from residency. I figure between saving for that and paying into student loans, there really won’t be anything left to put toward a Roth IRA or unmatched 401(k).

Thoughts?

Click to expand...

You are on the right track. You are getting an after-tax return of 5% - 6% which is equivalent to a taxable return of 6.25% - 7.5% at the 20% bracket (state taxes may apply, also). The student loan interest deduction (max $2,500/yr) that you are foregoing would reduce that somewhat, of course.

I do agree with Zaphod that it may be difficult to save for starting a private practice, but I am sure there are other factors to which I'm not privy - and that is a whole new conversation topic. I would put Roth contributions before practice savings - you can always take out original contributions tax- and penalty-free if you change your mind. You can't get that Roth space back for every year you pass up.

[The White Coat Investor]

Kevinhen16 wrote:

So I wanted to bounce this off a few people in this forum:

I’m about to start intern year of residency. Assume I refinance my medical student loans (close to $300K) at a fixed interest rate of ~5-6%. Wouldn’t “investing” all of my savings into paying off student loans be equivalent to a 5-6% tax-free rate of return (a difficult rate of return to find elsewhere)? Not only is the rate of return tax-free, but the interest payments are tax deductible. Therefore, would it not make the most sense to place my monthly savings into paying off student loans as opposed to saving for retirement? The exception would be if my employer matches any 401(k) contributions, in which case, I’d contribute up to the maximum match because that is essentially free money.

I also want to save toward starting a private practice upon graduating from residency. I figure between saving for that and paying into student loans, there really won’t be anything left to put toward a Roth IRA or unmatched 401(k).

Thoughts?

Click to expand...

I think I'd do a Roth IRA and get the entire 401(k) match before paying off loans as a resident, but you're right that paying them off gives you an after-tax 5-6% guaranteed return and that the first $2500 of interest you pay per year is tax-deductible. Bear in mind that you don't want to pay off loans that may be forgiven later.

[Kevinhen16]

Thank you all! That does help with putting things in perspective. I also agree that there is no way I could save enough to start a business without a loan, so perhaps saving toward the business at all might be a little silly.  I'm in an uncommon specialty (NMM/OMM). Many NMM/OMM practitioners set up a private practice after residency, usually with a cash-only model. So setting up a practice after residency is a pretty important goal. Unfortunately, because of this, I doubt I'll be able to ever qualify for any form of loan forgiveness.

I do certainly see how investing in a Roth now and taking the match are better options that saving money toward something I'll likely need a loan on anyway, and are also probably better than paying off student loans at this point, since with my income, I'd just be trying to empty a bath tub with a teaspoon, so to speak.

Thanks again for the help.

[jz]

Assumption:  --15% marginal tax rate.

Both repay of loan and average statistical market return will net you 5-6% real return or guaranteed return.

Perhaps the sweet spot is to repay loan to $2500/year to capture the $2500 X 0.15% = $375 /year tax deduction. Shunt the remainder of your discretionary money to retirement to capture both the match, and the tax deduction.