Max out Roth and unmatch 403(b) or pay down ~6.1% interest loans

[standupguy]

Will be starting residency this June. I have about $175k in loans averaged at 6.1% interest rate. Wife makes about 110K AGI with maxed out Roth and 401k.

Given our financial situation, if I do PAYE or IBR (would do PAYE), I have the opportunity to max out my unmatched 403b and ROTH, but based on my calculations would have ~196k in loans at the end of a 3 year residency. This situation would free up some cash to max out retirement accounts and go on a vacation every year to keep our sanity. Would have peace of mind financially I guess.

Other option is to do REPAYE with ~$1000 per month payment, possibly max out both ROTH and 403b, but would be cutting it very close and would leave very little money to enjoy life a little.  Wife and I live farely cheaply, with our big expenses mostly being a yearly vacation (not extravagant). Doing this, I would not get the 50% interest break b/c the $1000 per month would cover any interest. At the end of a 3 year residency, my principle would be down to about 167k, however that's 36k in residency that I would dump into my loans.

I know the adage that putting money into loans has the guaranteed return of the 6.1%, but would I be better off fully funding my retirement funds and taking that ~20-30k hit in interest. I fully plan on paying my loans down in 5 years upon residency graduation. I'm leaning more towards the first option mainly because of peace of mind and the fact that the 20-30k in interest (which is nothing to scoff at) can be taken care of in a couple extra student loan payments after graduation.

 

Thoughts? If I can, should I be directing the money towards my loans in residency or my retirement funds?

Thanks

[Dicast]

I think the easy decision is to max the Roth.

I think it is dangerous to say that 20-30k can be paid off in a "couple" extra payments.  I don't know what your specialty will be but having an extra 10-15k a month laying around takes some effort.  Rationalizing your way into having larger debts is a slippery slope.  Having a budget to keep yourself sane during residency is not a bad idea, just realize the extra debt burden afterwards will be balanced against other life goals when you start an attending job.  You'll want a house, a car, maybe have children or want to take bigger vacations since you have more time.

At 6.1% interest you've got to have significant performance in the 403b to make it a better option.  I don't know if you have the option of refinancing to a better interest rate or not...so I'd probably work on the debt after maxing the ROTH.  Leave yourself some cash to travel in the short periods of time you have in residency but maybe consider keeping the trips to a reasonable budget...

My wife and I took one large trip to New Zealand during residency, blew a bunch of money and have no regrets.  We weren't going to have that option for a long time and felt that it was worth it.  During med school we took road trips, camping, hiking and never spent more than $10-15 to stay anywhere for a night and had lots of fun doing those trips as well.  The priority is making sure you are both happy with the decision and understand what you are giving up later if you take big trips during residency.

 

[standupguy]

Thanks for the reply. One issue I'm running into is the 6.1% interest vs funding the 403b. I get that the return wouldn't be as great as putting money into the loans, but how much (big picture) would I be losing out on the 3 years of not maxing out that 403b?