Aggressive loan repayment approach?

[cottoncandypsych]

Hi! I’m a PGY1 trying to figure out the best way to tackle my ~$258,000 loans from med school. I have considered PSLF but leaning against it as I don’t love the restrictions it would place on my employment opportunities in outpatient psychiatry.
Assuming I will need to pay off the entire loan, an aggressive approach is obviously the best bet. A few additional factors in my case:

-I started residency several months late, so I am still in the grace period
-I have an inheritance of around $50k from when a grandparent passed recently
-I am not currently married but hope to be in the next 1-2 years
-my partner earns a good bit of money and has no loans
-still can’t afford the standard 10
-CARES act situation

So, from my understanding, the best approach at this point would be to:
-put the $50k towards the loan NOW to bring down the principal a bit
-prepay as much as I can from my personal savings on my high interest PLUS loans
-sign up for REPAYE to take advantage of the interest subsidy once CARES 0% interest ends
-overpay as much as I can
-once I get married, switch from REPAYE to PAYE and file taxes separately, or... refinance? If I can afford the monthly payments?

I’m not sure if I should consolidate or not... would it be smarter to keep them separate so I can target the highest interest loans first? Or should I consolidate so I can skip the grace period and reap the benefits of interest subsidy? (Assuming 0% interest ends soon)

I’m also not entirely sure if it’s worth it to start on REPAYE if I know that I’ll have to switch to PAYE within a couple years, triggering loan capitalization. Should I just start on PAYE from the get-go?

I’m just starting to really get a handle on all this stuff and it’s fairly overwhelming. Any advice would be super appreciated!

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[abolt18]

I think the answers to several of your questions depend on what "a good bit of money" means that your partner is earning.

 

[BorntobeDO?]

I would keep an emergency fund before I started to aggressively pay down. Not sure what kind of impact inheritances have on IBR, but I would be concerned about increased payments. The other thing is can you beat the interest in residency? Maybe refinancing to a lower rate would make this better first.

 

[Jack Donaghy]

You should have refinanced the day you started residency. Many (all?) have minimum payment options of $100 per month. Go check out the whitecoatinvestor web page for more details, a simple Google search with "loan repayment" should get you there.

 

[FutureInternist]

Gotta have 3-6 months savings, disability and life insurance, and then tackle loans

 

[cottoncandypsych]

I think the answers to several of your questions depend on what "a good bit of money" means that your partner is earning.

Hi! My partner makes around $110k a year and will likely increase steadily over the next several years.

 

[abolt18]

Hi! I’m a PGY1 trying to figure out the best way to tackle my ~$258,000 loans from med school. I have considered PSLF but leaning against it as I don’t love the restrictions it would place on my employment opportunities in outpatient psychiatry.
Assuming I will need to pay off the entire loan, an aggressive approach is obviously the best bet. A few additional factors in my case:

-I started residency several months late, so I am still in the grace period
-I have an inheritance of around $50k from when a grandparent passed recently
-I am not currently married but hope to be in the next 1-2 years
-my partner earns a good bit of money and has no loans
-still can’t afford the standard 10
-CARES act situation

So, from my understanding, the best approach at this point would be to:
-put the $50k towards the loan NOW to bring down the principal a bit
-prepay as much as I can from my personal savings on my high interest PLUS loans
-sign up for REPAYE to take advantage of the interest subsidy once CARES 0% interest ends
-overpay as much as I can
-once I get married, switch from REPAYE to PAYE and file taxes separately, or... refinance? If I can afford the monthly payments?

I’m not sure if I should consolidate or not... would it be smarter to keep them separate so I can target the highest interest loans first? Or should I consolidate so I can skip the grace period and reap the benefits of interest subsidy? (Assuming 0% interest ends soon)

I’m also not entirely sure if it’s worth it to start on REPAYE if I know that I’ll have to switch to PAYE within a couple years, triggering loan capitalization. Should I just start on PAYE from the get-go?

I’m just starting to really get a handle on all this stuff and it’s fairly overwhelming. Any advice would be super appreciated!

As noted above, set aside 3-6 months of living expenses (3 if you want to focus more on loans, 6 if you are more conservative. I'm on the conservative side). Put it in a separate high yield savings account like at ally bank where you won't access it except in true emergencies.

Get good, own-occupation disability insurance. For questions, see www.whitecoatinvestor.com and read everything you can about it before you buy it.

Then make a plan for the loans. The way I see it, you need to plan based on your current marriage status and have the backup plan be for when things change. Because if things don't work out or if it takes longer than 2 years to get married, it will help your student loan situation more if you planned as a single person.

By my back-of-the-napkin-calculations and really rough assumptions and estimations, I'd bet your loans will accumulate ~1250 a month in interest? RePAYE payments would likely be pretty minimal for this first year***.

I would take what's left of that 50K (after you've done the previous steps) and throw it at the high-interest loans to knock down principal. Make sure you call and follow up to make sure they apply it to principal. Those sneaky dirt bags will apply your payment to "future interest" if you're not explicitly instructing them to put it toward principal.

After you've done that, consolidate your loans and apply to enter RePAYE***. Continue to push forward with that plan until life circumstances change. When there's a wedding date set and venue reserved and paid for, then reassess your plan for the loans and decide if switching to PAYE makes sense or not.

Is your SO going to take these loans upon him/herself. Are they willing to contribute some of that 110K+/year toward your student loans after you get married? Because if they are, and if you're highly motivated to just crush loans hardcore, then switching to PAYE wouldn't really even matter at that point and your concern about capitalization becomes a non-issue.

Just some quick thoughts. Hope it helps. Your situation is not simple, but I think you should plan your loans based on your current status and adapt as that changes later.

****If you apply for RePAYE after you file your 2020 taxes, your payments for 2021 should be based on only a few months of income and therefore could even be $0 maxing out the subsidy.

 

[throwawayjosh381]

Hi! I’m a PGY1 trying to figure out the best way to tackle my ~$258,000 loans from med school. I have considered PSLF but leaning against it as I don’t love the restrictions it would place on my employment opportunities in outpatient psychiatry.
Assuming I will need to pay off the entire loan, an aggressive approach is obviously the best bet. A few additional factors in my case:

-I started residency several months late, so I am still in the grace period
-I have an inheritance of around $50k from when a grandparent passed recently
-I am not currently married but hope to be in the next 1-2 years
-my partner earns a good bit of money and has no loans
-still can’t afford the standard 10
-CARES act situation

So, from my understanding, the best approach at this point would be to:
-put the $50k towards the loan NOW to bring down the principal a bit
-prepay as much as I can from my personal savings on my high interest PLUS loans
-sign up for REPAYE to take advantage of the interest subsidy once CARES 0% interest ends
-overpay as much as I can
-once I get married, switch from REPAYE to PAYE and file taxes separately, or... refinance? If I can afford the monthly payments?

I’m not sure if I should consolidate or not... would it be smarter to keep them separate so I can target the highest interest loans first? Or should I consolidate so I can skip the grace period and reap the benefits of interest subsidy? (Assuming 0% interest ends soon)

I’m also not entirely sure if it’s worth it to start on REPAYE if I know that I’ll have to switch to PAYE within a couple years, triggering loan capitalization. Should I just start on PAYE from the get-go?

I’m just starting to really get a handle on all this stuff and it’s fairly overwhelming. Any advice would be super appreciated!

1. Watch out with REPAYE payments since your partner's income is included.

For single people repaye can save you thousands in residency but for those with dual income situations you ahve to crunch the numbers. My effective student loan interest was only like 3.6% with reapye and my slightly below average loan debt entering residency only went up marginally during my training.

2. Consolidating doesn't really do much. Last time I checked it gave you an effective interest rate and your rate was rounded UP to the nearest 0.125%.

3. For residents the idea is usually: have 3-6 mo liquid emergency fund, pay off or avoid high interest debt like credit cards. Max out ROTH IRA and preferably ROTH 401k.
Be frugal and usually avoid buying a house since you'll likely move in near future.

4. For attendings it's refinance vs go for PSLF. You can also continue making your 120 monthly payments for PSLF and put the money you'd have used in paying off your debt in a taxable stock/bond fund to pay off the debt in case PSLF falls through. This assumes your loan interest is lower than your expected investment return.

The CAGR of the S and P 500 is 9.25% from 1971 to December 2020.

CAGR of the Stock Market: Annualized Returns of the S&P 500

5. As long as your investment return outpaces your interest rate your net worth is going up. That said, if you had 6% or higher debt then it's a "guaranteed" 6% return by paying it down. Due to the CARES ACT you get 8 more months of 0% federal loan interest so you should obviously not pay it down. You shouldn't spend it, of course, but I'd put the money in a high-yield savings account. Not for the 0.5% return but for liquidity in case something happens. Paying off a 0% loan does not make any sense unless you know you will spend it and can't control yourself.

I'm sorry for your grandparent's passing. I'd definitely *not* pay down the 0% federal student loan debt. I'd keep it in savings right now in case of an emergency. You can put it towards your loans once the 0% interest ends.

 

[throwawayjosh381]

As noted above, set aside 3-6 months of living expenses (3 if you want to focus more on loans, 6 if you are more conservative. I'm on the conservative side). Put it in a separate high yield savings account like at ally bank where you won't access it except in true emergencies.

Get good, own-occupation disability insurance. For questions, see www.whitecoatinvestor.com and read everything you can about it before you buy it.

Then make a plan for the loans. The way I see it, you need to plan based on your current marriage status and have the backup plan be for when things change. Because if things don't work out or if it takes longer than 2 years to get married, it will help your student loan situation more if you planned as a single person.

By my back-of-the-napkin-calculations and really rough assumptions and estimations, I'd bet your loans will accumulate ~1250 a month in interest? RePAYE payments would likely be pretty minimal for this first year***.

I would take what's left of that 50K (after you've done the previous steps) and throw it at the high-interest loans to knock down principal. Make sure you call and follow up to make sure they apply it to principal. Those sneaky dirt bags will apply your payment to "future interest" if you're not explicitly instructing them to put it toward principal.

After you've done that, consolidate your loans and apply to enter RePAYE***. Continue to push forward with that plan until life circumstances change. When there's a wedding date set and venue reserved and paid for, then reassess your plan for the loans and decide if switching to PAYE makes sense or not.

Is your SO going to take these loans upon him/herself. Are they willing to contribute some of that 110K+/year toward your student loans after you get married? Because if they are, and if you're highly motivated to just crush loans hardcore, then switching to PAYE wouldn't really even matter at that point and your concern about capitalization becomes a non-issue.

Just some quick thoughts. Hope it helps. Your situation is not simple, but I think you should plan your loans based on your current status and adapt as that changes later.

****If you apply for RePAYE after you file your 2020 taxes, your payments for 2021 should be based on only a few months of income and therefore could even be $0 maxing out the subsidy.

I second the comment about own occupation, portable disability insurance. Many companies give you a discount if you continue with your current disability plan from residency to attendinghood. Term life insurance is cheap; good disability insurance can be somewhat pricey.

The main goal is to be self-insured which means accumulating a ton of assets then you can cancel your disability and life insurance.
For many docs that may be 2 million or more. With a 4% withdrawal rate, 2 million gives you 80,000 a year to live on.

 

[5yearstime]

Definitely suggest checking out white coat investor articles on loan repayment! Many strategies have different benefits on paper, but don't forget the psychological aspect of money! Maybe you can make more than 0% if you keep it in a more liquid account.... but will you really not touch it?? I know most people would find reasons to dip in.

I think you should pay towards your loans now and get the principle down. I was getting charged $1300 per month in interest alone before the COVID deferment. Your mandatory payments under the IDR plans will NOT preferentially pay off the highest interest nor will they go towards your principal. I have paid 15-20% of my gross income towards student loans every year during my 5 yrs of residency and yet my student loans are higher than when I started. Don't forget retirement either, just find a balance that works for your goals.

 

[Red Beard]

PSLF does present some limitations in terms of where you can work and how you work. That being said, having a large debt to service also puts limitations on you...you have to work a lot and make a lot more money!

I suggest getting on a PSLF qualifying payment plan ASAP and paying that payment through residency. If you decide to do a fellowship you may end up with 5-6 years of qualifying payments, and you might find yourself looking at jobs that would continue to qualify for the program. Eg staying on with your academic institution, going to the VA, a community mental health center, etc.

In the meanwhile, invest any excess money you can in a stock index fund.

If 5-6 years down the line you decide you just can't stomach a PSLF qualifying job, take the investment money and pay down your loans with it. Most likely that investment will have outpaced your loan interest (unless your loan interest is very high.)