Does it always make sense to forego loans if they aren't needed?

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kubyx

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I'm starting to gear up for my interviews and I'm trying to get my financial house in order. One thing that has me confused is whether or not loans always make sense.

I'm pretty fortunate to have a fairly high-paying job right now. I'm a nontrad ~6 years out of college, and I have been heavily investing since college. I'm at a point where I can likely pay off all 4 years of medical school out of my investments if I can sell my house for the value I'm estimating it to be next year, but it will be tight.

My concern here is that there might be certain perks of having loans that I'm not aware of. For example, I would hate to burn through my investments to pay for tuition, only to find that a job offering loan reimbursements is no longer an available perk. Then again, rates for loans are like 7% right now, so I'm not sure it makes any sense to not pay them off immediately. Am I missing anything?

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You can always make it a sign on bonus instead of 'loan repayment' anyway. They tax them both the same, so I don't see what you have to lose. Not having debt will put you so far ahead its not even funny.
 
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I have been trying to figure this out as well. I will probably run out of money my last year and I'm scared to live without a savings buffer. I've thought about doing some loans to give me options and if I end up having enough money at the end to just pay them off.
It will be a balancing game for sure with loan rates, cash flow, savings, and time. I'm also slightly concerned about after med school to support a family on a residents salary which was why I was also thinking I would get some loans just to have a buffer through the whole process.
I do plan on selling a lot of my investments while in school because long term capital gains tax is 0% for federal if you make less than 73k a year and are married filing jointly.
After that it jumps up to 15% to 25%
One other thing I am not sure on is if having assets and investments disqualifies you from some financial aid options.


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Remember that you can supplement your income after the first year of residency thru moonlighting. Investment assets will disqualify you from need-based aid, but many schools don't do much of that anyway. Some schools will try and force you to liquidate assets (including retirement accounts) before they will give loans, so make sure you don't report 401k on your FASFA (its not required for FASFA, but the schools will sometimes ask you to list it, don't do it, not required and can only hurt you!). You do have to list regular investments tho. But with the way the interest rates are on the debt (6%+) its hard to beat with investments anyhow (well, maybe not a really good REIT).

I understand the appeal of compound interest, but it is working against you with student loans as well. There may be a slight mathematical advantage of investing if you can perform above the average investor, but the market may tank also. The argument for not paying out of pocket is that the student loans are in deferment, so they aren't allow to capitalize during school. Also if you consolidate and use REPAYE as soon as you graduate, it will pay half of whatever interest is left over after your minimum monthly payment. Exp: you have 1000 of interest a month, your required payment is 250, the government will pick up the tab on half of the remaining 750, effectively lowering your interest rate. So taking all that in account, you maybe able to beat the debt with growth.

Personally, I know from my past loans that they are a PITA to get rid of, if I had the option, I wouldn't get them at all. That is perhaps a slight emotional decision, but its one that would make your life easier after residency. If you are planning a really long residency, perhaps it is worth it to keep investments, but it depends on the amount you have to start with. There is a decent chance the loans will grow faster, and you may have say 400k in investments in 10 years, but 500k in loans. That would be a poor outcome IMO, because you basically need to leave the money in to keep getting the benefits of compounding, but your debt beat you out. You still end up with a small starter home and living like a resident for even longer while you try and knockout the loans.
 
Thanks, that's good info. I've also thought about selling current investments to pay down a mortgage a bunch. Primary residence is also not counted, however, investment properties do count. I have switched the extra I was paying on my rental to the minimum and moved it to primary residence.


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Thanks, that's good info. I've also thought about selling current investments to pay down a mortgage a bunch. Primary residence is also not counted, however, investment properties do count. I have switched the extra I was paying on my rental to the minimum and moved it to primary residence.


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So you are trying to sell a rental and keep your current house? Are you in a school where you can use your current residence? If you are I would consider keeping it, but I wouldn't let it bias me towards residency (i.e. if I wanted gas, and there is no anesthesia in my town, I wouldn't pick a different specialty just to keep the house). Houses that you live in are nice because you can qualify for a lot of non school aid (not just financial, but think food stamps if you have family since no income) and they don't count as assets. I trust real estate more then the market, but some people say now that derivative swapping is back and triple B bonds that real estate is gonna tank again in a couple years. That doesn't matter if you bought before this summer, and I would argue that it risk is alleviated if you are able to sell your rental 'high.' Good problems to have.
 
You can always make it a sign on bonus instead of 'loan repayment' anyway. They tax them both the same, so I don't see what you have to lose. Not having debt will put you so far ahead its not even funny.

Is this a real thing like telling your employer to categorize that loan repayment into a sign on bonus?

OP, I was in a similar position like yours. I took out max loan bc if I take PAYE/REPAYE, my effective interest rate on those loans over 20 years is about 1.5-2.0%. I might pay back all of those loans by the end of residency if my finance situation changes. However, I personally will not take a hit in higher tax rates as a financial responsible person when handouts are being given out freely left and right. I just want fair treatment, but I really don't trust our government to do anything sensible. The returns on these loans, which stand at currently about 12-15% annually, will be used to buy a house during residency in order to cross out that living cost expense.
 
So you are trying to sell a rental and keep your current house? Are you in a school where you can use your current residence? If you are I would consider keeping it, but I wouldn't let it bias me towards residency (i.e. if I wanted gas, and there is no anesthesia in my town, I wouldn't pick a different specialty just to keep the house). Houses that you live in are nice because you can qualify for a lot of non school aid (not just financial, but think food stamps if you have family since no income) and they don't count as assets. I trust real estate more then the market, but some people say now that derivative swapping is back and triple B bonds that real estate is gonna tank again in a couple years. That doesn't matter if you bought before this summer, and I would argue that it risk is alleviated if you are able to sell your rental 'high.' Good problems to have.

If the market crashes at some point during my attending years, I will personally work like a horse taking 60-70 hrs week workload temporarily and buy all the stocks on sale. The best thing about being a physician is that your earning power sustains its normal growth of 3-5% regardless of the general economics.
 
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Is this a real thing like telling your employer to categorize that loan repayment into a sign on bonus?

OP, I was in a similar position like yours. I took out max loan bc if I take PAYE/REPAYE, my effective interest rate on those loans over 20 years is about 1.5-2.0%. I might pay back all of those loans by the end of residency if my finance situation changes. However, I personally will not take a hit in higher tax rates as a financial responsible person when handouts are being given out freely left and right. I just want fair treatment, but I really don't trust our government to do anything sensible. The returns on these loans, which stand at currently about 12-15% annually, will be used to buy a house during residency in order to cross out that living cost expense.
For the first part, you can choose to have the loan repayment paid to you rather than directly to the lender, it is a thing.

So I just wasted a bunch of time trying to calculate out what you said, so I could see if it could be true. Its not quite, but mostly because REPAYE is 25 years, and you don't qualify for PAYE as a physician d/t income restrictions. Under both those programs any amount forgiven is taxable. So going with 300k principle with deferred payments during school gets you to approximately 340k by the end of school, using REPAYE with the half interest paid option gets that upto 367k by three years or 394k by 6 for a longer residency (all uncapitalized interest as well).

At that point, you go upto your real interest rate of 6%, which is approximately 18k a year as long, as you recertify every year and keep the interest from capitalizing. REPAYE has you at approx. $1,776 a month for 250k a year income, and 2609 for 350k a year (assumptions: family of 4 in continental US). Long story short, you will be forgiven 116k (taxed for 46k from that) add that to what you paid and you come up with approximately $645k. With the 250k income you will be forgiven 297k, which will then be taxed at approximately 40% percent for 119k (top bracket). Total paid = approx. 590k.

So using my handy compound interest calculator and working backwards, I have my short residency guys interest at approx. 2.4%, and my 'specialist' at approx. 2.7%. Assumptions are no raises for my Docs (but I also didn't raise the poverty level either, so no decrease in payment).

When I used student loan heros repayment calculator, and allowing for a 2% increase in pay (I do not think our reimbursement is keeping up with inflation) I came up with 667k paid for my 250k guy with 109k forgiven (so add 43.6k to 667 = 710k) over the 25 years. The problem is I have no way to correct for the 3 years of residency with this, but this is more like 3% over the life of the loan. For my specialist, he pays 632k and ends up paying off his loan in 17.3 years according to student loan hero. This is more like 3%, since he paid it off quicker.

I have to admit, I thought I disagreed with you earlier, but actually, you are closer to correct with the way REPAYE is set up. That whole never letting the interest capitalize while you are in it is a big deal and really makes a difference.

That said, I still don't like debt, and would absolutely prefer to be debt free. Mathematically tho, you are right that the interest rate is effectively 3% or less as currently set up. I have to think most stocks will beat 3% over 20 years tho.

Interesting side note: These programs definitely lose their benefit the more you make. At 500k REPAYE basically is the standard 10 year plan.
 
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For the first part, you can choose to have the loan repayment paid to you rather than directly to the lender, it is a thing.

So I just wasted a bunch of time trying to calculate out what you said, so I could see if it could be true. Its not quite, but mostly because REPAYE is 25 years, and you don't qualify for PAYE as a physician d/t income restrictions. Under both those programs any amount forgiven is taxable. So going with 300k principle with deferred payments during school gets you to approximately 340k by the end of school, using REPAYE with the half interest paid option gets that upto 367k by three years or 394k by 6 for a longer residency (all uncapitalized interest as well).

At that point, you go upto your real interest rate of 6%, which is approximately 18k a year as long, as you recertify every year and keep the interest from capitalizing. REPAYE has you at approx. $1,776 a month for 250k a year income, and 2609 for 350k a year (assumptions: family of 4 in continental US). Long story short, you will be forgiven 116k (taxed for 46k from that) add that to what you paid and you come up with approximately $645k. With the 250k income you will be forgiven 297k, which will then be taxed at approximately 40% percent for 119k (top bracket). Total paid = approx. 590k.

So using my handy compound interest calculator and working backwards, I have my short residency guys interest at approx. 2.4%, and my 'specialist' at approx. 2.7%. Assumptions are no raises for my Docs (but I also didn't raise the poverty level either, so no decrease in payment).

When I used student loan heros repayment calculator, and allowing for a 2% increase in pay (I do not think our reimbursement is keeping up with inflation) I came up with 667k paid for my 250k guy with 109k forgiven (so add 43.6k to 667 = 710k) over the 25 years. The problem is I have no way to correct for the 3 years of residency with this, but this is more like 3% over the life of the loan. For my specialist, he pays 632k and ends up paying off his loan in 17.3 years according to student loan hero. This is more like 3%, since he paid it off quicker.

I have to admit, I thought I disagreed with you earlier, but actually, you are closer to correct with the way REPAYE is set up. That whole never letting the interest capitalize while you are in it is a big deal and really makes a difference.

That said, I still don't like debt, and would absolutely prefer to be debt free. Mathematically tho, you are right that the interest rate is effectively 3% or less as currently set up. I have to think most stocks will beat 3% over 20 years tho.

Interesting side note: These programs definitely lose their benefit the more you make. At 500k REPAYE basically is the standard 10 year plan.

Actually, all physicians should qualify for PAYE if you have a 350-380K student loan debt. Here's the guideline:

"For Pay As You Earn, a circumstance in which the annual amount due on your eligible loans, as calculated under a 10-year Standard Repayment Plan, exceeds 10 percent of the difference between your adjusted gross income (AGI) and 150 percent of the poverty line for your family size in the state where you live."

I have calculated it myself using diff assumption and metrics. However, the key change that I have made is an increasing tax bracket, in which I pay less taxes on my $$$ forgiven. I also assumed at real inflation rate of 1.0-2.0%. Nominal interest rate might be around 2.5%. However, the real interest rate is probably closer to 1%. Honestly, it's a no brainer to take out max loan even if you can afford the entire COA over four years.
 
Actually, all physicians should qualify for PAYE if you have a 350-380K student loan debt. Here's the guideline:

"For Pay As You Earn, a circumstance in which the annual amount due on your eligible loans, as calculated under a 10-year Standard Repayment Plan, exceeds 10 percent of the difference between your adjusted gross income (AGI) and 150 percent of the poverty line for your family size in the state where you live."

I have calculated it myself using diff assumption and metrics. However, the key change that I have made is an increasing tax bracket, in which I pay less taxes on my $$$ forgiven. I also assumed at real inflation rate of 1.0-2.0%. Nominal interest rate might be around 2.5%. However, the real interest rate is probably closer to 1%. Honestly, it's a no brainer to take out max loan even if you can afford the entire COA over four years.
Based on historical tax rates, I believe that assuming an increasing tax bracket is a bad assumption, we are basically at an all time low, taxes will increase not decrease. Inflation applies to both your investments and the interest, so it is not part of the equation as far as I am concerned.
 
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