Paying off loans in bulk after entering practice?

[devildoc2]

OK, lets say I take out 150k in med school loans.

I complete residency and then start working as a doctor making 100k per year.

I can live off 50k per year easy. Should I take that other 50k every year and use it to pay off the loans in 4 years or so (150k + interest)?

Or does it make more sense to just pay off the loan regularly over a 10 year or 20 year period?

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[trouta]

Depends on the interest rate of you student loans as well as the interest rate on other debt you have at the time as well as the interest rate you can make through investment.

If you can consolidate at a low interest rate on your student loans it makes sense to pay off your higher interest debt first (mortgage, credit cards etc.).

Also if you can make more investing than you are being charged in interest it makes more sense to pay things off slowly and make a little money that way.

Then again there are people that just hate debt of any kind. If you are that kind of person you may just want to pay off your loans in lumps. But that is a personal decision.

 

[smc927]

Don't forget taxes.

I ran the numbers through an online calculator. Excluding possible pre-tax deductions (health insurance, pre-tax savings plans, 401K, etc, etc) and other exemptions...

... if you file as SINGLE you'll lose roughly $30,000 per year in taxes.

... if you file as MARRIED you'll lose roughly $25,000 per year in taxes.

So now figure it out again at $75,000 per year!

Having said that, I know a primary care doc who is doing just that. He has four kids (another on the way) and drives used cars, bought an affordable house, etc, etc. He'll have things paid of much more quickly than others.

Personally it sounds like a great idea. The money you save in interest adds up, and becomes money you can put to work for you instead of against you.

 

[TommyGunn04]

don't forget about the long-term advantage of compounding! I'd argue that it's best to put the $25,000 per year into an IRA (or even better, a pre-tax 401k). The earlier you save for retirement the easier it will be, and the less you'll have to contribute later on. A very wise physician once told me, "Plan on living like a resident for your first five years in practice, and save as much as you can for retirement." If you wait until you've paid off your loans under the traditional 10 year repayment plan, you might not begin saving for retirement until well into your 40's! (and that's a BIG mistake)

 

[mpp]

Unfortunately, you are limited in the amount of money you can put into an IRA or 401(k) or other tax-sheltered type of account each year. You can always save money in non-sheltered accounts however.

 

[TommyGunn04]

Unfortunately, you are limited in the amount of money you can put into an IRA or 401(k) or other tax-sheltered type of account each year. You can always save money in non-sheltered accounts however.

Ah that's right...I believe the IRA cap is now up to $4000 for most people. Good point.

 

[CanIMakeIt]

Ah that's right...I believe the IRA cap is now up to $4000 for most people. Good point.

Is that per year or per month?

 

[MS05']

Is that per year or per month?

Per year...and isn't it increasing to $5000 next year?

 

[GeneGoddess]

For 2006 or 7, I can't remember... And it is supposed to increase by $500 every year or every other year after that (although I think it is set to "expire" in 2009 or 11, but that's a bit complex for here).

 

[TommyGunn04]

Per year...and isn't it increasing to $5000 next year?

I thought it was just increased from $3000 for $4000...maybe that was for the tax season ending in a few days though, so it may very well be going up to $5000 next year.

 

[i61164]

If you think you can make more on investments than you will pay in loan intererst, be careful.

Lets say that your consolidated loan interest rate is 5%, but you can make a guaranteed 6.5% by investing instead of aggressively paying down your loan. The 6.5% interest that you make will be subject to income tax or capital gains tax, so you will end up with less than 6.5%. Whether or not you are better off investing the money is not a simple question and it depends on your particular tax situation. It's really best to consult a financial advisor.

 

[Idiopathic]

If you think you can make more on investments than you will pay in loan intererst, be careful.

Lets say that your consolidated loan interest rate is 5%, but you can make a guaranteed 6.5% by investing instead of aggressively paying down your loan. The 6.5% interest that you make will be subject to income tax or capital gains tax, so you will end up with less than 6.5%. Whether or not you are better off investing the money is not a simple question and it depends on your particular tax situation. It's really best to consult a financial advisor.

Not to mention that fact that you will be able to write off interest paid on said student loans. However, most people getting locked in now are doing it at a much better rate than 5%. If you can lock into a rate <3%, for instance (I think this is certainly doable today, I got a flyer for 1.675% the other day), it would be more advantageous to use the money you would be paying the extra loan off with and applying that towards an investment that, at the very least, would pay you 6-7% a year. When the rates start to get closer is when the situation gets dicier.

Plus, in the long run, you would rather have money compounding longer, I think. You can never replace the effect of starting your investing a year earlier...the value of that money over time is tremendous when all is said and done. Pay the 1K a month in student loan payments and put the extra in solid, growth investments. Dont sacrifice saving for retirement/investing for paying off those loans, because you will not come out on top in the end, in my opinion.

 

[eldarion3141]

I know the interest rates on federal loans are going up this summer, so do my interest rates on my laons go up as well, or are they locked in for every loan that i take out?

 

[MadameLULU]

I know the interest rates on federal loans are going up this summer, so do my interest rates on my laons go up as well, or are they locked in for every loan that i take out?

some have a variable rate (e.g. the Stafford and private laons), but others are fixed rate (e.g. Perkins)

 

[OrthoFixation]

Not to mention that fact that you will be able to write off interest paid on said student loans.

If memory serves, the student loan interest deduction is phased out rather quickly with significant income, like over $100K or so.

 

[MS05']

If memory serves, the student loan interest deduction is phased out rather quickly with significant income, like over $100K or so.

ya, and watch who you consolidate with. Some banks/groups will sell your loan after you consolidate with them and you may lose those incentives like the auto deduction rate decrease and the on time payment rate decrease. Then your 1.6% will go up in smoke...

 

[Trismegistus4]

If memory serves, the student loan interest deduction is phased out rather quickly with significant income, like over $100K or so.

It's based on your Adjusted Gross Income, and for 2004, the AGI limit above which you didn't qualify for the deduction was about $65k.