Student Loan Case Studies # 1, 2, & 3

If you’ve visited my Student Loan Resource Page in recent months, you may have noticed the invitation to fill out a questionnaire to be considered for a case study. Today, I’d like to present a few of the first case studies we received.

I am the first to admit I am not an expert when it comes to the intricacies of student loan management, so I’ve hired someone who is.

Dr. David Michael Frederick Anderson, or DMFA to you, is our in-house student loan consultant, and he’s dug deep into the following case studies.

The first will be a complete case study, with the second and third more of a rapid response assessment. I was only planning to publish the full studies and email responses in the rapid responders, but DMFA’s assessments were too good not to share.

Jump to:

• Student Loan Case Study 001: Airstream Debt, a Mortgage, and $206,000 in Student Loans

• Student Loan Case Study 002: The Future Orthopedic Surgeon with a Half-a-Million Dollar Loan Balance

• Student Loan Case Study 003: New Pediatric Resident in a High-Cost-of-Living Area

I’m also partnering with Travis Hornsby, a friend who happens to run Student Loan Planner, a service which saves professionals thousands of dollars on their student loans. If you’d like a more in-depth look or a second opinion, for a few hundred dollars, he often finds tens of thousands of dollars in savings for you. If you opt to utilize his services, please mention I sent you in the consult form.

Let’s dive into Student Loan Case Study 001!

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Student Loan Case Study 001: Airstream Debt, a Mortgage, and $206,000 in Student Loans

 

The Questionnaire:

 

Student Loan(s): 

Mohela: unsubsidized,  $159,761, 5.3% fixed, RePAYE, not sure of initial balance I don’t think it has changed much ☹

Mohela: subsidized, $46, 522, 5.3% fixed, RePAYE

 

Age: 36

 

Current education status (student, resident, fellow, attending): attending

 

Specialty: Family Medicine (non-clinical currently)

 

Marital status & tax filing status: married, filing jointly

 

Your current income: $200,000

 

Anticipated changes in your current income: no

 

Spouse’s current income: $0

 

Anticipated changes in spouse’s current income: none

 

Spouse’s student loan details: Navient loan $7,561, 2.9% fixed

 

Do you have any other debt? (car loan, credit card debt, other) Approximate interest rate(s), monthly payment, and terms? Airstream trailer, at 4.99%, minimum is $460, pay $600, $75,000 left

 

 

Do you live in a high, medium, or low cost of living area (best guess)? Medium

 

Available retirement plans (401(k) / 403(b), 457(b), solo 401(k), SEP IRA, SIMPLE IRA, cash balance / defined benefit plan) / how much in total do you invest annually?

401(k): $38,000 – max

HSA: $2,500 – max

Husband 401(k)s: $90,000, puts nothing in as not working

 

Do you invest outside of retirement accounts? Approximately how much annually? Yes, very small taxable account with $4000, maybe $1000 per year

 

Do you have a mortgage? If yes, approximate interest rate, monthly payment, term, and total amount owed? 30 year term, 3.75%, FHA, $2106 per month, $313,000 left. We do live in a duplex and rent out other unit for $1500 per month

 

Are you pursuing Public Service Loan Forgiveness? If yes, How many qualifying payments do you have behind you? (Officially certified by your servicer)? no

 

Do you have any other form of forgiveness or assistance from an employer or state / local government entity? (for example, FQHCs or underserved areas)? no

 

Are you considering full-term, taxable loan forgiveness through one of the Federal income-driven programs (RePAYE, PAYE, IBR)? Doing RePAYE now, not sure it’s worth it.

 

Which of the following *best* describes your attitude toward student loans:

1. I want to pay them off as quickly as possible, even before saving/investing for retirement
2. I do want to pay them off quickly, but I want to save/invest for retirement first
3. I am ambivalent about them and would like a decent balance between paying my debt, saving/investing, and doing other things with my money
4. I am happy to let my student debt linger and simply pay the minimum amount for as long as possible

 

I am a cross between 1 and 3, I want the loans gone but want to save for retirement at the same time, so am doing a little of both.

 

Is there anything else you’d like us to know that would help us help you?

 

I had initially been ignoring my loans and paying the absolute minimum possible and hoping they would just go away after a while, but now I realize I want them gone.  I just recently paid off about $35,000 in private loans, so I’m making some progress.

My goal is to pay my student loans off by 40, I get a yearly bonus, and a company stock plan that I have been selling which ends up being an extra $50k per year I can throw at it.

I am planning on refinancing likely to a lower interest rate but am concerning about a huge monthly payment.

 

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The Response:

 

DMFA: Your concerns are very valid.  You’re still looking at more than your annual gross income in non-mortgage debt.  A high required monthly payment is going to be a pretty big undertaking, but you’re going to be eating a fair amount of interest going forward.  If you want to pay them off in 4 years, however, it’s going to take a bigger payment than you may initially want, but I think it’s going to be good for you, and I really think that it could fit into your budget.

I’ll start with a few minor things before getting to the student loans.  A couple years ago, I’d have said your home loan was particularly suboptimal at 3.75% FHA, esp paying mortgage insurance, but nowadays it’s hard to find anything under 4% for a 30-year term without paying points, so I’d leave that…especially since you’re renting out the other side for a net cost of $600/month, and particularly if you put all that into the principal.

The trailer loan looks like a very long amortization. Paying $600/month on $75,000 at 5% will take you almost 15 years to pay off, while losing $30,734 in interest.

 

 

OK, now to the student loans.  If you are going to pay them off in 4 years, then there is no sense in letting them stay at that high interest rate.  RePAYE is doing you no good right now since your minimum payment is more than the accrued interest, and hence there is no half unpaid interest subsidy…so it’s just a plain old loan at 5.3% (even SoFi’s 20-year is less than that) without a set term.

The key is determining how much you can pay each month.  Assuming a standard deduction on your income taxes, your very commendable saving rate, not factoring in your rental income since I don’t know how much of it you can deduct on Schedule E, and not factoring in your annual bonuses or stock plan, a gross income of $200,000 with those pretax retirement contributions should net you an effective tax rate of 10.84%, plus SS and MCR taxes, which yields $126,950 net per year, or about $10,579 going into your bank account each month.

With your $206,283 in student loans, refinancing that at 3.25% fixed for a 5-year term would be a minimum monthly payment of $3,729.60, or 35.3% of your monthly take-home pay.  That seems like it should be something you could fit into your budget, since after factoring in rental income (assuming it just offsets your mortgage) you only spend $600 a month on your mortgage (<5.7%, with the average household spending 15-25%).

If you want a lower minimum monthly payment but still want to lower your interest rate, you could consider a 10-year 4.5% fixed, which would be $2,137.88/mo, and just pay over the minimum whenever you’ve got a few thousand handy.

Since you seem to be amenable to using lump-sums throughout the course in order to pay it, this might possibly be a more attractive option. Should you want to pay it off in equal installments over 4 years, it would cost $4,588.76/mo, assuming you refinanced to the 5-year fixed rate.  Your 4-year plan seems very doable overall, but using nearly half your post-tax income to your student loans might be a bit much to bite off in your situation.

I’d focus on paying off your Airstream as well, depending on how low you are able to refinance your student loans; $1 toward your Airstream will save you more in interest than $1 toward your loans once that is restructured.  While your husband’s loan is at a lower rate than the others, the low amount owed makes it fairly easy to swat away. If this makes you feel better by picking one of them off, great! If not, then you might just set-and-forget it or round up to the next hundred dollars to pay it down a bit quicker.

 

So, to summarize:

• I think you can hack a 5-year 3.25% fixed at $3,729.60/month; if you don’t want to do that high of a monthly payment, you can just go with a 10-year 4.5% fixed at $2,137.88/month.

• Use those lump sums to achieve your pay-by-40 goal.

• Once you refinance, your Airstream will be at a higher rate (but lower principal) than your student loans, so you might consider shifting your priority to that.

• Keep up your current savings rate of about 20% gross – this should get you where you need to get.

 

Keep up the good work!  Good luck, and Cheers! -DMFA

 

Student Loan Refinancing Disclosures

 

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Student Loan Case Study 002: The Future Orthopedic Surgeon with a Half-a-Million Dollar Loan Balance

 

The Questionnaire:

 

Student Loan(s): 

Laurel Road (privately refinanced from MOHELA)

Principal $428,541.14, Accrued but not capitalized interest $63,977.90.

5.75% fixed

15-year repayment term starting after graduation from fellowship, $100/mo in residency and fellowship

Balance at time of entering initial repayment status

Repayment starting 1/1/2022 (6 month grace period after finishing fellowship July 2021: Balance $586,292.95

 

Age: 28

 

Current education status (student, resident, fellow, attending): PGY-3 Resident

 

Specialty: Orthopedic Surgery

 

Marital status & tax filing status: Single

 

Your current income: $57,300

 

Anticipated changes in your current income: Roughly $2000 increase each year of training. +/- Moonlighting if available

 

Do you have any other debt? (car loan, credit card debt, other) Approximate interest rate(s), monthly payment, and terms?

– Car payment: Remaining principle $3289. Monthly payment $275. Payoff date April 2019. I’m one month ahead in payments, expect to pay this off early.

 

Do you live in a high, medium, or low cost of living area (best guess)?

– Low cost of living

 

Available retirement plans (401(k) / 403(b), 457(b), solo 401(k), SEP IRA, SIMPLE IRA, cash balance / defined benefit plan) / how much in total do you invest annually?

– 403(b) through the hospital, personal Roth IRA. I’ve maxed out my Roth IRA the past two years, and I contribute 6% of my salary (up to the max for employer match) to the 403(b). In total, I invest roughly $9-10k a year in retirement accounts.

 

Do you invest outside of retirement accounts? Approximately how much annually?

– No, the remainder of my savings goes into my savings account for emergency fund and upcoming fellowship interview travel expenses. In total I have about $35k in assets.

 

Do you have a mortgage? 

– No

 

Do you rent? Monthly payment?

– Yes, $750/mo, $70/mo extra for garage

 

Are you pursuing Public Service Loan Forgiveness? If yes, How many qualifying payments do you have behind you? (Officially certified by your servicer)

– No, refinanced my substantial undergrad loans (public and private) and my med school loans intern year

 

Do you have any other form of forgiveness or assistance from an employer or state / local government entity? (for example, FQHCs or underserved areas)

– No, unfortunately!

 

Are you considering full-term, taxable loan forgiveness through one of the Federal income-driven programs (RePAYE, PAYE, IBR)?

– Nope

 

Which of the following *best* describes your attitude toward student loans:I want to pay them off as quickly as possible, even before saving/investing for retirement?

1. • I am ambivalent about them and would like a decent balance between paying my debt, saving/investing, and doing other things with my money
   • I am happy to let my student debt linger and simply pay the minimum amount for as long as possible

 

I do want to pay them off quickly, but I want to save/invest for retirement first* (I would like to do both at the same time)

 

Is there anything else you’d like us to know that would help us help you?

Shooting to have my loans paid off by the time I’m 35, which will give me 3 years to pay them off after starting my career at 32. Doable? Or crazy?

 

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The Responses:

 

PoF: With the salary you can command as an orthopedic surgeon, particularly while taking advantage of geographic arbitrage with a high salary in a low cost of living area, I think paying off the loans within a few years is both doable and desirable.

It will help stave off “lifestyle inflation”, too, since you’ll be redirecting much of your post-tax income towards paying off about a half-million dollars in loans.

With rising interest rates, by the time you’re done with training, you may not find a lower interest rate, but it will be worth taking another look at current rates when you are an attending. [note: I write my simple suggestions first, then let the expert bat clean up.]

 

DMFA: While you’re a resident making $57,300 a year, you won’t make hardly any headway in half a million in student loans even if you try to be aggressive.  In light of that, I think you’re doing a great job in maximizing your employer match (aka free money) and Roth IRA.

Unlike other borrowers who are trying to minimize their student loan payments on Federal income-driven plans as much as possible by reducing their AGI with pretax contributions, this would not benefit you very much since your payments are not affected by your AGI. Hence if your 403(b) has a Roth option, I would do that; matched contributions are always pretax.

One thing you *might* consider doing, though, is paying $208.33 to your student loans each month instead of $100.  This will maximize your student loan interest deduction of $2,500, meaning in the 22% bracket you’ll get back $550 at tax time.  Preventing that accruing interest from bearing more interest once you refinance when out of training is nice, but that 22% back is more than you’ll gain with just about any investment.

Your 3-year time horizon is doable if you can limit the lifestyle inflation which PoF mentions.  Say you pay $2,500 in interest in 2018 and 2019 and then the minimum $1,200 for 2020 (will probably exceed the deduction income cap from moonlighting in fellowship) and $600 the first half of 2021 until you finish fellowship while 5.75% is accruing on $428,541.14 with $63,977.90 already accrued; your refinanced principal will be $559,642.39.

Assuming rates stay the same (they prob won’t, but let’s use what we’ve got) and you take a 5-year term at 3.25% (I don’t know of any major lenders who refinance to shorter terms than 5), the monthly payment on that is $10,118.34 ($121,420/yr).  If you want to pay it in 3 years, you would need to pay $16,336.81 per month ($196.042/yr). If you’re single, that could be almost half of your take-home pay, so keeping your lifestyle limited is going to be the key.

Note that you would save about $20,000 in total interest by paying it off in 3 years instead of 5; while $20,000 is a huge amount to you now, it will be about 3 weeks’ take-home pay once you’re out of fellowship.  This is totally up to you based on how badly you want to be out of debt versus how aggressively you want to invest, maintain liquidity, etc.

 

So, in summary:

• Keep doing what you’re doing now; that’s fine.

• Consider paying $2,500 a year in interest while you qualify for the deduction.

• Pay off the student loans as quickly as you want once out of training; I’d refinance to a 5-year variable term and pay over the minimum whenever you feel like it.

 

 

Good luck!  And cheers! -DMFA

Student Loan Refinancing Disclosures

 

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Student Loan Case Study 003: New Pediatric Resident in a High-Cost-of-Living Area

 

The Questionnaire:

 

Student Loan(s):

Medical School Loans:

• Lender: Great Lakes
• Loan Type: Federal Stafford Unsubsidized
• Balance: $118,000
• Avg Interest Rate is 5.8%
• Payment Plan: Currently planning on the Standard Plan
• $118,000

 

Age: 26

 

Current education status (student, resident, fellow, attending): Graduated medical school in May, 2018

 

Specialty: Pediatrics

 

Marital status & tax filing status: Married filing jointly

 

Your current income: My salary will be $55,500.

 

Spouse’s current income: Currently making $40k

Anticipated changes in spouse’s current income: Job change coming. Can expect similar income.

Spouse’s student loan details: None

 

Do you have any other debt? (car loan, credit card debt, other) Approximate interest rate(s), monthly payment, and terms? None

 

Do you live in a high, medium, or low cost of living area (best guess)? High (SoCal)

 

Available retirement plans (401(k) / 403(b), 457(b), solo 401(k), SEP IRA, SIMPLE IRA, cash balance / defined benefit plan) / how much in total do you invest annually?

Currently not investing. Will begin to minimally in residency. Will have access to a 403(b) and wife’s 401(k). Planning to invest ~ $5,000 a year. Maybe more depending on what kind of match employer match we receive.

 

Do you invest outside of retirement accounts? Approximately how much annually? No

 

Do you have a mortgage? No

 

Do you rent? Monthly payment? Yes. $2,100/month

 

Are you pursuing Public Service Loan Forgiveness? No

 

Do you have any other form of forgiveness or assistance from an employer or state / local government entity? (for example, FQHCs or underserved areas) No

 

Are you considering full-term, taxable loan forgiveness through one of the Federal income-driven programs (RePAYE, PAYE, IBR)? No

 

Which of the following *best* describes your attitude toward student loans:

I do want to pay them off quickly, but I want to save/invest for retirement first.

 

 

 

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PoF: If you’re definitely not going for PSLF or another forgiveness plan, I would refinance. Your rate may not drop a lot, but companies like Laurel Road, SoFi, and Splash will allow you to make payments as low as $1 to $100 a month during residency, which may come in handy due to the HCOL area.

I don’t know how attached you are to SoCal, but I’m sure you know there are many places where your money goes much further and you’ll make more as a pediatrician, too. Obviously, a personal decision. Fortunately, your loan balances are far below the average of about $200,000 so you’ve done well to avoid digging the deep hole so many others are in.

 

DMFA: The low-paying specialty in the high cost-of-living area faces a fairly unique problem among physicians.  However, you’re in a pretty good spot with only $118,000 in debt at 5.8%.

RePAYE, while it has to include spouse’s income in the payment, is still a pretty good deal for you. For the rest of 2018, the payment is $128 (effective interest rate 3.29%) based on an AGI of $40k from 2017 and a family size of 2. Then, when you have to recertify income next year with half of your $55,000 income and her $40,000 income, it’d be about $307/mo (effective interest rate 4.46%).

Despite those fairly low payments, your interest would accrue at a lower rate than it would if you did a refinance in residency in the high-5% range (5.75% is fairly average) thanks to the half-unpaid interest subsidy of RePAYE and the poor refinance rates given to residents.

Once your payment is higher and there is no longer any unpaid interest subsidy (i.e. the rate actually is 5.8%), then you’d no longer benefit from being in RePAYE.  At that point, given the high SoCal cost of living, you can either choose really to tighten the belt and pay through it, or do the tiny $100/mo payment through Laurel Road (or is it Yanni Road?) or Splash while interest accrues for that year.

When you finish training, I estimate you’ll have about $135,000 or so in loans from the unpaid interest accruing (though mitigated by RePAYE).  If you refinanced at 5-year 3.25% fixed, that’d be a monthly payment of about $2,441, or about 15-20% of your take-home pay, assuming usual retirement savings and tax situation and your wife working.  That should certainly be doable while you continue to save for retirement.

 

So, in summary:

 

• If you can afford the RePAYE payment for the next two years ($128 and $307 respectively), then change your federal repayment plan to RePAYE

• If/when you can’t, refinance with Laurel Road or Splash for a suboptimal rate, but minimal payments ($1-100)

• When you finish training, refinance to a 5-year fixed which should comprise about a fifth of your take-home pay

• Consider living somewhere Peds makes more and that costs less to live?

 

Good luck, and cheers! -DMFA

 

 

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If refinancing is the best option for you, please consider signing up via my links, which you can find peppered throughout this post and on my Student Loan Resource Page, which has links to dozens of great articles. I’ll donate $50 to a charity of your choice if you can show that I was credited as your referral source.

 

If you’d like advice from a former Vanguard bond trader who has consulted on over 1,000 individual’s and couple’s student loan scenarios, or would like a second opinion, consider a consult from Travis, the Student Loan Planner.

If you owe more than $100,000 in student loans and aren’t 100% sure that you’re doing everything the right way, he finds projected savings of 125 times his consulting fee on average (that one-time fee ranges from $295 to $595). That’s tens of thousands of dollars.