Student Loan Case Studies # 4, 5, & 6

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. Last month, I shared the first few case studies analyzed by our in-house student loan expert, Dr. David Michael Frederick Anderson, a.k.a. DMFA

Today, I’d like to share a few more case studies. The first two are complete analyses, and the third is a more brief look, although I’ve realized that student loan studies can hardly be brief given the complexities of the various options for repayment, refinancing, and forgiveness.

Jump to:

 

 

 

 

I’m also partnering with Travis Hornsby (no relation to Bruce… I don’t think), 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 004!


Student Loan Case Study 004: A Million in Debt at 43 with No Clear Path Out

 

The Questionnaire:

 

Student Loan(s): 

Current balance: $389k + $30k interest

Balance at time of entering initial repayment status: $325k, recently missed recertification so interest capitalized to $389k.

 

Direct Student Plus Loan ­ 06/26/12

  • Interest Rate: 7.65%
  • Original Balance: $28,751.00 Unpaid Interest: $3,095.19 Current Balance: $37,673.00
  • Monthly Payment: $38.50 Repayment Term: 208 Months

Direct Unsub Stafford Loan ­ 06/26/12

  • Interest Rate: 6.55%
  • Original Balance: $44,944.00 Unpaid Interest: $3,791.09 Current Balance: $55,828.40
  • Monthly Payment: $57.05 Repayment Term: 186 Months Expected Payoff Date: 09/21/2030

Direct Sub Stafford Loan ­ 07/01/11

  • Interest Rate: 6.55%
  • Original Balance: $8,500.00 Unpaid Interest: $553.04 Current Balance: $8,539.01
  • Monthly Payment: $8.73 Repayment Term: 151 Months Expected Payoff Date: 09/21/2030
  •  

Direct Unsub Stafford Loan ­ 07/01/11

  • Interest Rate: 6.55%
  • Original Balance: $38,667.00 Unpaid Interest: $3,469.87 Current Balance: $51,099.48
  • Monthly Payment: $52.22 Repayment Term: 186 Months Expected Payoff Date: 09/21/2030

Direct Student Plus Loan ­ 07/01/11

  • Interest Rate: 7.65%
  • Original Balance: $26,864.00 Unpaid Interest: $3,077.32 Current Balance: $36,985.86
  • Monthly Payment: $37.79 Repayment Term: 199 Months Expected Payoff Date: 09/21/2034

Direct Sub Stafford Loan ­ 07/01/10

  • Interest Rate: 6.55%
  • Original Balance: $8,500.00 Unpaid Interest: $553.04 Current Balance: $8,539.01
  • Monthly Payment: $8.73 Repayment Term: 151 Months Expected Payoff Date: 09/21/2030

Direct Unsub Stafford Loan ­ 07/01/10

  • Interest Rate: 6.55%
  • Original Balance: $38,667.00 Unpaid Interest: $3,676.49 Current Balance: $54,142.53
  • Monthly Payment: $55.32 Repayment Term: 186 Months Expected Payoff Date: 09/21/2030

Direct Student Plus Loan ­ 07/01/10

  • Interest Rate: 7.65%
  • Original Balance: $33,459.00 Unpaid Interest: $4,124.34 Current Balance: $49,532.16
  • Monthly Payment: $50.61 Repayment Term: 199 Months Expected Payoff Date: 09/21/2034

Direct Sub Stafford Loan ­ 09/22/09

  • Interest Rate: 6.55%
  • Original Balance: $8,500.00 Unpaid Interest: $553.04 Current Balance: $8,539.01
  • Monthly Payment: $8.73 Repayment Term: 151 Months Expected Payoff Date: 09/21/2030

Direct Unsub Stafford Loan ­ 09/22/09

  • Interest Rate: 6.55%
  • Original Balance: $32,000.00 Unpaid Interest: $3,192.85 Current Balance: $47,019.44
  • Monthly Payment: $48.05 Repayment Term: 186 Months Expected Payoff Date: 09/21/2030

Direct Student Plus Loan ­ 09/22/09

  • Interest Rate: 7.65%
  • Original Balance: $20,000.00 Unpaid Interest: $2,619.55 Current Balance: $31,439.47
  • Monthly Payment: $32.13 Repayment Term: 199 Months Expected Payoff Date: 09/21/2034

 

set for lifeAge: 43

 

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

 

Specialty: Dentist

 

Marital status & tax filing status: Male, Married Filing Jointly

 

Your current income: $150,000, but can vary from $120,000 to $240,000

 

Anticipated changes in your current income: hopefully consistently >$240,000

 

Spouse’s current income: $54,000 working one to two days a week

 

Anticipated changes in spouse’s current income: none

 

Spouse’s student loan details: $100,000 @ 1.375%

 

Do you have any other debt? Credit card used to pay most monthly expenses, about $2k, paid in full

 

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

 

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?

  • $50,000 cash
  • $248,000 rollover IRA
  • $24,000 Roth IRA
  • Contribute max to Roth IRA annually, contribute max to 401(k) annually, contribute max to HSA account.

 

Do you invest outside of retirement accounts? Approximately how much annually? Yes, whatever we have “leftover”.  We sold our house and put ~$160,000 into a taxable Vanguard account.

 

bankofamericaDo you have a mortgage? No

 

Do you rent? Monthly payment? Yes, $2,100

 

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? Possible FQHC in future, but have not started down this path

 

Are you considering full-term, taxable loan forgiveness through one of the Federal income-driven programs (RePAYE, PAYE, IBR)? Considering the possibility, depending which scenario makes most sense.

 

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 was a #4, but after missing recertification, am hesitant about missing recertification, possible government cancellation of repayment programs

 

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

I have about a $480,000 dental practice loan.

My wife is a physician, but her loan rate is 1.375% so we are keeping that and paying it off last. Thinking about keeping it the full 30yrs, but if possible, we’d like to be financially independent and not have any debt.

My income for 2017 was low due to practice difficulties. It has been better in 2018, but I don’t feel 100% confident to take all the profits out of the business as income. I take about $10k/mth gross from part-time work, and could possibly take another $10k as salary from my dental practice, and possibly another $5k/mth as a profit distribution from the practice, so potential to take $25k/mth gross if business keeps up.

The part-time work has been more consistent income than the practice, but I’m hopeful that changes. I haven’t been paying myself too highly as I’ve been trying to keep my income down to maximize the PAYE program, but if it looks like refinancing and paying down student loans is the better option, I’m willing to do just that.

We currently have two kids (2yo, 5yo).

 

 

The Response:

 

DMFA: For starters – this is really complicated.  There’s a lot of concepts going in a lot of different directions, and a very open-ended realm of possibilities.  The multitude of ways you and your spouse can earn money makes this very difficult to try to create a high-fidelity simulation going forward.  So I will do my best, and recognize that all the variables are subject to change.

This will focus only on your current student loans.  Your wife’s loans of $100,000 at 1.375% are really not worth paying off any more than the minimum since that rate is probably going to be less than inflation in any given year; may as well pay it off with future inflated dollars.  Your practice loan is essentially seen as a business expense, so I won’t factor that in either, rather simply reduce your expected income by it.

Assuming that your principal at time of entering repayment was $360,631.55, this means that the 10-year standard payment is $4,163.33, meaning that if you were in PAYE, you would have a partial financial hardship until your AGI was $537,249.06 or higher.  Seems like that’s a bit above what you were planning on making. All your loans are Direct Loans, and the PLUS loans are student loans and not parent loans, so they should all be eligible for PAYE.

So assuming you bring home $200,000 a year (I’ll go with that since it’s between the $150-250k figure you gave me), and your wife makes $4,500/month, that’ll gross $254,000/year.  Putting $37,000 into 401(k) accounts (should prob be able to do more if you have profit-sharing or matching) and $6,950 into an HSA, your AGI would be about $210,000. That puts your payment for either PAYE or RePAYE at $1,436.25.  That will go up each year with your income when you re-certify annually based on your tax return.

Assuming usual payroll taxes and the standard federal income tax deduction, I estimate you’ll have about $13,500 in monthly post-tax income.  That means that payment is 10.4% of your net income. That should certainly be possible. Assuming you have a 4% annual increase in your income, and the term for RePAYE is 25 years and PAYE is 20 years, you will pay a total of $780,439 in RePAYE and $550,040 in PAYE.  Your “tax bomb” of forgiveness would be $168,405 of additional income in 2043 if RePAYE and $298,533.52 of additional income in 2038 for PAYE.

Assuming that you’re in a similar tax bracket, at which point the marginal rate would be about 32% for that chunk of income, you’d owe $54,000 in taxes for RePAYE and $95,500 in taxes for PAYE, bringing the total paid to $834,300 for RePAYE and $645,500 for PAYE. Seems pretty clear that PAYE would be better if you’re eligible for it.

 

Handling the Tax Bomb

 

Now, here comes the rub: how to plan for that “tax bomb” in 20 years (PAYE) or 25 years (RePAYE).  In order to have $95,500 in a taxable brokerage account 20 years from now, assuming you’ll earn 5% annually after taxes, you’d need to invest $232 per month, meaning your “loan payment” would have to be that much higher.

RePAYE, on the other hand, would require you to have a lower amount over a longer term ($90/mo to have $54,000 in 25 years), but you’d have 5 more years of loan payments of about $3,500-4,200/mo, again assuming your income goes up by 4% a year.  Add that $232/mo to the 240 payments you’d make for RePAYE (20 years), and you’d have paid $605,819.45 to the loan and your forgiveness tax-penalty fund over 20 years.

Now, let’s compare that to if you did a refi, for instance, 20 years at 5.125% which is what SoFi (see current rates) is offering at the time of publication.  That would be a payment of $3,263.30, or 23.7% of your post-tax income, and would result in $783,200 paid over the life of the loan.  Even without the additional investment account to avoid the tax bomb, that’s still $140,000 more than what you’d pay by taking the 20-year taxable forgiveness.

Should you decide to pay it more quickly, such as a 10-year plan at 4.5%, your monthly payment would be $5,071 (36.8% of your monthly take-home income; a lot, but doable), and you would pay $608,500 over the life of the loan – still barely more than what you’d pay with PAYE and the side-account, but with less-inflated dollars.

Now, I don’t necessarily think this is the best thing for society, since if everyone did this, they’d break the system…but, the Mike Meru approach of holding out for the 20-year taxable forgiveness while making PAYE payments would result in the least amount of money paid for you under these circumstances.

Be mindful that, should you decide to earn more (and of course you should not decide to earn less solely for student loans – it takes $12,000 of AGI to raise your student loan payment by $100) then your repayment amount will increase.  For instance, if your wife went to work to earn a physician average of $250,000 in 3 years once your youngest is in kindergarten, and you earned $500,000 while filing taxes jointly in year 6, then you would hit your 10-year standard cap for PAYE in year 8 (assuming the 4% annual increase in income) and pay off the loan without any forgiveness and by paying $657,300 over about 16.5 years.

At that point, a refinance would benefit you, especially since you could afford the higher payment and you’d be on the hook for the whole thing anyway.  If, say, you were to gross $500,000/year, and you refinanced to 5-year fixed at 3.4%, the payment would be about $7,100/month (about $84,800/year), which would probably comprise about 25% of your income and, including the payments already made with PAYE, result in $519,100 paid over the life of the loan over 10 years.

On the other hand, PAYE would allow you to file taxes separately in order to exclude your wife’s income from your payment calculation; the higher income will be taxed at a higher marginal rate, and you would not be eligible for several deductions and credits, but you would be able to exclude the entirety of your wife’s income from those payments, thereby keeping them low.  I haven’t yet created a calculator to estimate the difference in tax burden for tax year 2018 (post-TCJA), but if your loan payment is $24,000 less in a year, it’d be hard for the taxes to be that much worse.

 

In conclusion:

 

  • If your current earnings remain, PAYE with 20-year taxable forgiveness would result in least paid over the life of the loan

 

  • If you do so, set aside about $250/month in a taxable account with a significant fixed-income component (e.g. 50/50, 70/30, etc to ride out volatility, to assume 5% annual gain) to plan on paying the tax penalty in 20 years

 

  • If your wife goes to full-earning potential as a physician, that payment will increase, so you could either file taxes separately (would markedly increase taxes owed each year) or refinance the loan to a lower rate and pay it (since forgiveness would likely be zero)

 

  • In the interim, do your best to minimize taking on additional debt – I’m not sure where buying a house would fit into all this – and make the minimum payments on your wife’s 1.375% student loan

 

  • Continue to do your best to save money toward retirement using 401(k), Roth IRA, and HSA


You’re in a tough spot, but there are several paths to eliminate your student loan balance. Good luck and cheers! -DMFA

 


Current Refinancing Rates

 

Earnest: Variable rates 2.57% – 5.87%
Fixed rates 3.49% – 6.32%


SoFi: Variable rates 2.36% to 7.725%
Fixed rates 3.549% to 7.48%


CommonBond: Variable rates 2.54% – 7.41%
Fixed rates 3.20% – 7.25%


ELFI: Variable rates 2.55% – 6.01%
Fixed rates 3.09% – 6.69%


Laurel Road: Variable rates 2.80%—6.38%
Fixed rates 3.50%—7.02%


LendKey: Variable rates 2.68% – 8.06%
Fixed rates 3.15% – 8.79%


Credible: Variable rates start at 2.57%
Fixed rates start at 3.35%


Splash Financial!: Variable rates 2.72% – 7.46%
Fixed rates 3.25% – 7.28%


(above rates updated 7/10/18)

 

Find FIRE with me.

Get an amazing spreadsheet, new post notices, & a quarterly newsletter.

We won't send you spam. Unsubscribe at any time. Powered by ConvertKit

 

Student Loan Case Study 005: The Orthopedic Fellow Pursuing Geographic Arbitrage

 

The Questionnaire

 

Student Loan(s):

Great lakes loans

$59,700, federal subsidized direct loan, 6.8% fixed, in forbearance

$187,515, federal unsubsidized direct loans, 6.8% fixed, in forbearance

 

Age: 34

 

Current education status: Fellow – finishing July 2018.

 

Specialty: Orthopedic Surgery

 

Marital status & tax filing status: Married Filing Jointly

 

Your current income: 65k/year plus about 40k/year moonlighting

 

Anticipated changes in your current income:

I just signed a 5 year contract in my hometown.  The contract states the following

Year 1 – 550k + 50k for loans

Year 2 – 590k+ 50k for loans

Year 3 – 640k+ 50k for loans

Year 4 – production based+ 50k for loans

Year 5 – production based (50th percentile is about 575k) + 50k for loans

 

The 50k is basically a bonus that is W2 income.  It is not based on having actual loans. So I’ll get that even if they are paid off.  I just signed this contract.

 

Spouse’s current income: 45k

 

Anticipated changes in spouse’s current income: not sure if she will keep working, its an ongoing discussion

 

Spouse’s student loan details: none

 

Do you have any other debt? 

Car 1 – 22k loan, 3%, $500/month, 3 years left

Car 2 – 33k loan, 3%, $500/month, 5 years left

No credit card debt

 

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

Midwest, lower. [PoF: Geographic Arbitrage!]

 

Red Canoe by River

somewhere in the upper midwest

 

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?

401k.  I do very little right now.  My wife has about 200k in her Roth for her work.

 

Do you invest outside of retirement accounts? No

 

Do you have a mortgage? No

 

Do you rent? Monthly payment?

We rent right now, $1,600/month.  But we are moving in August. We plan on renting for about a year and plan on spending about $2,500/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? 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?

  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

 

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

 

Like I stated above, I just signed my job contract.  I plan on refinancing my loans ASAP to a lower rate. Should have done it a long time ago.  I plan on maxing out retirement accounts/529/backdoor roth and putting the rest towards saving up for a down payment for a home, paying off cars and knocking out my students loans in 24 months.  After that I would grow into my salary a bit and start a taxable account.

I think my case would be a great example for a higher paying speciatly.

I can’t thank you guys enough for the blogs, websites, podcasts.  I’m a big fan. My wife is an engineer who works part time. She is currently about halfway through the WCI course.  Immensely helpful.

 

The Response:

 

DMFA: Like I’ve put in the brackets above, and like you’ve deduced, you’re in pretty good shape despite some slightly imperfect bits along the way.  Your average amount of debt, high income, and reasonable perspective on the future are going to pay huge dividends.

 

Income:

A few questions are:

  1. Are you a usual W-2 employee, or an independent contractor?  (this affects your retirement)
  2. Will your wife work?  If she does, she should probably put as much of her income as possible into pretax retirement since you’re at the top bracket.

Assuming you’ve got gross income of $600,000, 401(k) of $18,500, and standard deduction of $24,000, over a full year, your effective federal tax rate in 2019 (a full calendar year of earning it) will be 24.42%.  After SS/MCR, total net post-tax income every month is $32,861. (it will be less in 2018 since you were still a trainee for half the year)

 

Student Loans:

I would refinance your student loans to a 5-year fixed rate plan.  With your ability to pay them off very quickly, the amount saved while a lower variable rate is being applied to the higher principal early on *might* result in less paid than if on a fixed plan.

However, simply to use SoFi as a reference, the split is 2.890% variable or 3.25% fixed; it’s possible to get a jump of 0.36% in only a few short months.  The amount you’d save is very little, meaning you’d probably just do better to take the fixed. $274,215 over 60 periods at 3.25% is a monthly payment of $4,470; that’s 13.6% of your net post-tax income.

 

Retirement savings:

Like you’ve said, $18,500 in 401(k) employee contributions If we use the 20% rule-of-thumb, with $600,000 in gross income, you’d aim for $120,000 in annual investing specifically for retirement.

To get to that $120,000, $11,000 of that will be two Backdoor Roth IRAs between the two of you.  Other than the 401(k), you’d need $101,500 over the span of the year; that’s $8,458.33 per month specifically earmarked for retirement savings, or 25.7% of your net post-tax income.

Hopefully, you will have the ability to do much more pretax retirement contributions than just the $18,500, including employer contributions (up to a total of $55,000 per account combined employee and employer), a Health Savings Account, possibly your wife’s 401(k), and any side work you may choose to do. [PoF: I challenge you to live on half your takehome pay. With a gross of $600,000 and a net exceeding $300,000, it shouldn’t be too tough.]

 

Cost of living:

Renting for $2,500 will cost you 7.6% of your net income.  That’s excellent. A usual recommendation is no more than 20-25% of your net income to the mortgage.  You would do well to start cash savings (non-invested, or in non-volatile easily-liquidated investments) into two pots: one, an emergency fund of 3-6 months’ expenses, and two, a down payment fund for whenever you decide to purchase a house.

To give nice round numbers, I’d shoot for $50,000 for an emergency fund and $150,000 for a down payment.  Were you to buy, say, a $750,000 house with 20% down, a 15-year mortgage at 3.5% would yield an estimated total mortgage/escrow payment of $5,383. Were you to assume you’d build those over the span of two years, that would be $2083.33 for the former and $6,250 for the latter, or 6.3% and 19% of your net.

 

Leftovers:

If you take the above steps: a 5-year fixed student refinance, $2,500 rent, $8,458.33 for retirement, and the emergency fund buildup and home down payment, you’d have $9,100 left each month, or 28% of your gross.  This would be for things like food, utilities, gas, vacations, child care, and anything else not explicitly listed. A quarter of your overall net income is a pretty good buffer zone. Clearly, you can (and probably should) decide to allocate the cash above to paying off your cars and student loans more quickly.

 

In Conclusion: 

Splash for Doctors
  • 5-year student loan refinance.  With that small 0.36% split, I’d take the fixed over variable.

 

  • As much pretax retirement as possible, two backdoor Roth IRAs, and then taxable brokerage acct (or other investments) up to target of 20% gross income.

 

  • Build a small emergency fund, eventually reaching 3-6 months’ expenses.

 

  • Choose between paying your existing debts more aggressively than you already are or building a house down payment fund.


You’re in a great spot; keep up the good work! -DMFA

 


Cash Back Refinancing Bonuses

Earnest: $300 bonus


SoFi: $300 bonus


CommonBond: $500 bonus


ELFI: $325 bonus


Laurel Road: $300 bonus


LendKey: $300 bonus


Credible: $300 bonus


Splash Financial!: Up to $1000 bonus


 

Find FIRE with me.

Get an amazing spreadsheet, new post notices, & a quarterly newsletter.

We won't send you spam. Unsubscribe at any time. Powered by ConvertKit

Student Loan Case Study 006: The Oral Surgery Resident with a $300,000 Student Loan Balance

 

The Questionnaire

 

Student Loan(s): [PoF: Too many to list, but if I listed them all, it would look a lot like the list from Case Study 004. Total current balance approaching $300,000.]

 

Age: 31

 

Current education status (student, resident, fellow, attending): Resident (PGY-2)

 

Specialty: Oral and Maxillofacial Surgery

 

Marital status & tax filing status: Married filing jointly

 

Your current income: ~$55,000

 

Anticipated changes in your current income: Nothing for the next year. When I become a PGY-4, there is an option to moonlight and make an additional ~$3,000/month

 

Spouse’s current income: $0

 

Anticipated changes in spouse’s current income: None

 

Spouse’s student loan details: No Loans

 

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

 

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

 

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? None available at this time.

 

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

I previously contributed $250/month to my roth IRA, until my wife recently lost her job. No we don’t invest anything anywhere.

 

Do you have a mortgage? Yes, 30-year fixed at 3.75%, monthly payment is $1,395 (includes Principle/tax/home insurance/property tax) I still owe ~$225,000.

 

Do you rent? Monthly payment? No

 

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)  No

 

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

To be honest, I’m probably somewhere between Answer 1 and 2. I am passionate about repaying my student loans ASAP as soon as I finish residency, but I also would like to start saving ASAP. I plan on living like a resident for 3-5 years and then approach both with equal vigor when the attending checks start coming in.

 

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

Lend Key student loans
I do have a question about purchasing a practice soon after residency. In the field of OMFS, you have the potential to double and even triple your income if you own the practice (or are part owner) vs just being an associate. But a lot of times buying a practice or buying into a practice comes with a price tag of close to $1M. What are your thoughts on taking on that much debt soon into the career while still paying off student loans and trying to build up your retirement accounts?

Also, as far as repayment of student loans, I am planning on keeping them in RePAYE during residency (where my effective interest rate is ~3.2%) and maintaining that for about 6-8 months after residency where I can get a steady history of income, then refinance with a  private bank at that time.

Thank you for your Blog and for being willing to look at my financial situation.  I have learned a TON from your site and am a huge fan of all that you do. I am looking forward to hearing from you and for your advice.

Thanks again.

 

The response

 

PoF: Looks like about a $200,000  $300,000 total student loan balance. PSLF is not an option, so living like a resident and paying them down reasonably quickly sounds like a good option.

The option to buy a practice or buy into one will have to be made when you know the specifics of a particular option in which to do so. But if you can make $800,000 a year as an owner versus $300,000 as an associate (totally made up numbers), the investment would seem to make sense. You’ll still have the equity in the business — it’s not like the buy-in is a sunk cost.

 

DMFA: K, so looks like you’ve had some interest capitalize here.  Here’s what it looks like to me:

 

  • $289,751 in principal and $7,591 in accrued interest, for a total of $297,342 owed.
  • Using an AGI of $55,000, I estimate your RePAYE at $253, and an effective interest rate of 3.54%.  Yours is probably less now since you prob used half an intern year’s salary as certifying income.
  • Assuming standard deduction, your effective income tax rate is only 6.07%, with $3,955 in post-tax income, so about $2600 after paying your mortgage.

 

At this point, I don’t think you can afford anything other than RePAYE, which is doing its job at staving off a lot of unpaid interest.  An in-residency refinance would allow for a lower payment with Laurel Road (or Yanny Road?) [PoF: Ha!] or Splash, but interest would accrue at the high 5s (5.75% is the going rate).  I don’t think this is worth trying to lower an already-low payment.

Once you’re earning, after 2 more years of residency, I estimate you’ll have $317,848 owed, at which point you’d refinance to the shortest term (and therefore lowest interest) at which you could afford the payment.

At that point, a 5-year 3.25% fixed refinance would have a monthly payment of $5,747, or $68,960 a year…so in order to work that into your budget, assuming you keep your usual spending habits (which is the hardest part), you would probably need an income of $300,000 to $400,000 (net of business expenses, including loan payment) in order to achieve that.

For instance, if you did that repayment, earned $300,000 after business expenses, and maxed tax-advantaged retirement accounts ($55,000 into 401(k), $6,950 into HSA), then that 5-year plan would be 37.1% of your post-tax income. That’s fairly reasonable.

One obstacle to your getting the best possible rates with refinancing would be inability to demonstrate proof of higher income since you wouldn’t have a contract for a salary as a business owner.  That’s a fairly common issue that many of us run into. At that point, you’d do well just to refinance to the best rate you can get, and then keep doing “soft pulls” to see when you’d get a better rate, and then do it.

If you’re taking a $1,000,000 loan to purchase a practice, that’s going to be much more of a cash flow consideration (i.e. if you owe $10,000 a month on it, but it helps you earn $35,000 a month, then it’s cash-flow positive $25,000/mo or $300,000/yr), meaning it may either help or hinder your ability to pay it.  You have to think of debt holistically; there’s debt from which you can actually earn money, and a business acquisition loan is one of those things (obv assuming the business goes well). This may however skew your debt-to-income ratio if the loan is under your personal entity as opposed to the business – which I think it would need to be in that instance – and may result in less-than-optimal refinance rates until your income is higher.  I admit my familiarity level with business loans is nowhere near my familiarity with student loans, though…I’d consult with a pro on that one and RTFP of your note.

 

In Conclusion:

 

  • Keep doing RePAYE through training.
  • When through with training, refinance to the lowest rate on which you can afford the payments.
  • As your income increases, keep checking back to attempt to lower your rate to the lowest offered, hopefully to a 5-year fixed.
  • Maintain your standard of living as best you can while maximizing your tax-advantaged retirement accounts.
  • Your business loan, while likely a necessity if you wish to earn more, may hinder your refinance rates…but clearly earning more money would be the superior option.

 

Good luck, and cheers! -DMFA

 


 

If you’d like to be considered for a future case study, please download the student loan questionnaire and return to me via e-mail.

A word of caution: we have a backlog of months of these to work through. Congrats to DMFA on finishing fellowship, moving his family to California, and beginning the next chapter of his life as an attending!

 

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 rather now wait months for adve, and would like to consult with advice from a former Vanguard bond trader who has consulted on over 1,000 individual’s and couple’s student loan scenarios, or you 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.

If you’d like a custom plan, book a time at this link if you have more than $300,000 in household student debt and at this link if you owe less. You’ll get a consult form to fill out in your confirmation email. Make sure to mention that you heard about it from Physician on Fire on the consult form.

 

Find FIRE with me.

Get an amazing spreadsheet, new post notices, & a quarterly newsletter.

We won't send you spam. Unsubscribe at any time. Powered by ConvertKit

9 comments

  • You know, I am not usually a fan of Travis’ recommendation to use long-term forgiveness programs and the tax hit people take at the end – usually because there is something behavioral about having student loan debt for so long and that becoming normal.

    That said, I agree with his recommendations above, particularly the first person. The math he shows is compelling and the person would stand to benefit from taking the long road in PAYE. The one question I have is what would this person do if the government changes those programs and the forgiveness at 20 years goes away? I know what to tell my medical students and residents about that problem with PSLF (just put the extra money you’re not paying each month into a taxable account so that you could pay the entire balance if the government reneges). What would you advise for the people who are concerned that these programs will change, alter, or get rid of the forgiveness aspect of REPAYE, PAYE, and IBR?

    Very thorough post and I bet helpful to many people in similar situations.

    TPP

    • DMFA

      That was me, not Travis 😀 but I do admit it was tough to bring myself to that conclusion. It does require the assumption that one’s investments for handling the added nominal income of taxable forgiveness will actually earn…but one who might wish to have a more conservative outlook might just plug-and-play with a lower compound annual growth rate to figure out a new monthly repair into the “tax bomb” fund.

      • DMFA

        As for preparing for possible changes to the loan programs or tax code, I’d apply the same heuristic to every other future planning endeavor, like pretax vs Roth – hope for the best (or the same), and prepare for the worst with an easily-liquidated investment, buffered for volatility to the greatest extent possible, such as a taxable brokerage account with a significant fixed-income or cash allocation. This can be as simple as a one-fund account like VTMFX or a 1/3 split between VTSAX, VTIAX, and VTEAX.

        I think that being able to cover one’s liabilities, even with the likelihood of their being forgiven, is still of paramount importance. I’d never advise one to enter into a scenario in which one couldn’t “dig out.” However, we see it very often – esp among OMFS, who are often not paid during residency and have very high federal debt burdens for dental school – that the die has been cast, and we’re stuck post hoc trying to figure out the best way to mitigate the disaster.

      • Haha sorry for the confusion. Travis’ picture at the bottom of the article threw me for a loop. Guess he was just the sponsor for the post!!

        And, yes, I agree about pre tax and Roth which is why I try to have a good mix of both.

        TPP

  • Subscribe to get more great content like this, an awesome spreadsheet, and more!
  • Again impressed with the detailed answers for these different cases. It is amazing about all the choices now available with these repayment programs that did not exist when I graduated. I can see why some people get paralysis by analysis and rather stick their head in the sand instead. Having an expert analyze each case individually and find solutions would easily cost several thousand dollars if someone chose to do this on their own. I hope a lot of readers take advantage of this free analysis.

  • I feel the need to throw in my $0.02 being a dental specialist (periodontist) and having been down the same road (somewhat) of Case Studies #4 and #6 above (and oh yeah, starting a website about it too, http://www.DebtFreeDr.com)

    First off, I think ALL of the info given to all 3 Case Studies was thorough but as you know, at least from down here in Louisiana, there’s MORE than one way to skin a cat.

    Knowing what I know now (going through about $300K in student loan debt + practice loans, mortgage, etc, here’s how I would have answered these situations):

    Case Study #4: Dude, you’re married and MUST work together. It’s OUR debt, not his and hers. We are the same age so I know where I am and where you probably SHOULD be at this part of your life.

    I’m going to focus on what’s the MOST important right now besides your wife. It’s the 2 and 5 year olds. I have a 13 and 11 year old. I can remember (vaguely), where they were 2 & 5 and love knowing that I have, and continue to, spend good QUALITY time with them. It’s hard to believe in only 5-7 years, they’ll be off to college.

    Don’t look focus on what’s the most important as you drill through this, you can DO it.

    If I were in your shoes I would:

    a. Look at selling the practice and getting rid of the practice loan (you stated you were having some practice difficulties and that your part-time work is more consistent than your practice). If you don’t want to sell it, consider working multiple part time jobs….focus on paying off ALL student loans within 5 year. More about that in a sec.

    b. Spouse – if you BOTH work the plan, you can easily be debt free in 5 years, (don’t EVER count on the government to REPAY anything!) Consider going through Dave Ramsey’s FPU so you are BOTH on board and then she’ll know, if she works full time for 4-5 years, both of you WIN = DEBT FREE.

    c. STOP all retirement savings and focus 100% on getting rid of the student loans. Why? Kids and LIFE gets MORE expensive later. Thank goodness you rent and hopefully you’ll continue to do so until you are debt-free. If you put the student loans off, you will keep putting them off because of: cars, weddings, college, new boat, SUV, etc. Don’t buy into the Jones’s, Read the Millionaire Next Door and get to work.

    If you need anything email me: [email protected]

    Case Study #6

    As a specialist, I can tell you that things have drastically changed since I started up a for scratch practice in 2005. I actually wrote a book about it here:

    What They Don’t Teach You In Dental School

    Also, another book about specialist marketing here:


    Great Dental Specialist Marketing

    If you want either or BOTH, email me and I’ll send them to you FREE.

    Basically my recommendations for you are the same as Case Study #4 EXCEPT, I do NOT recommend that you buy a practice out of residency. Again, things have changed so much ( <a href=”https://theauthoritypractice.com/”>I actually coach specialists on the side about it), that I urge you to work with someone or a group for 3-5 years BEFORE making a decision.

    I would love to see you DEBT Free, emergency fund in place, maxing out retirement accounts before considering buying a practice.

    Email me for any support you need. You’re in a great field and position to become very wealthy because…you’re already asking smart questions and know PoF!!

  • Petra

    For the second person … with that increase in income, I would just strive to pay off the loans within one year and just be done with them. June 2019 should see you debtfree. Oh, on top of that you can easily max out your 401k at work; and your wife’s too.

  • Osteosite

    Thanks so much for the consideration and thoughts on the plans. I’m actually the guy from case #5. Trying to educate myself as much as possible.

    To answer a few questions – I’m W2. And tentatively the wife will continue working for the time being, at least until the student loans go away.

    I refi-ed to SoFi 5 yr variable approx 4 months ago. The rate has increased already a few times to 3.36%, so that’s not cool. I will look at another refi once my paychecks start appearing.

    -Can you briefly explain why W2 would be different from 1099, besides the payroll tax?
    -I read one of POF’s recommendation on the order of loan payoff a while back and it mentions “after tax loan interest rate.” How would I calculate that?
    -My hospital system offers a “nonqualified deferred compensation” 457b. Would that be another area you would recommend to increase my retirement savings rate to the 20% ballpark? I’m assuming its nongovernmental but will need to learn more once the job starts.

    Thanks again.

Leave a Reply

Your email address will not be published. Required fields are marked *