The right way to think about student loans (pt. 2)
Note: This is part two of a two-part series on saving for retirement vs paying down student loans. If you missed the first post, you can read it here.
One of the most powerful tools an investor has is the power of compounding returns. These posts are to help show how valuable this tool is and how we want to make sure it is working for us and not against us.
Quick Note: It’s worth mentioning that this post is directed toward physicians with private loans. If you have a loan through a different program, like a Public Service Loan Forgiveness Program, this is still helpful information for the following reasons:
If congress passes a rule change you could be affected. How likely is that?
In 2015 Obama admin proposed limiting forgiveness to $57,500
In 2016 Republicans proposed eliminating Public Service Loan forgiveness for all borrowers
PLS began in October 2007: 10 years of monthly payments were required for forgiveness
The first cohort saw 1,173,420 loans certified as eligible
55 were granted forgiveness
We’ll get more into this in another post, but basically, everyone should keep reading
How a lower interest rate affects you
The first step to paying down your student loans is ensuring you have the lowest interest rate possible.
By lowering the average interest rate by 3% and planning to pay the debt off within 5 years we have seen clients save 10s of thousands of dollars and get out of debt faster than they imagined. Let’s take a look at an example:
Our average client entered private practice with an outstanding loan balance of $141,600 at a rate of 6.5%. This means they would have to make loan payments of $2,500 on loans that would remain outstanding for 68 months.
After helping them refinance their loans closer to 2.8% and only slightly increasing their student loan payment, they were able to pay them off an average of 8 months early with a savings of over $15,000.
Paying off student loans is a race to the finish.
We want to get this taken care of quickly, so our money can compound for us, not against us.
Remember that our typical rule for saving is percentage-based: It’s better to put a % of income away each year than constantly updating a fixed amount (ie. $500/mo in year one). This way, as your income increases, your savings increase proportionally.
Paying down student debt is an exception to this rule.
Your student debt is a hole we need to fill. And we want to fill it as fast as possible. Remember that advice your old med school professor gave you? To “live like a resident” for the first few years you start making doctor money? She was right.
In an ideal world if someone could “live like a resident” for only their first few years out of residency/fellowship they can pay off all student loans in 2 years (~$120k toward your loan per year).
Your income may have gone up $200k-$300k but your living situation is still built from an income of $60k-$80k. So this means you can’t afford the huge house, country club membership, or car lease just yet. But if we live like a resident, that will come. Soon. You want to be in a position to enjoy your success but you don’t want to be handcuffed to your student debt down the road.
Consider a married couple contributing $12,000 to their Roth IRA and being able to do that for 34 years and achieving an annualized return of 8%. This adds up to over $2,000,000. Tax-free.
How much you pay down changes based on the amount of student debt outstanding (You still have to live)
Consider a physician with a debt to income ratio of more than 2x (Ex: $140,00 in debt and an income of $280,000) This would put your estimated semi-monthly take-home pay around $7,500 and even if you were able to use half of that to pay down your loans it would take over 3 years to get rid of them. Not an option for everyone but definitely a goal.
Contrasting minimum payments vs an aggressive strategy
Alternatively, if you continued to make the $2,500 payment it would take 63 months to pay off the loan and you would end up paying $17,500 in interest on your loans (assuming a 4.5% interest rate).
By taking our recommendation and using half of your take-home pay each month to aggressively pay down the student loans, you would save 44 months (remember how long med school was?) and over $12,000 in interest!
12k compounding at 11% for those 44 months means you would instead have banked away over $16,400. This is a $28,4000 swing in your net worth! Just from paying down your student debt aggressively.
Refinance your loans through online banks
Everyone wants to lend money to doctors. As a physician, you have a relatively recession-proof job and a high income. Because of this, banks want to loan money to you, which means banks compete to earn your business, which means you can likely find a lower rate than the one on your original student loan.
Two of the online loan consolidation programs we have worked with are SoFi and Laurel Road. Student loans are not going away any time soon and that means there will be an influx of new loan consolidation tools coming available. Physicians are historically great people to lend to so expect to have more specialty products in the future. We like these because we have some positive experience with them but we are open to any company that will give our client the best deal.
What’s on your mind?
We’ll be sharing tidbits of wisdom like this with any subscriber every two weeks, along with deeper dives for our clients every month or so.
What questions do you have that we can answer in future posts? Reply directly to this email and let me know.
Talk soon,
Chris
-----------------
Fortress Physicians by the Numbers
🏡 42 Physician Households as Clients
💰 $680,000 Avg Household Income
👩 Average Age 44
💸 $3.25 Million Net Worth
📈 29% Average Savings Rate
Securities and Investment Advisory Services offered through Fortress Private Ledger, LLC. Member FINRA/SIPC