[Pay student loans early or invest?]

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newdoc
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[Pay student loans early or invest?]

Post by newdoc » Thu Aug 29, 2019 6:21 am

Hi I have about $214K in newly refinanced student loan debt. The term is for 7 years at an interest rate of 3.93%. I have no other debt and can afford to pay it off handily in 1 to 3 years if I wanted. My financial adviser says not to do this and to invest that money instead. I know Dave Ramsay disagrees with this approach. What do you all think?

cherijoh
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Re: [Pay student loans early or invest?]

Post by cherijoh » Thu Aug 29, 2019 6:28 am

newdoc wrote:
Thu Aug 29, 2019 6:21 am
Hi I have about $214K in newly refinanced student loan debt. The term is for 7 years at an interest rate of 3.93%. I have no other debt and can afford to pay it off handily in 1 to 3 years if I wanted. My financial adviser says not to do this and to invest that money instead. I know Dave Ramsay disagrees with this approach. What do you all think?
Your financial advisor is probably looking out for his/her own interests - more assets under management equal bigger fees. And why do you need a financial advisor anyway?

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JoeRetire
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Re: [Pay student loans early or invest?]

Post by JoeRetire » Thu Aug 29, 2019 6:33 am

newdoc wrote:
Thu Aug 29, 2019 6:21 am
Hi I have about $214K in newly refinanced student loan debt. The term is for 7 years at an interest rate of 3.93%. I have no other debt and can afford to pay it off handily in 1 to 3 years if I wanted. My financial adviser says not to do this and to invest that money instead. I know Dave Ramsay disagrees with this approach. What do you all think?
I agree with your financial adviser. 3.93% is pretty cheap.
If you were to pay off the loan, where would the money come from? What is that money earning these days?

Are you the kind of person who is unable to sleep at night if you have any debt at all?
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

ThriftyPhD
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Re: [Pay student loans early or invest?]

Post by ThriftyPhD » Thu Aug 29, 2019 6:45 am

Take a look at the wiki page on Prioritizing Investments.

However, there is not an entry for paying off low interest debt.

There is a similar list on Mr Money Mustache: Investment Order.

This one has an entry for low interest debt.
7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.
It comes after establishing an emergency fund and filling all tax advantaged space (401k, IRA, HSA), but before starting taxable investing.

No one is going to agree on every point, but worth looking at the reasons given and see if you agree.

Topic Author
newdoc
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Re: [Pay student loans early or invest?]

Post by newdoc » Thu Aug 29, 2019 7:06 am

Salary 500K, (just now starting new job)
Liquid assets about 44K at the moment
No retirement accounts funded yet but will begin soon

Does this change things?

Physicians tend to be targeted by financial advisors while we're young, naive and easily manipulated. My guy has been helpful and free so far but I've read quite a bit on this and will have no problem dropping him if/when I feel I'm being taken advantage of.

ThankYouJack
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Re: [Pay student loans early or invest?]

Post by ThankYouJack » Thu Aug 29, 2019 7:15 am

newdoc wrote:
Thu Aug 29, 2019 7:06 am
No retirement accounts funded yet but will begin soon

Does this change things?
yes, I would max those out first. And after that I would pay off the debt assuming you have enough liquidity for your goals.

cherijoh
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Re: [Pay student loans early or invest?]

Post by cherijoh » Thu Aug 29, 2019 7:51 am

newdoc wrote:
Thu Aug 29, 2019 7:06 am
Salary 500K, (just now starting new job)
Liquid assets about 44K at the moment
No retirement accounts funded yet but will begin soon

Does this change things?

Physicians tend to be targeted by financial advisors while we're young, naive and easily manipulated. My guy has been helpful and free so far but I've read quite a bit on this and will have no problem dropping him if/when I feel I'm being taken advantage of.
Financial advisors are never free - unless you are talking about an initial consultation. If you aren't paying an AUM fee then he is making his money on commissions from selling high ER funds.

Topic Author
newdoc
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Re: [Pay student loans early or invest?]

Post by newdoc » Thu Aug 29, 2019 8:13 am

cherijoh wrote:
Thu Aug 29, 2019 7:51 am
newdoc wrote:
Thu Aug 29, 2019 7:06 am
Salary 500K, (just now starting new job)
Liquid assets about 44K at the moment
No retirement accounts funded yet but will begin soon

Does this change things?

Physicians tend to be targeted by financial advisors while we're young, naive and easily manipulated. My guy has been helpful and free so far but I've read quite a bit on this and will have no problem dropping him if/when I feel I'm being taken advantage of.
Financial advisors are never free - unless you are talking about an initial consultation. If you aren't paying an AUM fee then he is making his money on commissions from selling high ER funds.
Of course not but they target physicians in high income specialties while they're in training and provide consulting/ counseling services on things like student loans and disability insurance for free knowing that when they finally do start making money that's an almost guaranteed significant return for them. Financial savvy docs will put an end to things when the time comes but many will say this guy's helped me for so long I might as well stick with him to manage my funds now that i have them.

cherijoh
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Re: [Pay student loans early or invest?]

Post by cherijoh » Thu Aug 29, 2019 8:39 am

newdoc wrote:
Thu Aug 29, 2019 8:13 am
cherijoh wrote:
Thu Aug 29, 2019 7:51 am
newdoc wrote:
Thu Aug 29, 2019 7:06 am
Salary 500K, (just now starting new job)
Liquid assets about 44K at the moment
No retirement accounts funded yet but will begin soon

Does this change things?

Physicians tend to be targeted by financial advisors while we're young, naive and easily manipulated. My guy has been helpful and free so far but I've read quite a bit on this and will have no problem dropping him if/when I feel I'm being taken advantage of.
Financial advisors are never free - unless you are talking about an initial consultation. If you aren't paying an AUM fee then he is making his money on commissions from selling high ER funds.
Of course not but they target physicians in high income specialties while they're in training and provide consulting/ counseling services on things like student loans and disability insurance for free knowing that when they finally do start making money that's an almost guaranteed significant return for them. Financial savvy docs will put an end to things when the time comes but many will say this guy's helped me for so long I might as well stick with him to manage my funds now that i have them..
Are you familiar with the White Coat Investor blog? You might find this post of interest

DecumulatorDoc
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Re: [Pay student loans early or invest?]

Post by DecumulatorDoc » Thu Aug 29, 2019 9:19 am

cherijoh wrote:
Thu Aug 29, 2019 6:28 am
newdoc wrote:
Thu Aug 29, 2019 6:21 am
Hi I have about $214K in newly refinanced student loan debt. The term is for 7 years at an interest rate of 3.93%. I have no other debt and can afford to pay it off handily in 1 to 3 years if I wanted. My financial adviser says not to do this and to invest that money instead. I know Dave Ramsay disagrees with this approach. What do you all think?
Your financial advisor is probably looking out for his/her own interests - more assets under management equal bigger fees. And why do you need a financial advisor anyway?
Agree that your advisor, despite his fiduciary obligations, has a conflict of interest. Your income is too high for student loan interest deduction, I would concentrate in knocking it out in a few years, while also maxing out your tax-advantaged options.

You are just starting out in your career both in medicine and investing. Keep reading and learning here. Post your situation and get advice from some smart folks on this forum. You won't need an advisor. And in case you need encouragement just look at the numbers. Here's a good calculator to estimate the AUM fee impact: http://www.hyllandcapital.com/blog/expe ... calculator

Bottom line: If you put away 20% of your salary year in and year out potentially with an ending value of $10,000,000, at an advisor fee of 1%, you will have paid at least $2 million to your guy. I'm sure he's nice, but for $2 million its worth the effort.

Topic Author
newdoc
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Re: [Pay student loans early or invest?]

Post by newdoc » Thu Aug 29, 2019 10:01 am

Thanks,

Some places say if I can get an AUM rate of 0.1-0.3%, if not a flat fee, that's actually reasonable. Thoughts?

Also, any more opinions on my student loan payment vs investment dilemma?

DecumulatorDoc
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Re: [Pay student loans early or invest?]

Post by DecumulatorDoc » Thu Aug 29, 2019 11:09 am

newdoc wrote:
Thu Aug 29, 2019 10:01 am
Thanks,

Some places say if I can get an AUM rate of 0.1-0.3%, if not a flat fee, that's actually reasonable. Thoughts?

Also, any more opinions on my student loan payment vs investment dilemma?
With 0.1% to 0.3% AUM you'll pay $150,000 to $450,000 over 30 years. It's better. Whats best: learn the simple concepts here and take charge. Next best is flat fee like Rick Ferri at https://rickferri.com or the ultimate low cost flat fee advisor Mark Zoril for $96/year at https://planvisionmn.com
Start there. Both of these guys will respond quickly.

cherijoh
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Location: Charlotte NC

Re: [Pay student loans early or invest?]

Post by cherijoh » Thu Aug 29, 2019 12:18 pm

newdoc wrote:
Thu Aug 29, 2019 10:01 am
Thanks,

Some places say if I can get an AUM rate of 0.1-0.3%, if not a flat fee, that's actually reasonable. Thoughts?

Also, any more opinions on my student loan payment vs investment dilemma?

If you invest in low-cost broad index funds or ETFs there really isn't anything to manage. If the market goes wonky, just rebalance periodically. A one time review by a true fiduciary could be immensely helpful, but if you are smart enough to get through med school, you are definitely smart enough to manage your own money. (The only possible advantage to a low-fee advisor might be access to DFA funds which are only sold through advisors).

I'd max out any tax-advantaged plans before I'd start paying extra on the student loans. Are they fixed rate or variable? Having a large debt burden will impact you if/when you buy a house. Paying at least a portion of the loans agressively will also tend to keep a lid on consumer spending and help you avoid getting too far on the hedonistic treadmill.

Topic Author
newdoc
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Joined: Wed Mar 13, 2013 8:21 pm

Re: [Pay student loans early or invest?]

Post by newdoc » Thu Aug 29, 2019 1:04 pm

cherijoh wrote:
Thu Aug 29, 2019 12:18 pm
newdoc wrote:
Thu Aug 29, 2019 10:01 am
Thanks,

Some places say if I can get an AUM rate of 0.1-0.3%, if not a flat fee, that's actually reasonable. Thoughts?

Also, any more opinions on my student loan payment vs investment dilemma?

If you invest in low-cost broad index funds or ETFs there really isn't anything to manage. If the market goes wonky, just rebalance periodically. A one time review by a true fiduciary could be immensely helpful, but if you are smart enough to get through med school, you are definitely smart enough to manage your own money. (The only possible advantage to a low-fee advisor might be access to DFA funds which are only sold through advisors).

I'd max out any tax-advantaged plans before I'd start paying extra on the student loans. Are they fixed rate or variable? Having a large debt burden will impact you if/when you buy a house. Paying at least a portion of the loans agressively will also tend to keep a lid on consumer spending and help you avoid getting too far on the hedonistic treadmill.
Fixed

deltaneutral83
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Re: [Pay student loans early or invest?]

Post by deltaneutral83 » Thu Aug 29, 2019 1:09 pm

I'd be much more inclined to take a 3.94% guaranteed rate of return when net worth is less than 5x expenses or so. Once assets are built up a little, I'd reconsider this scenario.

benaaye
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Re: [Pay student loans early or invest?]

Post by benaaye » Thu Aug 29, 2019 1:25 pm

That's a relatively low rate but I think it could depend on your tolerance and security. One way to go about it is to do both or half and half--you'll probably still be done with the loans within 5 years.

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Nate79
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Re: [Pay student loans early or invest?]

Post by Nate79 » Thu Aug 29, 2019 1:31 pm

Unless you are 100% stocks the guaranteed rate of return (after tax) is clearly more than the bonds are earning in your portfolio - you are paying a cost to keep the loan. I would pay it off to reduce risk and increase your return with the guaranteed rate.

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galving
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Re: [Pay student loans early or invest?]

Post by galving » Thu Aug 29, 2019 6:12 pm

Max the 401k.
Then pay the debt because it makes sense.

Consider that you made the 'investment' in your education because it enabled a 'return'.
Assuming you stay employed, your 'return' is your salary and likely much higher than the average market return.

Radman
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Re: [Pay student loans early or invest?]

Post by Radman » Fri Aug 30, 2019 7:32 am

I am in a similar position as you, I'm three years out from training. I have chosen to pay down the student loan debt. I reconsolidated my loans twice, first time to about 4.25% and then a second time to a variable rate once I made partner and I knew I could take the interest risk (because I intended to pay off then loan in less than 18 months) to about 3.0%.

Your advisor isn't technically wrong, if you string you student loans out over 7 years and use your extra funds to invest and say the market earns you 8-10% your net worth at 7 years will be higher than if you had payed off the loans. However, what you need to keep in mind is that they are not comparable risks. You could also invest in a leveraged fund and possibly get even more than 8-10%... for more risk. However, the market may not return 8-10%.

Your getting a return of almost 4% guaranteed with your loans. As comparison the Vanguard intermediate term bond fund currently has an SEC yield of 2.07%. So you can't beat your loan rate with a comparable risk investment.

Another reason I am paying them off aggressively is flexibility. What if I was injured and had to go on disability? I don't want to be paying off student loans then.

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Cyclesafe
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Re: [Pay student loans early or invest?]

Post by Cyclesafe » Fri Aug 30, 2019 7:56 am

The financial world is your oyster. No need to be greedy. Pay off the loan ASAP and start building positive net worth from zero. You're underwater now.
"Plans are useless; planning is indispensable.” (Dwight Eisenhower) | "Man plans, God laughs" (Yiddish proverb)

Topic Author
newdoc
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Re: [Pay student loans early or invest?]

Post by newdoc » Fri Aug 30, 2019 10:03 am

Cyclesafe wrote:
Fri Aug 30, 2019 7:56 am
The financial world is your oyster. No need to be greedy. Pay off the loan ASAP and start building positive net worth from zero. You're underwater now.
I totally understand this mindset and the emotional desire to cleanse oneself of debt but from a purely pragmatic/ practical standpoint, is this the best moneymaking decision?

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Cyclesafe
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Re: [Pay student loans early or invest?]

Post by Cyclesafe » Fri Aug 30, 2019 10:29 am

newdoc wrote:
Fri Aug 30, 2019 10:03 am
Cyclesafe wrote:
Fri Aug 30, 2019 7:56 am
The financial world is your oyster. No need to be greedy. Pay off the loan ASAP and start building positive net worth from zero. You're underwater now.
I totally understand this mindset and the emotional desire to cleanse oneself of debt but from a purely pragmatic/ practical standpoint, is this the best moneymaking decision?
You'll never know. You'd need a time machine. Either way you'll most likely end up with more money than you can efficiently spend in your lifetime. You're deciding now whether you want to take the chance of checking out with a swag of something like 3X or 3.5X of requirements (or even 5X vs 5.5X - just swagging). There is a not insignificant chance that not paying off the loan will inflict pain in the short to intermediate run (0-10 years) although for 30-40 years out it could be the better way to go. I also have faith that the long term will be favorable for investing, if only because the alternative is just so unpalatable. We would be having bigger problems (like Armageddon or whatever)
"Plans are useless; planning is indispensable.” (Dwight Eisenhower) | "Man plans, God laughs" (Yiddish proverb)

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