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Hello goons. My wife recently completed her medical residency and is now working full time as a hospitalist. However, she currently owes ~$300k at a 7.9% interest rate due to expensive medical school (I am going to double check this interest rate is accurate because it seems quite high). She is eligible for income-based repayment and a 20 year period for loan-forgiveness, however I think based on her salary as a hospitalist the minimum payments for the IBR loan will probably be enough to pay off the loan before the 20 year time period is over. Again, I am going to double check and see if this is true. My question is how should we go about tackling her medical school debt in the best way possible? Here is some information about us: My salary: $75k My wife's salary: ~$200k (she's looking for another job that might pay closer to $250k) My savings: $295k in a Vanguard taxable account, $85k in my Roth IRA, and about $20k in my bank account. My wife's savings: ~$10k in her Roth IRA, about $42k in her bank account We are currently renting a house ($1800 a month), have no kids, and aside from the $300k medical school debt and two car loans (I have $6500 left to pay off my car and she has about $10k left on her car, both at 1.9% interest rates) we are debt free. We'd like to purchase a house in the near future but we're not sure we are going to live in our current location for much longer so we've decided to rent for the time being until we make a more long-term commitment to a location. So goons, how would you go about tackling this debt? Let me know if you need more information.
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Jan 9, 2019 23:05
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| # ? May 3, 2024 13:00 |
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Figure out how much stock you can sell without incurring a significant capital gains hit, this will really depend upon your basis. In your first year out when your wife only earns a partial year salary, you may have a relatively low exposure to capital gains tax, you will have to run some tax simulators and figure all that out. Pay that amount off and set some aside for capital gains. Refinance the balance with a private lender like SoFi or Common Bond immediately to the lowest interest rate you can get based on the payments you can afford, you should be able to save at least 2%. Keep like six months of rent and bills either in a checking account you aren't going to touch or preferably in a high-yield savings account. I'm not sure where you live or what kind of schedule your wife works but $200k is low for a full time hospitalist, if she can pick up more hours or work at a better paying job without ruining your life she should probably try to do that at least until student loans are paid off and you have kids and stuff. Good news is you guys have a positive net worth already so you are in pretty good shape once those loans are beaten down to a reasonable amount.
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Jan 9, 2019 23:12
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BEHOLD: MY CAPE posted:Figure out how much stock you can sell without incurring a significant capital gains hit, this will really depend upon your basis. In your first year out when your wife only earns a partial year salary, you may have a relatively low exposure to capital gains tax, you will have to run some tax simulators and figure all that out. Pay that amount off and set some aside for capital gains. In your first paragraph does “basis” mean how much I originally purchased all of my shares for? If so, looking at my individual account in Vanguard it appears that my basis is about $230k and it is now valued at $295k. Meaning if I sold all of my shares hypothetically, I would be subject to capital gains tax on $65k, correct? The unrealized short-term gains are a somewhat negligible $2k compared to the unrealized long-term gains of about $63k. Our income would fall make it fall squarely in the 15% long term capital gains tax bracket (which is $78k to $488k for filing jointly in 2019 if I’m not mistaken), meaning I would owe about 15% x $65k = $9750 in capital gains taxes if I sold all of the shares in my individual account, correct? (Again, somewhat negligible short term capital gains) I guess this is the part where I need clarification/confirmation. I somewhat mindlessly put money into a Vanguard individual account after maxing out my IRA each year and keeping $20k as an emergency fund. I never really thought about selling because I always figured I wouldn’t sell until retirement at which point I would figure out a strategy for selling my shares.
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Jan 10, 2019 00:43
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I feel like as long as you restrict yourself to two luxury international vacations, one horse, and one boat per year, you should probably be okay. $275k as a married couple is, like, what, $8500 take-home? After rent and another $~2k for cars and miscellaneous expenses, that leaves you with ~$5000 a month. $60,000 a year. Might take you seven or eight years assuming no salary increases, but that's pretty fast to bang out a loan that big. Refinance the loan at a lower interest rate to speed that up. Is there something expense-wise you're leaving out, here, that's worrying you? CORRECTED EDIT: I think married filing jointly the long term capital gains exclusion is $75,000, isn't it? So you actually wouldn't pay anything on $65k in long-term gains, I don't think. Ham Equity fucked around with this message at 01:20 on Jan 10, 2019 |
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Jan 10, 2019 01:07
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Capital gains exclusions counts all income, so his salary alone will knock them out of it. I would say don't sell off your taxable to off her loans. Their income is high enough to easily pay it off, and if they get divorced he's pretty much screwed. You can probably refi the loans with sofi or whatever service. She is considered very safe, so you can probably trim 3-4% off those. She should probably throw a decent chunk of that $42,000 she has sitting around towards them now.
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Jan 10, 2019 01:45
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Mind_Taker posted:In your first paragraph does “basis” mean how much I originally purchased all of my shares for? If so, looking at my individual account in Vanguard it appears that my basis is about $230k and it is now valued at $295k. Correct. Paying $9k in capital gains (payable April 2020) to immediately save about $24,000 in interest this year would be an eminently reasonable move from a financial perspective. It would also be understandable if you didn't want to liquidate your life savings to pay for your wife's student loans, in which case you should decide between the two of you how much to pay off lump sum (including her $42k) and then refinance the remaining balance ASAP. FYI you will get significantly better rates with lower balances and the shortest repayment terms.
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Jan 10, 2019 03:06
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Why not just pay it off now in full?
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Jan 10, 2019 03:54
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CelestialScribe posted:Why not just pay it off now in full? Pure math-wise wrt interest that might seem correct. But (for illustrative purposes) 0 net worth that is 300k loans and 300k money is not the same as 0 net worth with no loans and no money. Why? It's hard to get a 300k loan in any other circumstances, and right now they have that as relatively easy to liquidate funds. So in the former category it's easy to stay 300k in debt and be able to use your 300k money for other things (house down payment, moving costs, periods of unemployment, international horse vacations, etc). This costs you the extra interest on the loan. But in the latter category, if you discover you need large buckets of liquid cash, it's hard to get another loan for 300k. The cost here is you just don't get to do any of the things I listed on the line above. For some people, the painful cost in interest causes them to want to pay down the loan NOW. For other people, having liquid funds they can actually do other things at every step of the way is important, so they'll take the interest hit. It's a very personal decision where on this spectrum you fall and how much money you want to buffer on hand. Plus (depending on how divorce laws work where they live) the money he accumulated prior to marriage might be salvageable whereas if he pays her debts with it it's definitely gone. No one ever really wants to think about that at the start of a marriage but it's also a risk. Definitely look into the MD loan refinancing companies and you can probably get quotes for different amounts of loans remaining, which can help guide how much to pay off now and maybe how much to leave for a more gradual payoff.
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Jan 10, 2019 05:18
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I don't think the risk/stress of having that much debt is worth the cash in the bank. Just seems like burning money to me. Those periods of unemployment you mentioned will be far easier to survive without a 300k student loan.
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Jan 10, 2019 05:33
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Yeah I'm hesitant to sell too much of my savings in my Vanguard account because it is a great safety net and also a way to have funds for anything that might come up (house down payment, kids, medical bills because America, etc.). However we also do not like the idea of a large loan over our heads with a somewhat high interest rate. Amara seems to be characterizing our decision quite well: do the maybe mathematically optimal thing and pay off all or most of it right away, or tackle it over 5-10 years and have more flexibility while maybe incurring some financial hit in terms of interest. I'll talk to my wife to see how she feels about this. Either way consolidating/refinancing seems like it might be for the best to knock a few points off her interest rate. The only downside to consolidation is that we'd lose the income-based repayment benefits that she has currently, though it seems like those benefits aren't really as important or even applicable now that she has a high-paying job (they were important when she was making $50k in residency).
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Jan 10, 2019 16:37
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Your payment with household income of $275,000 or more will just be your full payment. You will not get any benefit at all out of IBR.
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Jan 10, 2019 16:48
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Forget IBR unless you’re doing PSLF. Refinance at <4% and pay it off ASAP. Have your wife work some moonlighting shifts until it’s more reasonable. PM me if you want a refi referral link for earnest. I’m currently finishing off the last 100k on an originally 268k balance this year.
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Jan 10, 2019 18:37
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Mind_Taker posted:Yeah I'm hesitant to sell too much of my savings in my Vanguard account because it is a great safety net and also a way to have funds for anything that might come up (house down payment, kids, medical bills because America, etc.). However we also do not like the idea of a large loan over our heads with a somewhat high interest rate. It isn't a safety net, though. You have 300k in debt. The better safety net is to have no debt and a $275k combined income. If you can't save $150-200k of that a year, something is wrong! Depending on where you live too I guess.
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Jan 10, 2019 21:55
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CelestialScribe posted:It isn't a safety net, though. You have 300k in debt. The better safety net is to have no debt and a $275k combined income. If you can't save $150-200k of that a year, something is wrong! Depending on where you live too I guess. Do you also advocate paying off a mortgage the absolute moment you can? They're going to be able to refinance to a mortgage level of interest. A cash buffer is a cash buffer. It's no safety net to say "Oh I've got an income of 275k but currently no money... Oh oops lost job before I could make an actual safety net out of... Cash... So now I'm stuck taking on credit card debt." We have BFC superstars who actually had this problem. Thought they could run no buffer because their job was just so secure! Until it wasn't. Yes of course they could save up a bunch of money in a year... But then wouldn't it make more sense to finish paying off the debt after that buffer were established instead of counting chickens before they hatch (future salary) while sitting on no assets? Suppose they spend the entirety of savings to pay this debt but then there's a downturn in the economy this year and they both lose their jobs. With no assets they're forced to take on credit card debt at huge interest. If on the other hand they hadn't paid off that educational debt their debt would be sitting at 3-4% interest and they'd have money to ride out the unemployment while job searching. They might have to move to a new city to get a good job. Credit card or current 3-4% interest, which is better to finance a move? Do you find this scenario too unlikely? This is what we mean by "risk" and this is the risk that you get to mitigate by paying interest a little longer. It's clear you don't find this risk worth the lost money in interest. The rest of us though find it well worth the money.
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Jan 10, 2019 22:54
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CelestialScribe posted:It isn't a safety net, though. You have 300k in debt. The better safety net is to have no debt and a $275k combined income. If you can't save $150-200k of that a year, something is wrong! Depending on where you live too I guess. Agree in general with what Amara said above, although in this case I think a middle-of-the-road solution is the most reasonable. Say for instance they elect to wipe out their savings and retire all the student loans with a lump payment. Then the next day one of the following things happens, all of which have happened to physicians I know: -they are in a car accident and seriously injured, out of work and in rehab for a year -the medical practice fails to make payroll and they are not paid for four months (happened to me!) -a wildfire or hurricane destroys both of their places of work and they are out of work for 6 months or more -they are arrested for a DUI and their medical license is suspended by the State Board of Medicine for a year and they incur $65,000 in fines, attorneys fees, and costs of state-mandated rehab/supervision to receive a conditional reinstatement -they are sued for malpractice and the nature of the malpractice allegation is such that they are immediately terminated by their employer In all of the above situations it would have been much better to hold on to that $300,000 and plead for hardship from the lender.
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Jan 10, 2019 23:23
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CelestialScribe posted:It isn't a safety net, though. You have 300k in debt. The better safety net is to have no debt and a $275k combined income. If you can't save $150-200k of that a year, something is wrong! Depending on where you live too I guess. Federal taxes alone reduce it to about 200k then there is state and local so it would be quite difficult to save 200k
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Jan 11, 2019 16:30
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| # ? May 3, 2024 13:00 |
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Check in the thread for doctors for more specific advice about med school loans.
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Jan 12, 2019 06:39
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