Commentary from The Darwinian Doctor

This PhREI Network post is via Ian Cook, MD at Carpe Diem MD, and goes over their debt paydown strategy.

Ian and his wife both accumulated $300,000 of student debt on their way to becoming physicians. (That’s the same amount I accumulated by the time I finished residency!)

But their approach to student debt paydown is different from traditional advice. Read below how Carpe Diem MD decided to invest capital into real estate, rather than pay down their debt. He also does an analysis on the financial outcome of his decision.

This post first appeared on Carpe Diem MD.

Lauren and I both accumulated $300,000 in student debt on our path to becoming Physicians.   That is $600,000 of combined debt before our first paycheck.  We are not bitter or mad about this debt.  We view student debt as an investment in ourselves. 

The promise of Medicine and the ability to improve the lives of others was worth the investment.  We knew that when we completed the journey a personally and financially rewarding career would be waiting. 

Lauren and I have no regrets about choosing Medicine and would do it again.  We do have some concern about the future of Medicine and a desire to secure our family’s financial wellbeing. 

We look at our debt as the cost of achieving our dreams and plan to pay it off gradually. 

There are a ton of sites that will tell you to pay off your student debt rapidly.  

Our philosophy is let it ride…

Now to be fair it does depend on your interest rate.  If you are able to refinance your loans to less than 4% then there is little advantage to paying off your loans.  You can pay off your loans for peace of mind, which is reasonable, if you hate debt… 

Your debt tolerance will determine if you hold your loans or pay them off. 

Lauren and I are very debt tolerant.  We have been swimming in debt since our young 20s.  

Our income has increased significantly since our 20s and we could pay off this debt more quickly than the 30-year term.  However, we do not see the advantage in paying off student debt.  We would rather let the student debt ride and use our current savings for other investments.

The counter argument would be to pay off your loans as soon as possible.  By paying off your loans you will decrease your monthly expenses.  You also increase your net worth by resolving your debt balance…. In our case that would be $600,000… not bad.

Lauren and I chose to invest in assets rather than paying off student debt. 

In, 2016, Lauren and I decided to invest in a short-term rental (10 Reasons to Invest in Short Term Rentals). The best part of STR investing is that you can get started with 10% down if purchasing as a second/vacation home.  Traditional investment properties require 25-30% down. 

STR Purchase

So Lauren and I invested $50,000 (10%) on a $500,000 snow resort STR.   The mortgage for that property is covered by Short-term rentals.  The property equity has increased significantly since 2016. 

The STR property is valued at $800,000 and we owe $400,000 after loan paydown provided by rental income.  If you subtract the down of $50,000 then we have increased our net worth by $350,000 in 4 years… That is a 7x return on our $50,000 investment.

Student Loan pay off

If we “invested” $50,000 to pay down our student debt then we would have decreased our debt by $50,000 and increased our net worth by $50,000. 

If you calculate the interest saved over four years: 3.5% x $50,000 x 4 years the savings would be $7,000. 

(The savings of $7,000 is over-estimating because this does not account for balance pay down). 

STR purchase vs. Student Loan pay off

Therefore you can see that:

$50,000 invested in our STR resulted in a $350,000 increase in net worth

vs

$50,000 “invested” to pay down student debt would have saved $7,000 in interest and increased our net worth by $50,000

The results achieved on our STR purchase may not be reproduced on every purchase. However, if we only received 25% of the return we would still be better off than paying down our student debt.

Now this plan does not work for everyone. Some debt might not be worth letting ride:

  1. High interest student loans that you are unable to refinance. 
  2. Credit Card debt with high balances and high rates
  3. You are not comfortable with debt and the peace of mind is worth the price of paying your debt off.

Lauren and I are swimming in student debt and plan on letting it ride…

Thank you Carpe Diem MD for sharing your student debt paydown strategy!

So is this the definitive answer to the question of whether you should invest into assets or pay down your debt? Perhaps not, but it’s a valuable anecdote showing one option. You could certainly argue that Ian took a risk and got lucky with the appreciation on the property. Debt pay down, on the other hand, is a guaranteed (albeit small) return.

What is your debt pay down strategy? Visit a PhREI Network member blog for more content!

Are you a physician or physician spouse interested in real estate investing? Come chat with The Darwinian Doctor, Carpe Diem MD, and the Prudent Plastic Surgeon in the PhREI Network Facebook Group!