Student Debt Archives - The Physician Real Estate Investor Network

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

$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:

High interest student loans that you are unable to refinance.
Credit Card debt with high balances and high rates
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!

Commentary from The Darwinian Doctor

In this post, Jordan Frey from the Prudent Plastic Surgeon discusses debt payoff strategy.

Read below about how he amassed over $450,000 during training, and his detailed plan to pay it off.

He’s on an aggressive path to debt payoff and I have no doubt that he’ll wipe out this debt very quickly.

This post first appeared on The Prudent Plastic Surgeon.

Until now, I’ve written a lot about very personal aspects of my financial life and overall life. I’ve used actual numbers as much as possible. I want to be completely transparent. We’re in this together and it’s not fair to you if I am not totally forthcoming. However, so far, I have not revealed my strategy for paying back my massive student debt.

I have shared some information about my student debt

Here are some refreshers:

I took out student loans to pay for just about every cent of my private undergraduate and medical education
During my 7 year residency and fellowship training, I deferred all of my loans
Upon graduating training in June 2020, I owed over $450,000 in student debt

And here are some other random factoids about my debt situation:

My wife and I also had credit card debt upon graduating. In fact using our credit card was one of our biggest financial mistakes.
However, we paid off all of our consumer credit card debt (>$20,000) within 4 months of my finishing training
My wife is a smarty-pants. Because of this, she had full scholarships for her undergraduate and most of her graduate education. So, she has very little student debt
So, this post will be pretty much exclusively about my strategy to pay back my student debt

Why haven’t I shared my student debt strategy until now?

It’s a fair question.

As I reflect back, I think it is for a few reasons:

I think I was still figuring out my plan and didn’t want to share half-baked advice
A small part of me was still embarrassed about how much student debt I had and how badly I had mismanaged it
There are a LOT of opinions out there on how to best pay back debt. And most people feel very strongly one way or the other.

But now here I go into the crossfire!

My loan pay back strategy

First, some baseline facts:

My current student loan burden as of this writing (1/19/21) is: $438,787
Approximately 2/3 of these loans are federal and the remainder are private
The average interest rate on ALL loans is currently 6.1% (some of the private rates are variable)
- The interest rate for federal loans in 6.8%
- The average interest rate currently for my private loans is 5.34%
I have not yet refinanced any loans

And now some general tenants of ours:

Paying back debt is one of the highest priorities on our financial priority list in our written financial plan
Our current budget (please, please get one if you don’t have one…it’s easy!) calls for $6,675 be allocated towards student debt each month
Any monthly budget surplus goes towards student debt pay down
- This has general ranged from $2,000-$6,000/month

Ok, ok…now for the actual student loan strategy

I’ll keep with the theme and share this in bullet form as well:

Selenid and I organized my private student loans by lowest to highest amount
- If two loans are very similar in size, we prioritize the one with a higher interest rate
We also organized all of my federal student loans from lowest to highest amount due
Currently, we pay off the minimum amount due for all of my private loans each month
The remainder of the monthly allotment for student loans plus any monthly budget surplus then goes to pay the private loan with the lowest amount due
Once that loan is paid off, we move onto the next one on the list of private loans
We currently are NOT paying back any federal loans given the current 0% interest rate forbearance
I have NOT refinanced no private loans yet. Once I know if the federal loan forbearance will be extended, I’ll examine rates and may refinance the private loans

“Ok Jordan, that’s all well and good. But what about when the 0% federal interest rate is lifted?”

Great question, Jordan.

As of this writing (1/19/21), I am still adhering to the above strategy. It has been intimated that Biden will extend the 0% federal student loan interest rate forbearance for some more time before it expires on 1/31/21.

If he does extend the forbearance, I will keep going as stated. I will likely refinance my private loans.

But, eventually, the interest rates on my federal loans will go up and they will start coming due.

Once federal student loan forbearance is ended, my amended strategy will be one of two options

Option #1

This is the most likely option.

Once I have to start paying back my federal student loans, I will refinance all of my loans for 5 years with a variable rate. I plan to pay back all of my loans in 5 years or less and the 5 year variable is the best rate in most cases.

Currently, I qualify for a 5 year variable rate of 3.06%. This would amount to monthly payments of $7,896. This is less than what I currently pay most months and fits very well within my budget and financial plan.

Option #2

This would be the scenario if interest rates for some reason go back up and my current student loan rates are more favorable.

In this case, I would keep my loans separate and pay them back in the “snowball” fashion that I described above. Basically, I would organize them by lowest to highest amount, make all minimum payments, and pay lump sums based on my monthly budget to each loan progressively down the list.

If refinancing some or all of the loans then becomes beneficial down the line, I would pursue it at that point.

My student debt advice for you

This was a run down of my student debt circumstances and my plan to address them.

However, I think most of it is very much applicable to any physician with student debt. My student debt:income ratio is roughly 1:1.

Some may have a lesser ratio. A few of you may even have a greater ratio, but probably not by much. Regardless, these techniques work.

I also want to emphasize again that paying off debt is the most important thing that you can do to boost your financial well-being and advance towards financial freedom.

That’s because this really is the first step to financial freedom. You need to stop taking on new debt and get rid of any and all debt you have. Look, when you are in a hole the first step is to stop digging. Then start climbing out. You can’t run until you get out of the hole.

So, this is a huge thing that should definitely be at or near the top of your financial priority list that will go in your financial plan (more on this in future videos). Each $1 you use to pay off debt is $1 that your net worth increases.

Here are the actionable steps you can take NOW to manage your student debt

Create a list or table of all of your debts (including mortgage)
Decide how to prioritize them (highest to lowest interest, lowest to highest amount, etc)
Rearrange list so that they are in that order
Make lowest required payments on all debts
Take the remainder of the monthly amount budgeting for loans as well as any extra discretionary savings from that month and pay it to the first loan on your list
Keep doing this until that loan is paid off
Once that first loan is eliminated, repeat for the second loan and so on. Each time you eliminate a loan, you will be adding that required monthly payment to the rest of the allotted monthly amount for debt paydown, increasing the size of the snowball and the speed at which you pay off your debt

An ode to PSLF [All of this could have been avoided]

I could have taken advantage of the PSLF program because my training was 7 years, during which I could have made small income based repayments. Then I would only need 3 more years of repayments at a qualifying hospital to have the remainder of my loans forgiven. But I was ignorant and didn’t take advantage of this as a trainee. Now that my salary is much much higher, income based amounts are very high and any forgiveness, if at all, would be minimal.

Could have planned that better with just a little bit of financial education.

But no reason to live in the past!

In general, if you have a longer training period and/or have a low income/debt ratio (<1), PSLF likely will be a good option for you. If neither of those are true, a student debt strategy like the ones I covered above are likely your best options.

Well, there you have it! That is my student debt pay down strategy revealed

Most importantly, just keep remembering to break these concepts up into their most important tenants. Don’t get lost in the weeds.

Focus on the simple strategies to build wealth as a physician and you will be set!

Thank you Jordan for sharing your debt paydown strategy!

What are you doing to get out of debt? Please visit a PhREI network member blog for more great content!