This series of posts is sparked by an ongoing conversation with my fellow radiology resident Bo Liu (no relation to me) of whitecoatmoney.com Re: student debt management and net worth accumulation.
Our discussions cover many bases, so I will address individual key points in separate posts.
This post focuses on the prevalent dilemma of the highly educated (& indebted):
INVEST VS. PAY DOWN DEBT.
Bo (pgy2) chooses to invest instead of paying down his student debt (with 6.8+% interest, he selected income-based-repayment plan, with potential public service loan forgiveness in 8 years.) He offers great information on investment and retirement savings in his blog.
We both believe in time value and debt leverage,
but we approach our student debt/ net worth differently.
Bo makes minimal student debt repayment (~$400/mo is half of the interest accrued each month from student loan debt.) He channels his residual cash flow towards investment/ retirement savings @ potential 8-10% return.
Here’s Bo’s rationale for investing instead of paying down student loan:
- There are daily fluctuations in the market but over the long run, it gains ~10% a year (http://www.moneychimp.com/
features/market_cagr.htm). Since I’m investing for the long term, the downs won’t affect me.
- Since I’m buying and holding, the only income tax I will have to pay will be on dividends – most of which will be taxed at a lower rate under long term capital gains as compared to interest you earn from say a savings account which is taxed as ordinary income.
- Student loan interest is deductible – $2500 deduction at 25% tax bracket translates into $625 in your pocket each year. As long as your modified adjusted gross income (MAGI) is less than $80,000 ($160,000 if married filing jointly).
- I am interested in an academic position, which will qualify for PLSF. After 6 years of training, working for 4 more years in academic/non-profit will lead to student loan forgiveness.
Here’s my take:
- I like the fluctuation-free, tax-free savings I get with paying off student loan. It’s solid 6.8% tax-free return for every dollar I put towards student loan principle.
- I use 0% credit card (which will later be converted into 1-2% interest debt with balance transfers) to invest @ 8-10% return for the long run.
- I leverage debt with a large differential between interest paid and return earned. Specifically, I like to leverage 0-2% debt for potential 8-10% return; but I will not leverage guaranteed 6.8% debt for potential 8-10% gain.
- I will moonlight to boost my income starting this July. ( So student loan interest tax deduction won’t really help me.)
- While I may want to stay in academics, statistically majority of radiology grads get private jobs (not PLSF qualified) simply because there are 4x more private jobs than academic ones.
- Do you invest or pay down student loan?
- Are you going for PLSF (public loan service forgiveness) and why?
- Are you paying down your student debt aggressively? what are your opportunity costs in doing so?