Educational Debt - how would you pay it back?

Question

I am about to graduate from a medical school, with an educational debt of $200K. My starting salary in the profession will be around $125K/year, and should steadily go up aroud 5% every year for the next 25 years.

Is it good idea to pay back this loan right away, or opt to choose a 30 yrs repayment plan?

Also, if I choose the repayment option (30 years), will this be good on my credit report, rather than paying it back in 3-5 years?

Thanks

The interest on this loan is 6.5%

Answer 1

the Federal government is borrowing money at about 5% these days, so 6.5% is darn cheap interest, especially if some or all of the interest portion is tax deductible [ask your tax advisor about deducting interest on education loans].

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My personal rule of thumb is to repay debt if I can not find a reasonable investment opportunity [reasonable = fits into my investing plan and risk tolerance at this stage of my life] that offers a likely return of twice the debt's interest cost. Twice allows for estimating error in the investment return, normal variation, and income taxes.

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In this case, the equilibrium estimates for market returns on various popular investment instruments are likely as follows:

long term government debt 5%
long term corporate debt 8%
S&P 500 stock index 13%
small caps stock index 18%

[in equilibrium, the premiums between the various classes of investment instruments tends toward an average -- these estimates include the market observation for LT government debt plus (roughly) those averages. averages come from Ibbotson Associates -- an annual volume titled "Stocks, Bonds, Bills, and Inflation" read several back issues for clarity on this and related subjects.]

Since the estimate for long term return on the S&P 500 index [likely an appropriate risk level for you without knowing more about your finances] is about double the interest rate on your debt, I'd be inclined to pay the minimum amounts on the debt and stuff extra money away into stocks.

As a physician, I STRONGLY suggest that you find as many ways as possible to invest INSIDE retirement plans -- the Supreme Court has ruled that retirement plans can not be attached by malpractice lawsuit awards.

{Personally, I like mid-cap stock indices -- more return than S&P 500 with less risk (volatility) than small caps.}


does this help?

Answer 2

I'd pay it back as soon as i could. Live on $30,000.00 a yr and put the rest on the school loan. If you put 100k a yr on the loan you can pay it off in 2 yrs. Dont get caught in the trap and go out and get a 60k car and a 800k home and pay on the school loan for 30 yrs. you'll drown in debt. You can win with money like that. After you pay off the bebt then you'll have more money to invest for retirement.

check out daveramsey.com and listen to his radio show. Lots of good advice on money and debt and investing

Answer 3

Look at the interest rates on your loans. If they're small then don't pay back right away. You need to have money for your budget now. Keep all payments current and when the time comes that you can have investments that help your finances you can then pay them off.

Answer 4

If I am not bonded, and if I can afford it, I will probably repay them as soon as possible. At least I am probably not a nett debtor.