WCI’s Continuing Financial Education 2020

I was very much looking forward to traveling to Las Vegas to speak at WCICON20 earlier this month but ended up unable to because of the whole devastating pandemic thing, but Jim and crew have released the conference e-course today. I and several other folks who couldn’t make it in person recorded our talks for inclusion after the fact, so there are over 34 hours of lecture worth 10 hours of CME.

Due to horrific computer glitch, I lost audio during my original recording and had to the majority of it again a second time while juggling my infant and 4-year-old, so I welcome you to check it out and see if you can feel the undercurrent of my electronically induced suffering. The struggle is real.

The course is included in the conference fee, so even if you went in person you should still check it out and hear the extra talks. I already enjoyed the talk from Morgan Housel (author of the upcoming The Psychology of Money) earlier today.

For everyone else, the cost is $100 off through April 21 with code CFEINTRO (which is already embedded in this totally monetized affiliate link).

Fragmentation and the Family

Affluent conservatives often pat themselves on the back for having stable nuclear families. They preach that everybody else should build stable families too. But then they ignore one of the main reasons their own families are stable: They can afford to purchase the support that extended family used to provide—and that the people they preach at, further down the income scale, cannot.

[…]

For those who have the human capital to explore, fall down, and have their fall cushioned, that means great freedom and opportunity—and for those who lack those resources, it tends to mean great confusion, drift, and pain.

From conservative columnist David Brooks’ “The Nuclear Family Was a Mistake” in The Atlantic.

Even in medicine, we are seeing a disturbing trend. While the mean and median student debt are rapidly increasing due to high tuition rates, this is actually partially masked by the increasing percentage of medical students graduating with no debt. This suggests that a greater fraction of students come from means and have family support to cover medical school’s incredible cost. And those without that family support are either not getting in or are looking elsewhere.

It doesn’t stop at admission. These disparities and resource differences play out in specialty selection as well:

Over just a six-year period, the number of debt-free graduates almost doubled. And, overall, more competitive specialties like ophthalmology, ENT, urology, radiology have substantially more debt-free graduates than family medicine. Yet, we know we have a specialization problem in medicine. Free tuition at NYU isn’t going to change this massive headwind. The system needs retooling from far, far earlier.

On the WCI Podcast

I had a lot of fun talking to Dr. Jim Dahle on this week’s episode of the White Coat Investor Podcast about student loans:

 

 

I honestly think we may have talked more about my journey on this episode than I have with my actual writing on this site for the past eleven years, but I hope listeners found the contribution of another writer/blogger to be interesting  (also, don’t turn up the volume or you may hear my sniffles; kids…).

As Jim mentions, he actually started The White Coat Investor a couple of years after I started writing here. But he’s since built an impressive empire, steadily produced a ton of content, basically singlehandedly changed the level of discourse for physician finance, and taught/inspired a generation of young doctors to think critically about money. It’s just an incredible achievement.

I’m really looking forward to speaking at WCICON20 this March and meeting some of you there!

 

 

Student Loans: In Print and Online

I published the first edition of Medical Student Loans: A Comprehensive Guide in 2017. Waiting almost three years to put out a print version is what happens in the perfect storm of total DIY, extreme retentiveness, and being a generally lazy procrastinator. Oops!

But I’m happy to say I finally put the finishing touches on the print editions for both of my loan books this month, so those of you hankering for the perfect beach read need wait no further:

Hurray!

Even better?

But in what is surely a terrible business move, I’ve also put the entire text up online at benwhite.com/studentloans/.

So yes, you too can join the ranks of folks still exchanging money for that hard-fought knowledge (thanks!).

And yes, you definitely still download a nice ebook file in the format of your choice in temporary exchange for your email address so I’ll have a nice big audience for that infrequent newsletter I’ll probably never actually start. (PS I even put the unsubscribe link in the first sentence of the download email; did you know it actually costs a bunch of money to have an email list? Crazy.)

But if you just want to scroll through 45k words in a web browser, now you can do that too.

Student loans are crippling a generation of Americans and have a chilling effect on personal+financial wellbeing. I’m just trying to do whatever I can to help you get the information you need to make thoughtful decisions about managing your debt.

If You Have a REPAYE Subsidy: Maximize It, Don’t Pay Extra

A general rule of debt repayment is that it’s never a bad idea to put extra money towards paying down your debt faster. More money means getting out of debt faster and less money spent on interest. This is true for credit cards, most student loans, car loans, etc.

However, this is actually not necessarily the case in the context of income-driven repayment in the setting of negative amortization (i.e. when calculated monthly payments are unable to cover the amount of accruing interest).

If you can’t dent the principal, then there’s no point rushing to put extra money toward your federal loans. But why?

How Much Will It Take to Make Real Progress?

The average medical resident has big loans and relatively low income. While some intentional living can certainly free up some extra money for debt payoff, it’s much harder to have enough extra to completely mitigate negative amortization, let alone begin actually making progress on paying those loans down.

For example, $200k at 6% accrues $12,000 interest a year. A single resident earning $60k in PAYE/REPAYE has a monthly payment of around $344/month, or $3,864 for the year. In order to break even, you’d need to spend over $8,000 extra. Not chump change, especially on a resident salary.

Leverage Instead

Leverage the extra money you can earmark for loans to earn some interest elsewhere. A tax-advantaged retirement account (at least get the company match from work if available) or a Roth IRA are great options. When the question is between investing vs. paying down loans, the real answer is yes.

But if you specifically want to put money toward those loans, put it somewhere safe for now that earns some interest and then use it toward your loans. Don’t rush; it’s a waste.

To understand why you should wait, you need to have an understanding of how interest works with federal student loans and how payments get applied.

How Federal Student Loan Interest Works

1. Loans grow with simple interest, and capitalization is only triggered by very specific events. Capitalization is when accrued interest is added to the principal, thus resulting in a bigger loan accruing more interest at a faster rate. The main triggers are loan consolidation, the end of the grace period, changing repayment plans, and if/when you lose your partial financial hardship while in the IBR or PAYE plans.
2. You can’t pay down the principal by making extra payments until you’ve paid off all the accrued interest for a specific loan.

What this means is that once you begin repayment, you should never be surprised by a capitalization event. Your interest will continue to accrue every single day but it will not be added on to the principal unless one of the above factors takes place. Because the principal does not change, the amount of interest accruing remains constant. No matter how big the number gets, the rate of interest accrual remains the same until a capitalization event occurs. Paying down a little extra interest itself now as opposed to later does not change the natural history or your loans or alter the amount needed to pay them down.

In the REPAYE program, half of any accrued interest that is not covered by your monthly payment is forgiven. Therefore, the lower your monthly payment, the lower your effective rate. That doesn’t mean you shouldn’t still set aside more money every month toward debt repayment, just that there is a real financial benefit to paying as little as possible directly to the servicer in the short term until you are able to dent the principal.

That Money is Still Spoken For

To reiterate, I am not suggesting that you take this extra money that you could otherwise put your loans and spend it toward lifestyle inflation.

That money should be in some kind of loan payoff slush fund, such as a CD or interest-bearing online savings account like Ally Bank.

Earning 1 or 2% risk-free in a savings account will make that money go further when you finally use it on your loans. A lot different? No, of course not. But it does help just a little bit to mitigate what can be relatively high federal loan rates. Sure, it can function as an emergency fund too, but you should give that account a name like “loan money.” It’s not for vacations.

When to Deploy

If you’ve been saving money on the side for loan payoff, there are several situations in which it’s time to pull the trigger and make a large lump sum payment.

  • Right before a capitalization event, such as losing your partial financial hardship in IBR or PAYE.
  • Right before a private refinance.
  • When your income increases enough that you’re actually able to start making substantial progress on your loans, then you can jumpstart it with your slush fund.

Caveat: if you have not consolidated your loans and have some plus loans at a higher interest rate, one could conceivably put all extra funds into paying off that loan first. Given that an individual loan will be a smaller amount, it may be feasible to make progress on it. However, in general, I recommend most people consolidate for the reasons outlined in this post.

Maximizing the REPAYE Subsidy

One of the common REPAYE questions has been if I pay extra will it eat into my repaye subsidy and thus ultimately lose money? There has been some discussion, but the answer is supposed to be that you can. That said, I would almost never trust a servicer to ultimately apply these things correctly. As we’ve discussed above, there isn’t a great reason to do this on a routine basis. In most cases, you’d be better off leveraging that money elsewhere.

One thing to consider is that placing money into a traditional pre-tax retirement account like a pretax 401k/403b reduces your adjusted gross income (AGI), which reduces your payments by 10% of the contributed amount the following year, which in turn increases your amount of unpaid interest thus increasing your unpaid interest subsidy and ultimately lowering your effective rate. That’s a mouthful, but it means that the more you can lower your AGI, the less interest accrues on your loan.

That said, the income-lowering strategy is much more effective in reducing payments toward PSLF than in saving money on the accrued interest. For example, a $100 pre-tax contribution will lower payments the next year by $10 and would thus result in $5 of forgiven unpaid interest.

Lastly, if you are considering the possibility of PSLF

Never spend a dollar more than absolutely necessary directly on your loans until you are ready to permanently give up that plan. Any dollar extra you pay is a dollar wasted in the event of achieving loan forgiveness. Again, if you are nervous about the PSLF program, then you hedge your bets by being financially prudent in other ways, not by tilting at your loans.