What should future Doctors Do? Pay down student loans or invest?

There are many competing goals when you first match into a residency program as a fourth year medical student.

• Establish your living situation while in residency. Buy or Rent?
  • Is it feasible to buy a home, even with the many Doctor Loan options?
    • Yes, you can buy, but can you maintain a home during residency?
  • You have hundreds of thousands of student loans to manage.
    • Successfully manage your loan portfolio means understanding your loans and knowing what to do when.
      • DO NOT IGNORE.
    • If you are married or have dependents:
      • Protect them by thinking of purchasing TERM life insurance.
    • If you have children, you need to begin saving for their college education (i.e. 529 plans).
    • Establish an emergency fund.
      • At least three months of expenses to have in the event of an emergency or transition.
    • Assess your disability insurance
      • Is what you get through your residency program enough? Most disability plans do not kick in until 90 days from the event.
    • Begin thinking about building up your retirement investment accounts.
      • You are already behind college classmates, who have been working 4-5 years.
    • Consider saving up for a down payment for your dream home.
      • Unless the dream house can wait.

You have been living like a student while in medical school

Plan to continue to do so for the entirety of your 20s as a resident.

Have a few hobbies or splurges you would like to enjoy now.

It can be overwhelming to balance all of these competing priorities with limited residency income.  Having and executing a plan is important as you begin earning a resident income and later as you move on to your physician earning years. Many medical students graduating today are ill equipped to carry out a plan without someone who can serve as their quarterback.

It is important that you consider selecting a trusted financial planner or advisor. Although you are capable of doing this on your own, a financial advisor can take it off your hands and guide you along the process. Knowing how to select a financial planner is key to your success. See the following article on how to find a financial advisor, https://www.kevinmd.com/blog/2018/03/physicians-find-financial-advisor.html. There is even a course that the White Coat Investor put together that can give you the basics to do this on your own and not use a financial planner/advisor, https://www.whitecoatinvestor.com/fire-your-financial-advisor-the-wci-online-course/.

The most common concern about how to use your money right after residency: should you pay down student loans or invest? One of the first decisions you will have after the match is choosing your retirement investment vehicle. Most residency programs will offer you a 403(b) plan and others will offer a Roth 403(b) plan. The latter is a better way to go.

The decision between paying down student loans and investing is a balance between how much you are paying in interest compared to what you could earn investing. The student loan interest rate range over the last few years has been between 5-7%. If you are not going for Public Service Loan Forgiveness (PSLF), then you should strongly consider whether refinancing your student loans could lower your interest rate or by doing RePAYE, the interest savings (50% of unpaid accrued interest not charged) may be a better deal than through a private loan refinancing.

Conversely, what can you expect in investment returns? Historically, the market has returned over 10% from 1950-2017, according to data from NYU. Of course, your expected return may be a little lower if you include bonds in your portfolio. Investing is not without risk. Even though the stock market has had an incredible run since 2009, the stock market can, and does, experience significant declines. Investing in the stock market is an “invest and leave it” kind of thing. You cannot allow your emotions to dictate.

When you invest, you can put the money in retirement accounts such as a 401(k), a backdoor IRA, or a regular taxable account. Remember that retirement accounts offer tax benefits that you need to consider in the “student loans vs. investing” debate.  From a mathematical perspective, it is better to invest than pay off student loans because the expected return of the stock market typically exceeds that of the interest rate on your student loans. From a strictly mathematical perspective, it makes sense to put your money in the stock market.

This is why many residents are encouraged to contribute toward the Roth IRA while they can and while earning an income that allows them to contribute up to $5,500 annually. Once the resident begins earning attending physician income, most likely they will be unable to continue contributing toward their Roth IRA, due to exceeding the eligible income thresholds. Residents also have the ability to contribute upwards to $18,000 pre-tax annually under a 403(b), which many residents will have as part of their benefit package. The earlier you exercise these options, the more investment compounding works in your favor. Tack on the benefits of contributing money to a tax-advantaged account, and the difference between investing and paying off student loans widens.

Why not hold your student loans indefinitely, then?  If the math shows you will end up with more money investing rather than paying off student loans, does it ever make sense to pay off your student loans early. Absolutely! There are many good reasons to pay down your student loans, especially private loans with much higher interest rates, but, for those with the ability to consider the Public Service Loan Forgiveness (PSLF), it makes no sense to pay more than necessary on student loans.

Remember that you are able to borrow money from some brokerages at interest rates lower than typical student loan interest rates. Few people recommend using margin to invest in the stock market with leveraging, but it is routine for physicians to continue to hold student loans while investing in the stock market.

While there is a strong mathematical case for holding student loans while investing, there is also a strong psychological incentive to pay off student loans. You are not a company to maximize profits for your shareholders. You do not need to wring out every cent of profit in your portfolio. The relief of being free from the student loans that will be hanging over your head for a decade or longer is a good reason to pay off your student loans before investing, but not before you ruled out PSLF.

The decision to pay down student loans vs. investing in the stock market is, like all personal finance decisions, a personal decision. Mathematically, it is better to invest in the stock market or invest generally, because the stock market has a higher expected return than the student loan interest.  However, investing instead of paying off student loans introduces leveraging to your portfolio, and there are strong psychological incentives to pay off your student loans quickly.

In general, because of the benefits of retirement accounts, I recommend that the typical new resident maximize their tax-advantaged accounts before paying down student loans. After maximizing tax-advantaged accounts, then begin paying down student loans before investing in a taxable account, unless going for PSLF.