Should I pay off my $360k student loan debt or invest?
Rental Property Investor · Anaheim, CA · Member since 2019 · 11 posts · 5 votes
Should I pay off my $360k student loan debt or invest?
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Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes@Monique Sison, I used to feel the same way that @Payton Reid felt - pay off debt before investing. But then I interviewed @Craig Curelop on the BiggerPockets Money Podcast (Episode 35) and the way he started investing while paying the minimums on his student loan debt has that route making sense.
20 Replies
- Developer · Raleigh, NC · Member since 2019 · 6 posts · 20 votes6y
@Monique Sison I would recommend focusing your attention on finding a good paying job, save $5k for emergencies, move into a modest rental property so you can start living your own life, then start tackling your debt.
I would crush your student loans before investing.
- Rental Property Investor · Hawthorne, CA · Member since 2018 · 655 posts · 900 votes6y
Hey Monique first I would like to congratulate you on becoming a dentist. Before you make decision about investing in real estate, I would first explore the following:
1.How much income do I have coming in
2. What are my liabilities or how much money do I have to pay out every month
3. How much disposable income do I have
4. How long will it take to save enough money to put down on an investment property
5. Look into what mortgage loan you can qualify for being that your debt to income ration as it stands is very high
Some side notes:
If your parents are letting you stay at home, take advantage of that and save as much money as you can
While you are pondering your path, I would pay the minimum on your students loans until you can determine just how you want to approach the real estate investment game
You need to way more detailed and educated on what exactly its going to take for you to buy your first investment property.
It is not impossible but its not going to be easy. Good luck!
- 6yMindy JensenPro MemberBiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
@Monique Sison, I used to feel the same way that @Payton Reid felt - pay off debt before investing. But then I interviewed @Craig Curelop on the BiggerPockets Money Podcast (Episode 35) and the way he started investing while paying the minimums on his student loan debt has that route making sense.
- Rental Property Investor · Anaheim, CA · Member since 2019 · 11 posts · 5 votes6y
@Payton Reid thanks for your response! Good paying job, check, $5k for emergencies, check. Now all that’s left is the modest rental property and to find a lender who I can qualify with!
- Rental Property Investor · Anaheim, CA · Member since 2019 · 11 posts · 5 votes6y
@Damaso Bautista thanks for the response! Right now I have a great income ($170k before taxes) and no liabilities since I live at home, I’m very lucky! So far in the past year, I’ve saved about $20k, but I recently started on a new repayment plan (PAYE) for my student loans that allows me to make $35/month payments so I can save even more aggressively. I’m trying to find a lender with a program for doctors, because you’re definitely right.. most lenders don’t love my debt to income ratio!
- Rental Property Investor · Anaheim, CA · Member since 2019 · 11 posts · 5 votes6y
@Mindy Jensen thanks Mindy! I have to give that podcast a re-listen! I really would like to get started because I feel that now is the prime time for me to grow my wealth as opposed to throwing my whole income towards my debt and ending up with no wealth built after the debt is paid off in 10 years.
- Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes6y
Originally posted by @Mindy Jensen:
@Monique Sison, I used to feel the same way that @Payton Reid felt - pay off debt before investing. But then I interviewed @Craig Curelop on the BiggerPockets Money Podcast (Episode 35) and the way he started investing while paying the minimums on his student loan debt has that route making sense.
I'm with Mindy on this one.
The right investments will help you pay down that debt faster while giving you assets, equity, ect.
Are you in a position to look at a house hack of a duplex/fourplex type property for a first investment?
Then you're only saving 3.5% down, you will ideally be living for free (so your current rent payment you can throw at student loans), and then and additional profits you can save toward your next purchase or also pay down the loans.
- Realtor · Boston, MA · Member since 2019 · 244 posts · 275 votes6y
I graduated in 2007 with ~$80k in student debt. I put my loans into deferment for a year and during that time bought my first 2-unit multi family (lived in one, rented the other).I have made a little bit higher than minimum payments on my student loans for 12 years now, and did take a chunk of cash I came into to pay off one of the loans entirely. But I still owe about $30k after all these years and make $400 monthly payments (about $100 more than the minimum).
Assuming all goes well with my current deal, I will soon own 25 doors. Once I finish rehabbing and refinance one of my other deals, I'll have something like $150k cash in the bank and a decent net income from the rentals. I could pay off the remaining $30k at any time, and would love to be mentally free of that debt.But it doesn't make sense. I have refinanced to be down under 3% interest on that student debt. I can reliably make ~15% returns by investing in real estate.
Given how much debt you have and your current living situation, I would split the difference. Assuming you net $10k/month after taxes and you can live on $2k/month as long as you are at mom and dad's, take the remaining $8k and save it until you have enough for a decent down payment and reserve funds on either a house hack or rental that will allow you to live for free and get out of mom and dad's. That should be 6-12 months depending on your area, unless you are in one of a handful of expensive cities.
Once you are into a situation where you are on your own and living with your mortgage covered by house hacking/tenants, then you could do something like pay 50% of your $8k savings towards the loans and save 50% for the next investment. Having that $360k hanging over you forever (with the interest capitalizing at your $35 payment level) is not ideal and you need to attack it sooner or later. If you can continue to live cheaply, you can buy another investment every 6-12 months and still be on a path to have your debt paid off in ~10 years.
One thing you should definitely be doing no matter what else you do is trying to restructure that debt to get a much better interest rate. Even if you can only get a portion of it down, it will help a lot.
As far as finding a lender, I'd recommend that you go interview some local private banks (usually identified by "bank and trust" or just "trust" in their name, or characterized by lots of talk about wealth management on their websites) and talk to them. Lay out your circumstances and your plans just like you did here. You should be able to find a banker who is willing to work with you and wants to build a relationship with you and help you grow your portfolio. It may take a while but there are some excellent private banks out there and they cater to people in your income bracket with custom banking solutions.
- Rental Property Investor · Anaheim, CA · Member since 2019 · 11 posts · 5 votes6y
@Jason Turgeon wow, that was an amazing response! Thank you for taking the time to put that together. It really laid everything out in an easy to understand manner.
I agree with you about splitting the difference. I think that’s an excellent plan. Even though I would like to focus on real estate, the thought of the student loan balance growing does give me a bit of anxiety.
I am currently on the PAYE program which forgives the total remaining loan balance at the end of 20-25 years, however that forgiven balance is seen as income and I would be required to pay taxes on it. So assuming my loan balance grows to $600k and I’m taxed at the highest tax bracket, I would owe about $300k in taxes that year. I don’t know that I would want to wait that long and then pay my tax bill in a lump sum.
Everything you suggested sounds great, thanks again for sharing your insight.
- Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes6y
Originally posted by @Monique Sison:
Hi, my name is Monique and I am a newly graduated dentist. I’ve entered my profession with a mountain of student loan debt ($360,000 to be exact). My plan was to make small payments on my student loans and focus on saving money for a downpayment for my first investment property, but my family seems to think this is a bad idea. They think I should continue to live at home for the next 8-10 years and put all my income towards my loans. The interest rate on all my loans is an average of 6%... what do you all think? Invest or pay down my loans?
Monique, I have the psychological scars that come with being raised in poverty. A debt like that would be a real burden on my mind. I can agree that the smart move is, if the interest level on your debt is lower than the projected returns on an investment, any logical person should invest first and pay off their debt later. But logic has very little with my damaged responses to financial hardship.
The big trap that I know I would fall into is believing I can spend my way out of debt. I would constantly find myself fighting the urge to spend a bit more...no...spend just a bit more...come on, just sssssspeeeeennnnddd. I'll be taking a measured approach to pay off my debt, who bother DEPRIVING myself of "the good life"? Why not spend 17 years paying off the debt instead of 13 years if I could enjoy myself a bit more with my money, hey, it's MY MONEY damn it! And it would just keep going, rationalizing and justifying smaller and smaller debt payments and more and more personal spending.
You can try investing your way out of debt. But you're not going to do well spending your way out of it, if there's even a trace of me in you. Stay at home with your parents unless you buy property with a FHA loan that has a residency requirement. Work to limit your personal expenditures. Just because you're taking a different path out of your debtor's prison doesn't mean you're not in debtor's prison. You need to pay off $360K of debt tobget back to broke. Between now and when that debt is paid off, h9wever you pay it off, all sorts of things can happen, all kinds of pressures can affect your life and your ability to make wise decisions about your personal finances. You're living under a mountain of debt. Don't allow yourself to believe it isn't inexorably crushing you every minute you're stuck down there.
- Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes6y
In addition to @Payton Reid's advice, you can also start reading books on real estate investing right now. Get your personal finances in order first and learn from other's experiences before you dive in!
- Rental Property Investor · Anaheim, CA · Member since 2019 · 11 posts · 5 votes6y
@Natalie Kolodij yes, this is the direction I’m leaning towards! I would love to do a multi family for my first househack. I’m speaking with a lender right now that says they have a loan I would qualify for with my large student loan debt.
- Member since 2018 · 127 posts · 106 votes6y
As a general rule, if you can make a rate of return that is higher than the interest on debt, then from a money efficiency standpoint, you would want to do that. For example, if your debt costs you 6%, but you can make a guarantee rate of return of 10%, the difference between the two, 4%, would be the gain in your wealth.
- Rental Property Investor · NC · Member since 2018 · 776 posts · 776 votes6y
This is why Dave Ramsey is so popular with his debt snowball methods; because it's such a psychological game to pay off debt. Sure, you can huddle in your families garage for the next 10 years and pay your loans off. But is that really motivating you to continue?
A lot of good advice here. My advice is to start your own life, save money, house hack, then tackle your debt. House hacking can save you an additional $1,000 a month and speed down your debt payments. Good thing is you make more money than most people. So this may be a quicker process.
- 6yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
Originally posted by @Monique Sison:
@Damaso Bautista thanks for the response! Right now I have a great income ($170k before taxes) and no liabilities since I live at home, I’m very lucky! So far in the past year, I’ve saved about $20k, but I recently started on a new repayment plan (PAYE) for my student loans that allows me to make $35/month payments so I can save even more aggressively. I’m trying to find a lender with a program for doctors, because you’re definitely right.. most lenders don’t love my debt to income ratio!
I can't see that payment plan lasting long as to pay the principal alone would take almost 900 years. Your debt to income ratio will be a problem and $360K is a huge student loan. Why not look for a home where you can rent out part of it and live in the other part? A duplex or single family home with a basement or secondary suite.
If you are making $170K and living at home, but saved only $20K; you should also review where your money is going.
- Rental Property Investor · Anaheim, CA · Member since 2019 · 11 posts · 5 votes6y
@Theresa Harris thanks for your response! I forgot to include an important piece of info regarding my loan payments! They are based on my income, so as my income increases, the payments increase. In addition to this, the total remaining balance on the loan will be forgiven after 25 years and taxed as income.
Also, yes it seems like I should have been saving more! But I didn’t discover real estate investing and Bigger Pockets until recently and before that I was making $5000/month payments for my student loans... (that’s where all my money was going 😆) now that I’ve gained some knowledge about leveraging debt, I am saving all that money that was previously going to my loans so I can make a downpayment on a single family home or maybe a duplex if I’m lucky!
- Rental Property Investor · Anaheim, CA · Member since 2019 · 11 posts · 5 votes6y
@Frank Geiger this is exactly what I was thinking. If I put my head down, give all my money to the loan servicer, and “sacrifice” like my family is suggesting.. I will end up with no wealth built and will have learned nothing about investing.
- Rental Property Investor · Montgomery, AL · Member since 2019 · 62 posts · 17 votes6y
Hi Monique,
When I graduated from pharmacy school, I had about $275k in student loans so I definitely understand your situation. I lived with my parents for about 2 years and managed to save a good 60k (I still paid them rent and helped with bills). I stayed with them until I got married. I think staying with your parents would be a great strategy, but I wouldn't use that money to pay off the student loans. Are there any nonprofit offices or opportunities with the VA as a dentist? I ask because I currently work for a nonprofit hospital which qualifies me for the Public Service Student Loan Forgiveness program. You have to be on one of the income based repayment programs which you already are and after 10 years your loans would be forgiven (no tax on what's forgiven). Now, I focus all of my savings on real estate investments. I use to follow Dave Ramsey's principles to pay down debt but then I read something very profound "the number one wealth building tool is not income, it's time)". The quicker you can invest, the more money you can make. Think about all the time(=money) you would be wasting focusing on putting all your money towards your loans. I would rather have the cash flow from my investments pay off my debt...
"Many young people have been made to believe their income is the number one wealth building too they have. They've been told to waste their valuable time doing everything else, but invest. They're told - pay off debt, have a fully funded emergency account, have your down payment on your house, pay off your mortgage, pay off student loans- and the list goes on. You end up paying everyone else during the best years of your life when you could have started investing early..."
- Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes6y
I think there is a student loan bubble and there's at least a chance that you might see some loan forgiveness programs within the next ten years.
In addition, I think you can invest your way out of debt faster than you can earn your way out of debt. I bought a group of rentals with 160k down just over 2.5 years ago and with appreciation and loan paydown I'm about to refi out close to my original down payment. You may have to go with commercial loans rather than the more attractive interest rates available on residential loans but there is no dti requirement. Live at home for a couple years to get that nest egg (and salary) built up.
Geez. No wonder dental work is so expensive.
Best of Luck whatever you do.
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