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New Grad: Significant Loans/High Salary/401k

5,081 Views | 41 Replies | Last: 5 yr ago by OldArmyBrent
AggieMainland
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I have a family member (A&M Bachelors degree) about to finish with a PharmD. Pharmacy is looking a lot worse now than it did 5+ years ago. The market is saturated in big cities due to all the new schools that started offering a PharmD. So more and more grads every year don't really make you feel very positive about the future. The high salaries are already starting to go down and hours are getting cut. Its not uncommon for a Walgreens to only guarantee 32 hours...which means it will take longer to pay off the big loans.

With that in mind, how would you handle the following situation:

-single
-lets assume $100k/yr salary
-no 401k matching in the first year, lets say 4% match in year 2
- $130k in student loans

Where should the disposable income go to after saving up for some sort of emergency savings? 100% to pay off loans? Or would you contribute some to the 401k before using the rest for loans?

With the uncertainty in the industry, I'm thinking they should try to pay off those loans as soon as possible. My initial thought is to forget about the 401k in Year 1 and focus on the loans. In Year 2, contribute to the 4% match (free money) and after that put the rest toward the loans. No sure about interest rates on the loans but I'm assuming they are not great.

Thoughts?
62strat
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AG
Year 1 is the furthest from retirement which means the most gain potential. I wouldn't skip those very important first years. Those gains in 35 years will far out weigh the 8% or whatever school loan rate.
Shiner Bock
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Look for a VA or federal govt pharmacy job. Qualifies for PSLF, 5% match, pension, etc.
WestTxAg16
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There is typically 6 months before interest starts to kick in, correct? At least that's been the experience I've had. I think that should play into the equation as well. Whether you attack the loans pre-interest or use that time period to set aside a little nest egg. I think a combination of paying both loans off and saving would be the best plan of action. If 401k match starts right away then that free money would be tough to give up IMO. That's a portion of 'compensation' that's being given up. Also, restructuring that debt with SoFi would be an option as well. You might be able to get a more favorable interest rate.
nactownag
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AG
1) emergency fund
2) payoff all debt (try to be done in two years)
3) 15% into retirement
Dddfff
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Yup. Get debt free yesterday and then save for retirement like a boss.
Baron von Bulsh
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Just graduated with my PharmD last year. Just curious, where are they in pharmacy school at? Where are they wanting to live/work?
EliteZags
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if you have a PharmD and are relatively personable look into the title Medical Science Liaison and thank me in the future
Ragoo
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Screw the debt, pay yourself and your future self first.
texan12
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Nm
Gordo14
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Depending on your interest rate on your debt. I would aggressively pay that off after emergency fund and 401k. 401k is tax advantaged - so do that up to any match, but otherwise, paying loans comes with a risk free return of your interest rate. Especially if it's 6%+, paying that would be by far the best thing (from a risk-adjusted perspective) that you could do with your disposable income.
10andBOUNCE
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Without a 401k match in year one I would go crazy living on absolutely nothing and not saving anything in 401k to crush debt only. Year 2 i would consider saving 401k up to the match and continue crushing the debt until it's gone.
dantes
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62strat said:

Year 1 is the furthest from retirement which means the most gain potential. I wouldn't skip those very important first years. Those gains in 35 years will far out weigh the 8% or whatever school loan rate.
It would be smarter to pay off the loan first. Historical stock market is less than 8% . Pay off the loan and then double the contribution next year to 401k. 8% on 130k will add up quickly. Basically it is an asset that yields -8% and has a larger balance than the 401k.

Pay the loan first
dantes
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Ragoo said:

Screw the debt, pay yourself and your future self first.
By this logic everyone should max out their credit cards and contribute to their 401k. Need to consider the interest rates
Casey TableTennis
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dantes said:

62strat said:

Year 1 is the furthest from retirement which means the most gain potential. I wouldn't skip those very important first years. Those gains in 35 years will far out weigh the 8% or whatever school loan rate.
It would be smarter to pay off the loan first. Historical stock market is less than 8% . Pay off the loan and then double the contribution next year to 401k. 8% on 130k will add up quickly. Basically it is an asset that yields -8% and has a larger balance than the 401k.

Pay the loan first


With only a 1 yr time horizon you are correct.

Assuming a normal life expectancy, especially if the person in the OP has the capacity to max out the 401(k) and make meaningful payments to the loans, your argument falls apart.
terradactylexpress
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Edit -Agree with the above, beat me to it
Ragoo
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dantes said:

Ragoo said:

Screw the debt, pay yourself and your future self first.
By this logic everyone should max out their credit cards and contribute to their 401k. Need to consider the interest rates
i am not sure how you came to the conclusion of maxing out cc as the same as not expediting the payment of student loans.
mavsfan4ever
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dantes said:

62strat said:

Year 1 is the furthest from retirement which means the most gain potential. I wouldn't skip those very important first years. Those gains in 35 years will far out weigh the 8% or whatever school loan rate.
It would be smarter to pay off the loan first. Historical stock market is less than 8% . Pay off the loan and then double the contribution next year to 401k. 8% on 130k will add up quickly. Basically it is an asset that yields -8% and has a larger balance than the 401k.

Pay the loan first
If you pay $20,000 to the loan at the beginning of year one (I'll just say the beginning to keep the math simple), then you would save $1,200 in interest (assuming 6% interest rate). You only save interest on the part you pay off. Not the full amount of hte loan. It would be even less than $1,600 if you don't pay the $20,000 off all at the beginning of Year 1 (which he wouldn't).

if you put $20,000 into the 401k, you get immediate tax savings of somewhere around $5,000+. The savings in taxes along would make this option better than the loan. Plus, you would get the return on this $20,000 in year 1. Plus the return on this $20,000 on each year thereafter.

It seems like 401k is clearly the better option unless I am missing something.
500,000ags
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I am just learning what the FI community is.

The answer is to max out every one of your tax-deductible buckets, build an emergency fund, and then to shoot everything you can to debt repayment.
aggiebq03+
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I just want to know if the OP is asking math question? Because if so we are lacking some basic info needed to answer properly.

Or a personal finance question? Because if so you need to know a lot more about the persons goals, risk tolerance, future plans. And also we are still lacking some basic info about the math part.

Math questions only have one correct answer once all the variables are defined.

Personal finance question have an almost infinite number of answers and none of them are particularly wrong. Just some are more correct given a specific persons situation.
12thAngryMan
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I'd split the difference. Contribute a decent amount to the 401(k), say 10-15% of income. Then take the rest and pay down loans aggressively. Then, when they are paid off in 2-3 years, instead of letting your lifestyle inflate with all that extra cash flow, put most of it into your 401(k) or other investments. No one really needs a Mercedes...
HalifaxAg
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There's always hookers and blow...I never saw that mentioned.
John Francis Donaghy
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12thAngryMan said:

I'd split the difference. Contribute a decent amount to the 401(k), say 10-15% of income. Then take the rest and pay down loans aggressively. Then, when they are paid off in 2-3 years, instead of letting your lifestyle inflate with all that extra cash flow, put most of it into your 401(k) or other investments. No one really needs a Mercedes...


Yep. You have a pretty high income. Contribute enough to your savings to start building a portfolio, and put the rest to the debt. As the debt gets paid off, redirect the freed up money to your investments.

Get your debt paid off on 3-5 years but have no investments to speak of? Bad.

Have a nice starter portfolio, but a crap ton of outstanding debt bleeding you dry? Bad.

You have to stay on top of both from day one. Putting either on the back burner will come back to bite you.
Keeper of The Spirits
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AG
Life is short, build your emergency fund, then bucket some fun money for vacation or whatever gets you off, then use the rest to do either 401k or pay the loan
dantes
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Casey TableTennis said:

dantes said:

62strat said:

Year 1 is the furthest from retirement which means the most gain potential. I wouldn't skip those very important first years. Those gains in 35 years will far out weigh the 8% or whatever school loan rate.
It would be smarter to pay off the loan first. Historical stock market is less than 8% . Pay off the loan and then double the contribution next year to 401k. 8% on 130k will add up quickly. Basically it is an asset that yields -8% and has a larger balance than the 401k.

Pay the loan first


With only a 1 yr time horizon you are correct.

Assuming a normal life expectancy, especially if the person in the OP has the capacity to max out the 401(k) and make meaningful payments to the loans, your argument falls apart.
To illustrate the logic, assume you are starting from Day 1, would you borrow $130k today at 8% to invest in an asset with a historical expected return of 7% and drawdown risk (stock market)? That would not be a good business to be in. That would be the equivalent of not paying the loan.

The answer is to 1. Stay liquid as to not miss payments 2.Pay off the loan asap unless there is an asset which yields more than 8% for sure (in which case, invest everything you have in it and borrow as much to invest in it)

Obviously everyone's tax situation is different so those rates would need to be adjusted for tax benefits/shields, but that is the logic behind it
dantes
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Ragoo said:

dantes said:

Ragoo said:

Screw the debt, pay yourself and your future self first.
By this logic everyone should max out their credit cards and contribute to their 401k. Need to consider the interest rates
i am not sure how you came to the conclusion of maxing out cc as the same as not expediting the payment of student loans.
To show how interest rates come into effect and should be part of the calculus. Obviously (almost) nobody borrows at 28.99% to invest at 7% in the stock market. A home loan at 4% would be a good one to keep in some form , 8% student loan would not be in that scenario

The whole idea of having "investments", which actually cannot be withdrawn without penalty while carrying a high interest rates of loans is not a good idea.

Good Bull Jones 17
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AG
If those of you who are advocating for OP to keep his debt to invest more, why don't you enroll at some out-of-state college, borrow as much as you can in student loans, and dump that into your 401(k)?
ShotOver
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Ragoo said:

Screw the debt, pay yourself and your future self first.
Democrat much?
Ragoo
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Bigsteve said:

Ragoo said:

Screw the debt, pay yourself and your future self first.
Democrat much?
what? How in the wide world of sports is the recommendation that you save for your future above paying down debt a Democrat ideal?
Ragoo
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Good Bull Jones 17 said:

If those of you who are advocating for OP to keep his debt to invest more, why don't you enroll at some out-of-state college, borrow as much as you can in student loans, and dump that into your 401(k)?
401k has a yearly maximum.

There are plenty of people who take out personal loans and invest that money.
Ragoo
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dantes said:

Ragoo said:

dantes said:

Ragoo said:

Screw the debt, pay yourself and your future self first.
By this logic everyone should max out their credit cards and contribute to their 401k. Need to consider the interest rates
i am not sure how you came to the conclusion of maxing out cc as the same as not expediting the payment of student loans.
To show how interest rates come into effect and should be part of the calculus. Obviously (almost) nobody borrows at 28.99% to invest at 7% in the stock market. A home loan at 4% would be a good one to keep in some form , 8% student loan would not be in that scenario

The whole idea of having "investments", which actually cannot be withdrawn without penalty while carrying a high interest rates of loans is not a good idea.


an 8% loan vs 7% return this year is pretty short sighted when considering compounding in 20 or 30 years. You also need to consider inflation. You can pay off your loans today or tomorrow with cheaper money.
dantes
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Also, if the loan was not paid off, the interest would compound at 8% for 30 years vs 7% for the investment. Should be pretty apparent what the better decision is ex tax shields. Would you rather invest at 7 or 8%?

Basically, the answer (excluding inflation, individual taxes etc since those are all unique) is to put 100% towards the -8% debt and then contribute to the 7% thereafter
500,000ags
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I made the mistake of not maximizing my pre-tax buckets, and when I look back at the effect of missed compounding and higher taxes, it makes me sick.

If you're choosing between paying high-rate debt like credit cards at 18% or more, then duh, pay those off. If you're choosing between paying low-rate debt like a mortgage or federal student loans at 3-5%, I think you just let those go until you've maxed out the limit for 401(k)s, HSAs, etc. Once you've reached those maximum contributions each year, THEN pre-pay the low-rate debt.

Prepaying cheap debt with post-tax dollars, especially if you're in a high marginal tax bracket, is costing you much more than the interest rate in the long run.
Ragoo
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dantes said:

Also, if the loan was not paid off, the interest would compound at 8% for 30 years vs 7% for the investment. Should be pretty apparent what the better decision is ex tax shields. Would you rather invest at 7 or 8%?

Basically, the answer (excluding inflation, individual taxes etc since those are all unique) is to put 100% towards the -8% debt and then contribute to the 7% thereafter
we are talking about expedited payments, not zero payments.
Good Bull Jones 17
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That's nuts.
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