Why I Didn't Consolidate My Student Loans

Sometimes, I feel like I am being bombarded with adds and articles talking about consolidating my student loans. I even recieve a letter in the mail about it at least once or twice a month. Most of my friends from pharmacy school have consolidated their student loans, and many people suggest it as their strategy of choice, so why didn't I consolidate my student loans?

For me, the choice was fairly simple. In order for me to pay off my student loans in 10 years, I would need to pay around $3,200 per month. In my residency after graduation, I brought home $2,400 each month after taxes. It was financially impossible for me to start paying back my loans at that time, so naturally, I filed for income driven repayment, which reduced my payment to $0 per month for my direct federal loans. I also have 2 small private student loans that total about $5,000, and the payment on those was only $50 each month. After my residency, I was hired on by my for-profit employer for an excellent position that paid me a salary of $120,000 per year. This was much closer to the pharmacist salary that my friends made, and as long as I was financially responsible, I could have started making the 10 year repayments at that time.

Where I differ from my friends though are my financial goals. My goals are not to pay off my student loans as fast as possible. Sure that would be helpful and would still free up $100s of dollars of dispensible income for me and my family each month, but 10 years from now, I don't simply want $100s of dollars extra, or even a one time increase of $3,200 each month (if my loans were paid off). I want pure financial freedom. My goal is to reach the independence that comes with working because I enjoy it, and because it aligns with the impact I want to have on the world. Not simply because I need to provide food, shelter, and clothing for my family.

With that in mind, paying off my student loans would only be a small portion of becoming financially free. I would still have a mortgage, and probably a car payment, and health insurance to worry about. I would also still be required to work my everyday job as a pharmacist, because I would need the income to afford those things. For these reasons, I instead chose to pursue student loan forgiveness after 20 years of payments under the pay-as-you-earn plan (PAYE). Under PAYE, I am able to pay closer to $800 per month and invest the difference (3,285-885= 2,400) of $2,400 each month into passive income streams, like my 401k, HSA, and real estate.

Here's how the numbers play out for my situation with a 20 year timeline (the amount of time for PAYE forgiveness), 6.5% student loan interest rate, and 7% investment interest rate. Under a 10 year repayment, I would pay $3,285 each month for the first 10 years and invest nothing. Then invest $3,285 each month for the next ten years. My total investment principle invested and producing income would be $544,644.

Under a 20 year payment plan on PAYE, my payments will increase as my income increases, but my savings will stay the same. I will always invest at least $2,400 each month. I will pay $885 per month starting out, but my payments will increase to $1,431 at the end of 20 years, assuming my income increseases at 2.5% annually. *Spoiler alert pharmacy students, it doesn't. You will wish your salary increases by 2.5% each year. Anyway, under this model, I will have $1,180,670 saved up after 20 years. BUT, I will also have $416,705 of my student loans forgiven, which will be included in my income tax. On the $416,705, I will owe the IRS about $154,000. That's a lot of money, and that's why it's so important that I continue to invest the $2,400 each and every month, so that I can affor that hefty tax bill at the end. So, I will subtract that $154,000 from my $1,180,670, and that gets me to roughly $1,026,000 in 20 years. That's $482,000 more than if I had paid off my loans in 10 years!

As you can see, even including the huge tax bill that I plan to have due after 20 years of repayment, the choice is fairly obvious that PAYE and investing the difference is a better long-term strategy financially. The big points of focus are that I could not pay off my loans any faster than 10 years, and I must remain diligent in investing at least $2,400 each and every month. If I could pay my loans off in approximately 5 years or so, I would probably pursue that strategy, just to get rid of them. Also, if I didn't think I could remained disciplined enough for 20 years to invest, then paying off my loans faster might be a better option. Regardless, I feel confident in my strategy, I've set a plan for how I am going to achieve my goals, and I don't have to invest in unsafe ventures, or put my principle at risk in order to gain the largest financial benefit.