Loans from retirement fund

[bjl584]

In terms of the student loans....why does the total amount matter? It seems to me that the monthly payments should be most important. The program that I am doing right now called income based repayment calculates my payments based upon my yearly income. So at $50,000 a year, my payments are about $200 per month. When I'm making closer to 60K or 70K in fellowship, they will go up accordingly to probably around $300/month. This program has several advantages including: my payments go to covering most of the interest and what amount I fall short, the federal government covers, and after being in repayment for 25 years, the loans are forgiven no matter what the balance.

I understand what you are saying, but your advice seems rather arbitrary. If you look at the simple numbers month to month, why would this be a bad move for me? My payments on a 200K home would likely be slightly less than what I would pay in rent in this area. So if you make the argument that a monthly payment of $1000/month is too much, then how could I afford to live in an apartment? I think most people would agree that on a 50K salary, $1000 per month of rent is not unreasonable. There are many residents that are forced to pay more than that.

I hear a lot of general statements on these forums like "you shouldn't buy a house for x amount of money if you are making y amount per year" but those statements are often made without looking at the details and it seems that details are the most important when making financial decisions.

Don't fall into the trap of focusing on monthly payment only. You must look at total cost. How much will you pay back on your loans if you only pay $200 a month? Probably over $300,000. That's $100,000 or more than your original loan balance.

Same goes for houses and cars. Look at total cost of ownership. Not just monthly payment. Especially houses. There are taxes, utilities, repairs, and upkeep costs that will raise your cost of ownership quite signifigantly over the mortgage payment.

[disneysteve]

In terms of the student loans....why does the total amount matter? It seems to me that the monthly payments should be most important.

Really? I'm not even sure how to begin to answer this question if that's your belief. If you don't think the amount of your debt matters, I don't think anyone here can help you.

after being in repayment for 25 years, the loans are forgiven no matter what the balance.

That's nice but that only applies if you plan to be still paying off your student loans 25 years from now. Is that your intent? I paid off my loans in 12 years and the only reason it took that long was because I switched jobs after 7 years, was unemployed briefly and then took a significant pay cut for a while.

My payments on a 200K home would likely be slightly less than what I would pay in rent in this area. So if you make the argument that a monthly payment of $1000/month is too much, then how could I afford to live in an apartment? I think most people would agree that on a 50K salary, $1000 per month of rent is not unreasonable. There are many residents that are forced to pay more than that.

There are a lot more costs to owning than to renting. A good estimate is 30-40% above your mortgage payment. So if your loan will cost $1,000, your true costs will probably be more like $1,300-1,400. Even the $1,000 is probably close to 35% of your take home pay - you earn 50K but don't actually get that of course. Housing should be no more than 28%.

As for other residents, how exactly are they "forced" to pay more? Who forces them to have their own place and not share a place with 1 or 2 or 3 other people to reduce costs?

[ngordonmd]

I regards to the student loans....I do plan on paying them off early. There is another program called service based repayment that forgives your loan balance after 10 years if you work in an academic or rural hospital (including my time in residency and fellowship). But regardless I will not start making large payments to my student loans until I finish fellowship, at which point I should be making around $350,000 in my specialty. So if you're going to make the argument that I should take my entire student dept into account, then why wouldn't I also take into account my future earnings. My point is that many people make the argument that I have to look at my total dept, not just what I'm paying per month, but if I'm going to think that long term, then I should take my future income into account which will be ample to pay off my loans.

Secondly, my parents own 2 duplexes and a very nice home. I know how much goes into both duplexes per month and it is NO WHERE NEAR 30-40% on top of the mortgage. Thats saying that if the mortgage on one of their properties is $1200, then they are putting $400-500 into the place monthly. Thats absurd and would be an absolute terrible investment.

I still think the problem is that everyone here operates on some arbitrary rules and can't think past them. You say that you should only spend 28% on rent a month, but what if you sublet a room in your apartment to help with the cost? Do you take that into account? Whats a better investment; buying a 2 bedroom 2 bath house that you can afford by your standards or buying duplex with two 1 bedroom/1bath units and living in one and renting the other? I think the latter is a much better investment, and I don't think you can argue with the numbers. But I get the feeling that most people here would choose the former, because of this creed that you live by. I am sure that everyone here has saved very well and is meticulously careful with their money, but I think sometimes you have to think a little outside the box to make a better investment that could pay off more in the end.

Take student loans for example. Many people have student loans at very low interest rates. 4 years before I went to medical school, the rates were 2.9%. So why would you pay off the loans if you found an investment that made 3.5%. If you can make more money than you are losing, it seems like a better investment. This doesn't apply to me, because my loans are at a high interest rate and will behoove me to pay them off early, but my point is that sometimes you have to crunch the actual numbers before making a decision instead of just going by a set of rules that don't always apply.

[ngordonmd]

And the residents that are forced to pay that much for rent do so because they moved here not knowing anyone they could live with and they want to live somewhere they know is safe, which sometimes comes with a premium.

[bjl584]

My point is that many people make the argument that I have to look at my total dept, not just what I'm paying per month, but if I'm going to think that long term, then I should take my future income into account which will be ample to pay off my loans.

Total debt is a real number. Future income is not, as it is not guaranteed. Banks do not approve loans based on what you might be making someday in the future.

[bjl584]

Take student loans for example. Many people have student loans at very low interest rates. 4 years before I went to medical school, the rates were 2.9%. So why would you pay off the loans if you found an investment that made 3.5%. If you can make more money than you are losing, it seems like a better investment. This doesn't apply to me, because my loans are at a high interest rate and will behoove me to pay them off early, but my point is that sometimes you have to crunch the actual numbers before making a decision instead of just going by a set of rules that don't always apply.

I agree in theory. I wouldn't prepay low interest debt if I could get a better return somewhere else. I did it with my first mortgage. Why prepay on a 4.75% loan when I was getting close to 10% in the market? It didn't make sense to do so at the time. There are some cirumstances where paying off debt is a sound idea regardless of the interest rate attached to it however. If you are close to retirement for example, or if you want to improve cash flow, or if you want to reduce your debt to income ratio.

[riverwed070707]

So what exactly were you looking for advice on again?

Sounds like you've made up your mind. You don't need us. Good luck!

I'm going to repeat this question because you didn't answer it. You aren't going to convince anyone here that your original plan is a good idea, but we're also not here to stop you. You asked for advice, we gave it and now you can choose to take it or leave it.

Do we have an emoticon for beating a dead horse?

[ngordonmd]

I wasn't ever looking for advice. If you read my original post, I just wanted to know if anyone had experience or knowledge about the retirement fund loan, which no one was able to answer. I got the information I needed somewhere else. I absolutely plan on undertaking this plan and will resurrect this thread in 6 months or so with my progress. Regardless of all my arguing, I do appreciate everyone's suggestions, even though I might not agree.

[BuckyBadger]

I wish your father the best of luck in your endeavors.

[kv968]

I wasn't ever looking for advice. If you read my original post, I just wanted to know if anyone had experience or knowledge about the retirement fund loan, which no one was able to answer.

Just out of curiosity, what is your father's "retirement fund"? IRA, 401k, SEP-IRA...? Because if its a 401k, he most likely will only be able to out a $50K loan at the max.

[disneysteve]

We spoke with his accountant who said there was another option that included loaning the money to a third party who could not be an immediate relative who could then endorse the check to me. The third party would have a promissory note saying they would pay the money back with interest within 5 years and I would also sign a note saying that I would make payments to third party.

So getting back to the original question, you are actually borrowing money from two different people - your father and the third party who is essentially co-signing your loan. That leaves two people on the hook if anything goes wrong. You said you got the answer elsewhere. What was the answer?

[maynard]

Yikes

[disneysteve]

Something occurred to me that I think is worth mentioning if OP is still around.

What any of us would do personally and what we advise others to do are sometimes two different things. Over the years, I've done things in my personal financial life that worked out just fine but I'd never tell others to do the same. For example, I got my first credit card in college with my father co-signing. It was never a problem and I was very responsible with the card. Will I do the same with my daughter? I might. Would I ever suggest to someone else that they co-sign for their child? Absolutely not! I think as a general rule it is a horrible idea to co-sign for a credit card or loan for another person regardless of the relationship.

So some of this may apply here. We tend to give general advice that will apply to most people without us knowing all details of the situation (which isn't possible given the venue). Take our advice for what it is. You may not agree. You may choose not to follow it. That's fine. It's your money and you know your situation better than any of us.