“Become debt-free as soon as you can!”

“Invest as much as you can, as early as you can!”

We’ve all heard some version of these sentiments. It’s true that there’s no more gratifying feeling than being debt-free, but it’s also true that starting to invest early can be a boon for financial security later in life. What’s a physician, loaded up with medical school student loan debt, to do?

The answer is unsatisfying: It depends.

When you have extra cash in your budget to invest or use to pay down debt, its highest and best use depends on the interest rate on your debt, the expected return on your investment, your financial stability, and your personal philosophies around debt.

There are several resources to help you grapple with the debt payoff vs. invest decision including our own explainer: Should Physicians Pay Off Debt or Start Investing Early?

According to Fidelity, if the interest rate on your debt is greater than 6%, prioritize paying that off before re-allocating funds to investment accounts. Wells Fargo and Physicians Thrive offer additional resources and frameworks to consider. To further guide your decision, let’s run through some examples that demonstrate a range of approaches to paying down student loan debt, investing, or a mix.

Example: Dr. Mike Gets a Raise — What Should He Do?

Mike is an emergency room physician who in the past six years has built up a nest egg of $75,000 while making minimum payments on his student loans. After a recent raise, he has an extra $2,000 each month that he’d like to invest, pay down his student debt, or both. Let’s run through a few scenarios to help him decide on the best route.

First, let’s take a look at Mike’s student loan debt situation:

• Initial student loan debt balance (6 years ago): $300,000
• Current student loan debt balance: $248,652.50
• Student loan debt minimum monthly payment: $2,325.90
• Student loan debt average interest rate: 7%
• Student loan debt term: 20 years

Next, let’s review the details of his investment account:

• Initial investment account balance (6 years ago): $0
• Current investment account balance: $75,000
• Anticipated 20-year average annual growth rate: 8%

For purposes of these simplified scenarios, we’re ignoring the hard-to-ignore effects of tax and fluctuations in annual investment returns. All excess debt payments and investments begin at Year 6 Month 1.

Scenario 1: Mike Takes a Debt-First Strategy

If Mike focuses on paying down his debt, he’ll dedicate the entire $2,000 left over each month to pay down his student loan debt. For purposes of this exercise, we’ll assume that Mike doesn’t contribute anything to his investment account until he finishes his student debt payment.

**Investment contributions begin at Year 11, month 12

Scenario 2: Mike Takes an Investment-First Strategy

Let’s assume that Mike instead puts $2,000 per month into his investment account. He’ll continue to make his minimum student loan payments.

Scenario 3: Mike Takes a Balanced Approach Between Paying Off Debt and Investing

Finally, let’s see what happens when Mike puts an extra $1,000 into his student loan and an extra $1,000 into his investment account. Once the debt is paid off, he puts a full $2,000 into his investments.

*$1,000 per month from Year 6 Month 1 through Year 14 Month 3. $2,000 per month from Year 14 Month 4 through Year 20 Month 12

Analysis

• Debt-first: As expected, Mike pays off his debt the fastest when he hunkers down and puts the full $2,000 into his student loans. However, his investment account balance is only $502,060.11 at the end of a 20-year period.
• Investment-first approach: he had invested the $2,000 while making minimum payments on his student loan, he’d end up with $852,690.14 in his investment account.
• The balanced approach: By investing $1,000 and using $1,000 to pay down his debt, he’d end up paying off his student loan debt in about 14 years with $628,862.74 in his investment account at the end of Year 20.

The clear winner? It depends on personal preference. If a looming six-figure debt balance weighs heavy on Mike’s mind and heart, it might be worth focusing on getting rid of his student loan payments. If he’d prefer to build up his investments, it might behoove him to prioritize his investment contributions.

Note that a subtle change in facts could change the result of this case study. For example, if the expected annual investment return were 4% rather than 8%, it wouldn’t be as advantageous to invest.

3 Rules Before Paying Off Student Debt

You aren’t ready to start aggressively paying off student loan debt if you haven’t done these three things.

• Establish an Emergency Fund: Debt payments can’t be clawed back. Make sure you’re financially stable before you start making extra payments on your student loan debt. Consider opening a high yield savings account (HYSA). We explain why and how to do this.
• Pay Off High-Interest Debt: Before you set your sights on paying off your relatively low-interest student loan debt, make sure you don’t have any higher-interest debt outstanding, such as credit card debt. If you do, you’ll want to focus on paying that off first.
• Take Advantage of Employer Matches on Retirement Savings: Dave Ramsey may disagree on this point, but as a physician with a long student debt payback period ahead of you, it may be a good idea to take advantage of your employer’s retirement contributions match, even if you want to pay down your debt as soon as possible.

If you are grappling with this decision, consider consulting a financial advisor. If you're not sure where to start, check out our guide: How to Choose a Financial Advisor: What Physicians Need to Know.

Join the Discussion

What strategies are you using to manage debt and investments? Share your experiences and learn from fellow physicians!