What matters most to your financial plan.
Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.
Question: My husband is a physician. He graduated a couple of years ago with about $200,000 in student loan debt. We have a fixed 2.875% interest rate on $150,000 of that debt and a 4.5% fixed rate on the remaining $50,000. Both are 30-year loans. At this time he’s making a pretty good salary, and we’re good savers. We’re maxing out the retirement accounts that he’s eligible for, earning about 10% on them, and we have 529 plans in place for our kids. We’re left with about $70,000 a year that we want to start investing. Should we use that money to pay off those loans before we start investing? And what about the fact that my husband — as good as he is at his job — has an occupational risk of being sued? How should that factor into our planning?
Ric: From a cash-flow perspective, it seems you’re doing everything right. After taking care of your retirement and your kids’ college educations, you still have a large sum available to invest. You should be well on your way to meeting all of your goals despite (or perhaps because of) your debt. Both the interest rates you’re being charged are low, so I would suggest paying only the minimum on them; there is no reason to pay more per month. Instead, divert excess money toward your investments.
Consider: Is it reasonable to assume that a properly diversified portfolio could earn at least as much as the debt is costing you? History says it could — and investing your cash means it remains available to you (subject to market values) if you need it. By contrast, money you give to the lender is gone forever.
As for your concern that your husband could be sued — let’s face it, physicians do get sued more often than any other occupation — there are two answers. First, your husband needs to carry proper liability insurance protection; second, there are asset-protection strategies you can engage in to protect you. You and your husband should talk with an attorney.
And I’ll take it a step further: Not only is your husband at risk of being sued, but he’s also in an occupation where his income might be threatened by changing federal policy. Both of these issues reinforce my advice that you invest instead of paying off the loans early. After all, liquidity can make the difference between financial security and financial devastation.