Many years of study and residency mean higher student loans and a slower start to investing for doctors, according to the Wall Street Physician. Therefore, doctors fresh out of residency should consider whether it’s better to pay down loans or start investing in stocks, the publication writes.
The Benefits and Risks of Investing While Holding Student Loans
Firstly, the interest rates of student loans must be compared with the expected returns of investments, Wall Street Physician writes. Doctors typically have student loans with interest rates between 6% and 7%, and if they aren’t looking for public service loan forgiveness, they should consider refinancing for a better rate, according to the publication.
The stock market carries its risks but has provided good returns since 2009, and has historically returned 10.9% between 1950 and 2017, writes Wall Street Physician citing New York University data.
Furthermore, 401(k) or backdoor individual retirement accounts, which have significant tax advantages, may make investing more attractive than paying down loans, the publication writes. As stock market returns are typically higher than student loan interest, especially when using accounts with tax benefits, it makes mathematical sense to invest, according to Wall Street Physician.
However, if a physician invests in stocks while still carrying debt, they have technically introduced leverage into their portfolio — using borrowed money to invest, the publication writes.
This can be high-risk: if a physician has $100,000 in student loans and an investment portfolio of $150,000, then their net worth is $50,000, Wall Street Physician writes. This means they are 300% in stocks, and while some advise being 100% in stocks due to the bull market, few would use leverage to go past this, according to the publication. Moreover, the psychological benefit of becoming debt-free shouldn't be underestimated, Wall Street Physician writes.
Doctors should max out tax-advantaged retirement accounts and then pay down student loans, according to the publication. Physicians should pay down loans before investing with any taxable account, unless they are looking to use public service loan forgiveness, according to Wall Street Physician.