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I have a friend. He is an up-and-coming doctor. This means he has about $160k in student loans. The interest rate is about 6%. In a month or two he is selling his house. From this sale he will have about $90k in cash. He is matching soon and finding out where he will be moving to for his placement or whatever it is called. He will probably be residing in NY, CA, MN, or UT.

The other day he posed a question to his "finance-knowing" friends, myself included, about whether he should:

  • (A) pay down $90k in debt immediately, which should save something like $20k to $25k in interest payments, and rent in the new location, OR
  • (B) When he moves to his new location, buy a new home with his wife using the $90k as part of the down payment and continue to pay back student loans at 6%.

One friend noted that certain hospitals have loan forgiveness programs and he should wait to see where he matches. Another friend noted that he should be mindful of the looming, albeit slim, possibility of federal loan forgiveness. I responded that it depended on whether he thought the return on his next investment, whether it is a house or not, would generate more than 6%. Of course a home or stocks can go down in value. But my intuition tells me that paying down $90k in one go is a little conservative. At the same time I think that house prices are due for a correction in general over the next 3-4 years so he is probably better off renting for the next 3-4 years whether or not he uses the 90k to pay down the student loans. I am very curious to see if the advice here on money.stackexchange aligns with this thinking or if there are any blind spots and/or more detail in the logic above.

I did see this similar question but it is from 2017 and I am wondering if any of the other variables (med school student, loan forgiveness, etc.) change any of the calculus. I know that this is a bit of a matter of preference but I am very curious if there are some objective "good moves" here that I am not aware of. Thanks!

TL;DR: Two-Part Question

  1. Should this med school friend buy a home or rent in his new location?
  2. If no to buying a home, should he take $90k and throw it at student loans (saving $25k in interest), invest the money in something else, or is this entirely a matter of preference?

Updates to Questions

  • Yes, it is likely to be for 3-4 years with another move.
  • It is 6% fixed rate. I am not sure how bearable the payments are. I'll need to find out.
  • Neuro resident. Likely moving in 3-4 yrs.
  • Color: I think his wife wants to buy and he wants to rent while paying down med school loans aggressively.
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  • Is it 6% fixed rate? How bearable are the payments?
    – littleadv
    Commented Jan 10, 2022 at 19:33
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    Price corrections aside, are they committed to staying wherever he matches long-term, or only for the duration of his residency? Renting may be the better idea regardless if they plan on selling again in just a few years.
    – chepner
    Commented Jan 10, 2022 at 20:14
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    While investing early is important, your friend isn't going to lose that much by waiting a year compared to what he could lose by committing the money in any one place too soon.
    – chepner
    Commented Jan 10, 2022 at 20:19
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    (Older) doctor here. Depending on what kind of resident, in 3 years he might be moving again.
    – Damila
    Commented Jan 11, 2022 at 21:42

2 Answers 2

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The general rule is not to buy a house if you don't plan to stay for 5+ years. This has nothing to do with prices going up or down, rather the transaction costs.

https://www.cnbc.com/2018/01/25/thinking-about-buying-a-home-ask-yourself-how-long-you-plan-to-stay.html

With respect to the $90k, for a medical resident in a specialist field, maybe spend the money on living expenses to have a slightly less miserable residency. And look into White Coat Investor re: "Own-Occupation, Specialty-Specific" disability insurance:

https://www.whitecoatinvestor.com/the-five-big-money-items-you-should-do-as-a-resident/

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  • TY. This is a great rule of thumb. I added the 2nd part of the question re: what to do with the 90k (i.e., if it is advisable to pay back 90k in loans immediately, invest it for the home in 5 yrs while continuing to pay back the loans regularly, half and half, or if it is just a matter of preference). If you can touch on that I'll mark as accepted! Thx. Commented Jan 12, 2022 at 15:30
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"pay down $90k in debt immediately" - This is a poor decision. It uses the entire pot of money in one go.

Keeping the $90k available will allow your friend and his spouse flexibility that they would not have if it were used immediately.

They can:

  • pay taxes (if any are owed) on the profit from the sale of the home
  • use the money for moving expenses
  • if they decide to buy, pay for a down payment and the inevitable new-home expenses
  • if they decide to rent, the $90k is there to pay rent or accelerate payments on debt
  • make decisions about using parts of the windfall
  • invest the money and earn >6% on a basic mutual fund or index fund thereby having more money to pay off debt, buy a house, etc. in the future
  • take a vacation
  • be generous to a charity
  • buy a car
  • survive surprise medical bills or emergencies without incurring more debt

Having a years income in cash or non-retirement investments is a boon. It gives your friend and his spouse a lot of flexibility. If they pay off loans or otherwise tie up that money all at once they sacrifice a significant amount of freedom and cut off a significant safety net.

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  • Source - I had a similar windfall a few years ago. We were able to buy good used cars, refinance a mortgage, pay off consumer debt. I still have almost a years income from that windfall sitting in a mutual fund. It is incredibly empowering to have a decent salary available. Had I paid off debt like OP is asking about I would not have that gigantic safety net.
    – Freiheit
    Commented Jan 12, 2022 at 15:39
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    Only caveat I would add is that 6% interest is 6% every single year, while an index fund will average above 6% in the long run but could easily average less over the next few or even the next five years. Commented Jan 13, 2022 at 22:37

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