Financial Gurus: Invest or Pay Interest

[Polska]

Given $20,000 would you invest it (Retirement or Non-Retirement Accounts) or would you use it to pay off interest on the loans in an effort to not allow them to compound too much.

I'm figuring that investing would require you to at least earn 6.8% to break even.

But I'm interested to hear what some people with some hardcore accounting skills have to say..

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[etf]

here's what i'd personally do - i'd stash the money into bond funds for 3-4 years while i was in medical school. at the end of the 3-4 years, i would pretty much know if i would be matching into a high paying specialty or not. if i was pretty sure that i was going to be able to pay off the loans with no problem, i'd then invest that entire amount into some super-aggressive mutual funds (since by then i wouldn't have time to manage it myself, being a doctor and all!). otherwise, i'd use the money to pay off my student loans at that point. just my thoughts.

 

[MaxPower]

Personally I would invest it, since I believe that you can make over 6.8% with investments easily, in the long run. Sure, the market might tank the next couple years but even if you pay back interest the amount you need to pay back later will not be decreased that much. If I didn't invest it I would just not take out the loans this year at 6.8%, rather than just let it sit while I pay back interest. I would not pay back interest on loans from this year or last year, since I can get more than the 2.77% or 4.7% in interest.

I never understood why people would pick the standard repayment plan in the last couple years because it would cost them less money overall. A radiologist I know who just bought a new house was telling me how stupid he felt when he worked his butt off trying to pay back his student loans, only to take out a mortgage at almost double the interest rate.

 

[teninepit]

here's what i'd personally do - i'd stash the money into bond funds for 3-4 years while i was in medical school. at the end of the 3-4 years, i would pretty much know if i would be matching into a high paying specialty or not. if i was pretty sure that i was going to be able to pay off the loans with no problem, i'd then invest that entire amount into some super-aggressive mutual funds (since by then i wouldn't have time to manage it myself, being a doctor and all!). otherwise, i'd use the money to pay off my student loans at that point. just my thoughts.

bond funds, YIKES, bond funds still provide the risk of losing capital after 3-4 years depending on interest rates. If you are going converative at least do CD that way you wont risk losing principal. If you want to try and achieve a higher rate of return then you should really step into the stock market via index mutual funds or an asset allocation of mutual funds.

 

[teninepit]

Given $20,000 would you invest it (Retirement or Non-Retirement Accounts) or would you use it to pay off interest on the loans in an effort to not allow them to compound too much.

I'm figuring that investing would require you to at least earn 6.8% to break even.

But I'm interested to hear what some people with some hardcore accounting skills have to say..

Given you're just entering medical school and since you seem to be taking out loans I am going to assume the 20k is not gonna go far if you use it to pay for school or living expenses otherwise. Then you probably should go ahead and invest it first in an IRA with some kind of stock mutual fund. The balance after the IRA put into an account and also invest in stocks. Dont even screw with wasting your 20k on school. Over the next 8 years until after residency, you probably will be well ahead by investing that money in a diversified mixture of stocks.

My whole point, is the 20k is not gonna get you far in terms of paying for medical school since you are doing loans anyway and this is talking from experience. Save the money by investing and getting a start on your retirement/net worth.

 

[Stroganoff]

Keep in mind investing is only for long term goals. Where did you get this $20K? From Staffords? Are all your tuition/living expenses covered?

 

[Polska]

Keep in mind investing is only for long term goals. Where did you get this $20K? From Staffords? Are all your tuition/living expenses covered?

I've been working a regular job makin 38-40K.. but i've been living a minimalist livestyle.. I sell anything I don't need anymore via eBay.. I eat pretty cheap since i prep my own food.. and I rarely spend on anything except for golf.. soccer events.. and other expenses.. (but only once every 2 weeks)..

so basically.. i've got about 20K in CDs.. @ about 4.5%.. but i know if i keep them there.. my CDs are going up 4.5% while my loans are costing 6.8% for a net of -2.3%..

 

[Polska]

Personally I would invest it, since I believe that you can make over 6.8% with investments easily, in the long run. Sure, the market might tank the next couple years but even if you pay back interest the amount you need to pay back later will not be decreased that much. If I didn't invest it I would just not take out the loans this year at 6.8%, rather than just let it sit while I pay back interest. I would not pay back interest on loans from this year or last year, since I can get more than the 2.77% or 4.7% in interest.

I never understood why people would pick the standard repayment plan in the last couple years because it would cost them less money overall. A radiologist I know who just bought a new house was telling me how stupid he felt when he worked his butt off trying to pay back his student loans, only to take out a mortgage at almost double the interest rate.

Can you explain the 2.77% or 4.7%.. I kinda lost you in some parts of the reply..

Basically, your saying that the 6.8% loans should be spread out as much as possible so you can save up cash to use to pay for a house that would be on a mortgage that is higher than 6.8%..am i following?.. what's the average mortgage rate for a 400K home loan?

 

[proman]

I think you need to think a bit about what's going to happen over the 4 years:

Are you starting school with student loan debt? That will reduce how much you can borrow in the Federal programs. What will be your tuition? Will you max out the Federal limit before you graduate? Is your car going to be reliable for the next 4 years? How about misc expenses (like USMLE board prep and tests, residency applications and interview expenses etc). What's your school's budget (do you have to take out private loans to meet it?) All these questions are geared to estimating what your financial status will be 3-4 years from now. If any of these questions lead you to think that you'll need money 4 years from now, do not invest it in stocks or mutual funds (or CDs for that matter). Instead, keep it in a high yield savings account. That 4.5% CD seemed great but you can get 4.65% in a savings account with all of that money immediately available. Plus, the Fed is not done raising interest rates so those rates will be going up.

As far as paying the interest before it capitalizes, you can wait until you graduate because that interest accrues without capitalizing until you enter repayment (or consolidate).

Over the last 4 years of school I was 100% invested in stocks. Over that time here are the stocks I lost money on: Dell, Microsoft, JP Morgan, Dupont, SBC, Eastman Kodak. I still managed a 15% annual return because 1 stock doubled. Looking back, that was far too much risk for what I needed that money for. I entered school with 35K in undergrad/grad loans, and had to take 20K in private loans, after maxing the federal. I still needed money for residency interviews, moving, living expenses before residency pay kicks in etc.

So basically, project your financial picture 4 years from now. Chances are you'd rather have that money to live on than have paid down a little bit of accrued interest.

 

[etf]

bond funds, YIKES, bond funds still provide the risk of losing capital after 3-4 years depending on interest rates. If you are going converative at least do CD that way you wont risk losing principal. If you want to try and achieve a higher rate of return then you should really step into the stock market via index mutual funds or an asset allocation of mutual funds.

a floating rate fund will have capital appreciation in a rising interest rate environment, and keep a pretty stable value should interest rates stay stable. geez, a lot of the advice here is pretty aggressive, considering that we are going to be stuck in school and won't know how our finances will pan out over the next several years. i only gave conservative advice because i thought it might be the consensus view; in fact, i'm one of the most aggressive investors out there. if someone gave me 20k tomorrow, i'd dump a good chunk of it into orange juice/ nat. gas futures, because hurricane season is coming up...

 

[Polska]

I think you need to think a bit about what's going to happen over the 4 years:

Are you starting school with student loan debt? That will reduce how much you can borrow in the Federal programs. What will be your tuition? Will you max out the Federal limit before you graduate? Is your car going to be reliable for the next 4 years? How about misc expenses (like USMLE board prep and tests, residency applications and interview expenses etc). What's your school's budget (do you have to take out private loans to meet it?) All these questions are geared to estimating what your financial status will be 3-4 years from now. If any of these questions lead you to think that you'll need money 4 years from now, do not invest it in stocks or mutual funds (or CDs for that matter). Instead, keep it in a high yield savings account. That 4.5% CD seemed great but you can get 4.65% in a savings account with all of that money immediately available. Plus, the Fed is not done raising interest rates so those rates will be going up.

As far as paying the interest before it capitalizes, you can wait until you graduate because that interest accrues without capitalizing until you enter repayment (or consolidate).

Over the last 4 years of school I was 100% invested in stocks. Over that time here are the stocks I lost money on: Dell, Microsoft, JP Morgan, Dupont, SBC, Eastman Kodak. I still managed a 15% annual return because 1 stock doubled. Looking back, that was far too much risk for what I needed that money for. I entered school with 35K in undergrad/grad loans, and had to take 20K in private loans, after maxing the federal. I still needed money for residency interviews, moving, living expenses before residency pay kicks in etc.

So basically, project your financial picture 4 years from now. Chances are you'd rather have that money to live on than have paid down a little bit of accrued interest.

what bank do you go to? I've got 4.35% 3-month CDs with no risk of loosing principal at my bank but savings account = .85% and money market = 3.8%

 

[lealf-ye]

checkout citi bank and hsbc online saving. 4.65-4.75%

 

[Grasshoper]

check out ING Direct

 

[etf]

check out the franklin floating rate daily access fund...

just kidding.

 

[LJDHC05]

I'm kind of new to this investing thing but here's what I would do:
-75% (15k) into a 12 month CD to preserve the principle and to be re-invested with a higher interest rate.
-20% in something more liquid and higher yield like a decently rated non-retirement moderate-risk capital appreciation mutal fund with a decent mix of domestic bonds and stocks
-5% in a high risk emerging market fund

 

[Mikhail]

Given $20,000 would you invest it (Retirement or Non-Retirement Accounts) or would you use it to pay off interest on the loans in an effort to not allow them to compound too much.

I'm figuring that investing would require you to at least earn 6.8% to break even.

But I'm interested to hear what some people with some hardcore accounting skills have to say..

Don't forget that you have to pay taxes from the interest you earn. That's why 6.8% is not the break even in this situation. Depending on you tax bracket, you should look at approximately 8% interest return.
Most people prefer to pay loan and/or interest rather than investing money.

 

[UserNameNeeded]

You have to pay taxes on investment? What if that's your only source of (paltry) income (since you're a student)?

 

[etf]

if you make less than like $4000 (i think) per year (which i guess is the size of the standard deduction), you don't have to file a tax return and thus, would not have to pay taxes. i'd check with someone who knows what they are doing though.

 

[UserNameNeeded]

Yeah, I wondered if I had to file taxes this past year and my parent's tax advisor said since my employers withheld nothing (well, $4, before I had it changed) except the standard Social Security and Medicare tax and because I earned less than $5,200 (this goes up every year) I did not have to file a tax return.

So, theoretically, as long as my investment returns are less than that number, I won't have to file a tax return during medical school. As much as I would love to make a killing in investing, I'm pretty realistic about that kind of return (for me) being very unlikely.

 

[etf]

lol, i just use the huge losses that i have from when i was just starting off a few years back to offset enough gains so i keep it under that threshold.