plauto

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So let's say you got $100,000 sitting in a high yield (relatively speaking, 1.6%) account. No CC debt. About $70,000 in Stafford loans and about $70,000 more to go. Own a house with about 60-70K equity built in and about $160,000 5.8% mortgage left on it. Roth IRA with about $15,000 and regular IRA with about $10,000. No current needs for anything (kinda...:D). Anyway, what would you do with the money as far as investing (not wasting)? I am planning on moving in 2 years for residency and I'd like to get a nicer house.
Have fun with this.
 

Bobblehead

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Save it for the frictional costs you're about to incur for your "nicer house." The Realtor (TM!) needs to make his commission.
 

chinocochino

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I would invest in the stock market (just no-load index funds, since I'm relatively new) and also pay off some of the stafford loans, depending on the interest rate. Did you get the stafford loans at the current 6.8% rate? If you got the unsubsidized staffords, I would pay them off. (8.5%)

Debt is not necessarily a bad thing if your investments are yielding more than the debt interest rate.

So let's say you got $100,000 sitting in a high yield (relatively speaking, 1.6%) account. No CC debt. About $70,000 in Stafford loans and about $70,000 more to go. Own a house with about 60-70K equity built in and about $160,000 5.8% mortgage left on it. Roth IRA with about $15,000 and regular IRA with about $10,000. No current needs for anything (kinda...:D). Anyway, what would you do with the money as far as investing (not wasting)? I am planning on moving in 2 years for residency and I'd like to get a nicer house.
Have fun with this.
 

Flapjacks

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If you asked Birdman, he would tell you to buy 13 pounds of blow and bounce back.
 

dotdash

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So let's say you got $100,000 sitting in a high yield (relatively speaking, 1.6%) account. No CC debt. About $70,000 in Stafford loans and about $70,000 more to go. Own a house with about 60-70K equity built in and about $160,000 5.8% mortgage left on it. Roth IRA with about $15,000 and regular IRA with about $10,000. No current needs for anything (kinda...:D). Anyway, what would you do with the money as far as investing (not wasting)? I am planning on moving in 2 years for residency and I'd like to get a nicer house.
Have fun with this.
When you say $70,000 "more to go", do you mean you will be taking out $70,000 more in loans in the next 2 years? If so, I would use the $100,000 to avoid that. You would save the origination fee for those loans (I believe) and also have less debt for when you try to buy the new house. Put the money somewhere safe-ish (boring Vanguard bond fund, tax-exempt) and pull it out over time so you don't have to increase your debt load. If you didn't mean that, then I'd do something like what chinocochino said.
 

plauto

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When you say $70,000 "more to go", do you mean you will be taking out $70,000 more in loans in the next 2 years? If so, I would use the $100,000 to avoid that. You would save the origination fee for those loans (I believe) and also have less debt for when you try to buy the new house. Put the money somewhere safe-ish (boring Vanguard bond fund, tax-exempt) and pull it out over time so you don't have to increase your debt load. If you didn't mean that, then I'd do something like what chinocochino said.
yes, I meant I need to take out 70,000 more for the next 2 years. I'll definitely pay off the interest before it becomes part of the principal. I just would like to invest in something safe that gives a little more than 1.6% and that allows me to take the money out in 2 years.
 

dotdash

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yes, I meant I need to take out 70,000 more for the next 2 years. I'll definitely pay off the interest before it becomes part of the principal. I just would like to invest in something safe that gives a little more than 1.6% and that allows me to take the money out in 2 years.
Why would you want to incur the $70,000 in debt at all (rather than using the $100,000 to live on and pay tuition)? Are these subsidized loans? If so, then I guess the deal is that you are using the US taxpayers' dollars (and subsidized interest payments) rather than your own to live on, investing your own in the meantime.

If these are unsubsidized loans, then you have to beat whatever the interest rate is on your investments to make it worthwhile, which you may or may not be able to do. See what you can get for a return on a nice safe bond fund, or invest half in the stock market and half more safely, but really, unless you like to gamble, you're probably better off using the money so you don't have to take out the new loans. You would still be able to invest $65,000 the first year and the remaining $30,000 the second year.

Am I missing something?
 

plauto

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Why would you want to incur the $70,000 in debt at all (rather than using the $100,000 to live on and pay tuition)? Are these subsidized loans? If so, then I guess the deal is that you are using the US taxpayers' dollars (and subsidized interest payments) rather than your own to live on, investing your own in the meantime.

If these are unsubsidized loans, then you have to beat whatever the interest rate is on your investments to make it worthwhile, which you may or may not be able to do. See what you can get for a return on a nice safe bond fund, or invest half in the stock market and half more safely, but really, unless you like to gamble, you're probably better off using the money so you don't have to take out the new loans. You would still be able to invest $65,000 the first year and the remaining $30,000 the second year.

Am I missing something?
between Stafford and institutional loans about $12000 a year are subsidized and $23000 a year are Stafford unsubsidized at 6.8%
I thought of using my savings to pay for the unsubsidized portion of the loans, and get that 6.8% investment guarantee. I just felt uncomfortable in case I need to move to an area of the country where housing is expensive and I need a bigger downpayment for a decent home.
Rookie question: how much would my educational debt count against a mortgage? If I owe $140,000 for school loans, does that mean that I will qualify for a mortgage $140,000 smaller than somebody with a comparable income but without debts?

Am I going the wrong way about this?
 
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dotdash

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The mortgage company will be concerned about your debt-service-to-income ratio. So if you are paying off more student debt or debt at a higher interest rate, then there will be less room under the ratio cap for you to make mortgage payments. On the other hand, they'll want to you to have a 20% down payment to qualify for the lowest interest rates. The debt-service-to-income ratio used to have to be under 38%, but I don't know what they are using for a criterion now.

You can run some numbers to see if it's better (from a getting-the-mortgage point of view) to have cash and higher loan payments or lower cash and lower loan payments. It depends, I guess, on the cost of the new house and whether your bigger problem will be putting together a down payment or convincing them you can make the monthly payments. You can also call a mortgage person at any big bank (Wells Fargo, Citi, etc) and ask. They'll probably be happy to spend a couple minutes with you.
 
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My only comment : obviously you probably had the 100k when you made the first round of student loans. You choose to hold on to your reserve fund as a hedge against future uncertainty. Maybe you should continue to do this. What happens if you don't match for residency? Even the best student in your class is not guaranteed a residency position.
 

plauto

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My only comment : obviously you probably had the 100k when you made the first round of student loans. You choose to hold on to your reserve fund as a hedge against future uncertainty. Maybe you should continue to do this. What happens if you don't match for residency? Even the best student in your class is not guaranteed a residency position.
definitely my initial thought as well. I just would like to see if my money can work for me a little better. When I opened the savings account interest was over 5%. Now it just sucks at 1.6%
 
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One other thing you might want to note : reducing future student loan debt is only a good idea if you anticipate actually eventually paying the full loan balance. With income based repayment, there's ways that appear to allow you to make the taxpayers pay the vast majority of the loan balance. In short, the way to 'exploit' the new rules appears to be

1. Pick a long residency/fellowship track that takes as many years as possible. Make sure the institution offering the residency/fellowship is considered a non profit. (nearly all hospitals offering residencies are)

2. During training, pay the required payments for income based repayment. This will be about $3600 per year on a resident's salary.

3. After 5-8 years of residency/fellowship, make sure your first employer is a non profit, such as an 'academic' physician slot. Keep making those income based repayment payments.

4. At the 10 year mark, the entire loan balance is forgiven. Tax free. By my rough calculations, you'll have paid about $80k in constant dollars no matter how high your income as an attending is or what your total loan debt is.

As for your 100k? Since you wouldn't actually get a 6.8% return by preventing taking out student loans, the optimal investment strategy is :
1. Leave a sufficient emergency fund in the savings account.
2. Invest the rest in a vanguard index fund

Now, there is some risk that the Federal government will renege on this Income Based Repayment agreement. This probability is less than 50%, because even the government can't normally violate a written contract.
 
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plauto

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thanks for your great replies. So I decided to invest about 20/25% of my savings in Vanguard index funds. Also my IRA advisor gave me the same advice. I think I will allocate the money as follows:
40%: 500 index
30%:intermediate-term bond index
30%: total bond market index

The 1st is more aggressive, the last two more conservative. I guess we'll keep our fingers crossed...:xf:
 

Flapjacks

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I don't think OP needs MCAT tutor.
 

plauto

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I'd pay off the unsubsidized student loans, keeping $15K in savings for emergencies.
 

Lonestar

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Plauto, its simple.

Pay off your student loans if they are at 6.8%. I promise you that it will be difficult to duplicate that kind of return by investing. It can happen but your chances are at 50%.

pay the debt off. Now, if your loans were at 4.25% like mine, then i would say invest in good dividend paying stocks with a history of increasing dividends (7% --> my rate of return without stock price appreciation).

Hope this helps.
 
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One other thing you might want to note : reducing future student loan debt is only a good idea if you anticipate actually eventually paying the full loan balance. With income based repayment, there's ways that appear to allow you to make the taxpayers pay the vast majority of the loan balance. In short, the way to 'exploit' the new rules appears to be

1. Pick a long residency/fellowship track that takes as many years as possible. Make sure the institution offering the residency/fellowship is considered a non profit. (nearly all hospitals offering residencies are)

2. During training, pay the required payments for income based repayment. This will be about $3600 per year on a resident's salary.

3. After 5-8 years of residency/fellowship, make sure your first employer is a non profit, such as an 'academic' physician slot. Keep making those income based repayment payments.

4. At the 10 year mark, the entire loan balance is forgiven. Tax free. By my rough calculations, you'll have paid about $80k in constant dollars no matter how high your income as an attending is or what your total loan debt is.

As for your 100k? Since you wouldn't actually get a 6.8% return by preventing taking out student loans, the optimal investment strategy is :
1. Leave a sufficient emergency fund in the savings account.
2. Invest the rest in a vanguard index fund

Now, there is some risk that the Federal government will renege on this Income Based Repayment agreement. This probability is less than 50%, because even the government can't normally violate a written contract.
.

Wow, this is actually a very neat program. But what if after residency and fellowship, my attending salary actually becomes greater than my loan balance? Would this situation still qualify me under the Income Based Repayment agreement?

Thanks
 
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Wow, this is actually a very neat program. But what if after residency and fellowship, my attending salary actually becomes greater than my loan balance? Would this situation still qualify me under the Income Based Repayment agreement?

Thanks
Yes. Also, keep in mind that after tax salary is a very different number than pre-tax. For example, under current tax law a salary of 300k is ~180k after taxes. The discussions I have seen on efforts to control the deficit state that an across the board spending cut of 8% (that is, cutting spending INCLUDING social security spending) and a tax increase of 8% will be needed merely to get the rate of growth of the deficit under control.

It seems like a reasonable assumption to assume that 300k attending salary might be decreased to 250k with changes to the healthcare system, and a further reduced to maybe 120k after taxes.
 

plauto

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well, here is an update....I took about 30% of the money and split it evenly among 3 Vanguard index funds (S&P500, medium and long term bonds) and a high dividend ETF (iShares, DVY). I wish I had the guts to take out more and buy a couple of individual stocks I got my eyes on, but I'm holding off for now. Thanks for your help and your PMs.
 
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I think you made the right decision. I hope that $70,00 is your reserve fund. If that's too much money for your personal life situation to hold in reserve, perhaps you should consider investing more of it or at least putting some of it into bonds or CDs.
 

dragonfly99

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I think you should avoid taking out any more student loans, and use the money to pay for living expenses and tuition. However, if you want to keep some for a house down payment that's cool...in the current crappy economy in a lot of areas the big banks like Wells Fargo want you to have at least 10% down payment, or even 20%, even if your credit score is awesome.
 
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I would put it in 4 CDs (2-6month 2-12months 25,000 each).
I would not pay on my loans because some jobs pay them for you as an incentive. I would buy a smaller house (or consider renting) if that was an option (less in taxes, less space to put unneeded stuff, less in utility bills).
If I dont get a job to pay my student loans I would use 85,000 on loans when I graduate and put the rest in an emergency fund.
 
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So let's say you got $100,000 sitting in a high yield (relatively speaking, 1.6%) account. No CC debt. About $70,000 in Stafford loans and about $70,000 more to go. Own a house with about 60-70K equity built in and about $160,000 5.8% mortgage left on it. Roth IRA with about $15,000 and regular IRA with about $10,000. No current needs for anything (kinda...:D). Anyway, what would you do with the money as far as investing (not wasting)? I am planning on moving in 2 years for residency and I'd like to get a nicer house.
Have fun with this.
fund the roth to the max
look at ONEFUND
 

HamOnWholeWheat

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One other thing you might want to note : reducing future student loan debt is only a good idea if you anticipate actually eventually paying the full loan balance. With income based repayment, there's ways that appear to allow you to make the taxpayers pay the vast majority of the loan balance. In short, the way to 'exploit' the new rules appears to be

1. Pick a long residency/fellowship track that takes as many years as possible. Make sure the institution offering the residency/fellowship is considered a non profit. (nearly all hospitals offering residencies are)

2. During training, pay the required payments for income based repayment. This will be about $3600 per year on a resident's salary.

3. After 5-8 years of residency/fellowship, make sure your first employer is a non profit, such as an 'academic' physician slot. Keep making those income based repayment payments.

4. At the 10 year mark, the entire loan balance is forgiven. Tax free. By my rough calculations, you'll have paid about $80k in constant dollars no matter how high your income as an attending is or what your total loan debt is.

As for your 100k? Since you wouldn't actually get a 6.8% return by preventing taking out student loans, the optimal investment strategy is :
1. Leave a sufficient emergency fund in the savings account.
2. Invest the rest in a vanguard index fund

Now, there is some risk that the Federal government will renege on this Income Based Repayment agreement. This probability is less than 50%, because even the government can't normally violate a written contract.

The IBR program is not funded. Unless the economy turns around, and all of the country's entitlement programs miraculously become sustainable, I wouldn't plan on using it as a silver bullet to relinquish your loans.
 

The White Coat Investor

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So let's say you got $100,000 sitting in a high yield (relatively speaking, 1.6%) account. No CC debt. About $70,000 in Stafford loans and about $70,000 more to go. Own a house with about 60-70K equity built in and about $160,000 5.8% mortgage left on it. Roth IRA with about $15,000 and regular IRA with about $10,000. No current needs for anything (kinda...:D). Anyway, what would you do with the money as far as investing (not wasting)? I am planning on moving in 2 years for residency and I'd like to get a nicer house.
Have fun with this.
What I'd do with it and what you should do with it are two different things. I'd invest most of it in a taxable account, and use the rest to beef up my emergency fund a bit. You, however, should use a large chunk of it to pay down debt. And you should refinance your mortgage. 5.8% is ridiculous these days. Mine is at 3.625%. It should be easy to get a no-cost refinance under 5%. Aren't Staffords at 6 or 7 % these days? Seems like a pretty good investment to avoid taking those out.