Investing Loan Money

[The Knife & Gun Club]

Is it ever advisable to take out more loans than one needs in order to invest the money?

My parents and I were talking about this recently and they think it'd be a good idea to take out maximum loans even though I'll be relying primarily on family financial support during med school. They'd invest the money on my behalf, and as long as it makes >6% per year then it'd be a good deal. Plus with federal loan forgiveness Id have the opportunity to potentially get a good chunk of debt forgiven, making med school substantially cheaper than if we paid cash.

Obviously risky if the market tanks or something, but baring a major economic collapse it seems like this could be a reasonable decision to make.

All comments, criticisms, etc are welcome.

Thanks,

Knife

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[MaxPlancker]

A 6% gain is pretty big…

Why don't you just use the loans for med school and your family can invest the money they were going to spend on your schooling…it's the same deal except it might save you in legal situations possibly (I have no idea about the legality of using the loans for other purposes etc).

 

[IslandStyle808]

I guess the reason why you are saying this OP is because the maximum you can be gifted by your parents is $10,000 and this is why you want the loans invested instead because it would be in your name. If I recall correctly, your loans will be dispersed to the medical school first. So I don't think you will see a large amount of that money to being with.

Just use the loans as intended and not worry about the repercussions of investing it and being in trouble with the federal government. Not a good game to play.

(if people are going to respond that it is illegal, put a link to that statement, not found anything yet)

 

[Dr. Jan Itor]

They'd invest the money on my behalf, and as long as it makes >6% per year then it'd be a good deal. Plus with federal loan forgiveness Id have the opportunity to potentially get a good chunk of debt forgiven, making med school substantially cheaper than if we paid cash.

Obviously risky if the market tanks or something, but baring a major economic collapse it seems like this could be a reasonable decision to make.

Don't forget loan origination fees and inflation. And any fees associated with whatever investments you make. So really, you'd need to make a lot more than >6% just to break even. I'm not sure if you have any current investments, but I'd look into some rates of returns to give you an idea of what you can realistically expect. For example, my retirement account is at 6.19% over 10 years. Granted, that includes the crash in 2008, but it's entirely reasonable to expect that the market is going to tank again at some point during your medical training.

Seems like a lot of risk for very little potential gain.

 

[RangerBob]

Technically it's also illegal, or at least against the promissory note you sign--student loans are meant to pay for tuition, housing and school-related stuff. They're not meant for investing, fancy trips, etc. Does that mean no one ever uses student loans for vacation? No. Has anyone ever been caught/prosecuted/punished in anyway for doing so? Not that I'm aware of.

As the above poster points out, you have to make a lot more than 6% given fees, taxes. So how much are you really going to make if you come out ahead? It just isn't worth the headache. Plus you can only give each of your parents so much money without paying taxes on it yourself (and then if they give it back to you they can only give so much without paying taxes). I think the limit is something like $12,000 or so (ie, you can give each of your parents that much without YOU having to pay taxes, and they can each give you that much without THEM paying taxes on it). You'd have to look up the exact amount.

Also, please don't count on loan forgiveness--it's not a guarantee. No one should ever, ever, borrow money any expectation other than they will have to pay it back in full. If the forgiveness programs stick around, that's great (for right now, but the cost of college is likely to keep getting worse then), but don't count on it.

Overall, I'd call it a pretty bad idea. Don't use high interest loans for investing. Ideally, just don't use loans at all in life (college, cars, house) if you can avoid it. If your parents are that set on investing, then do what the other poster suggested--let them invest their own money, and you use student loans to fund your education.

 

[The Knife & Gun Club]

Thanks for the advice...as for the actual use of the loans I'd use them for med school since I already have the money I'd invest in my own name, so I don't have to deal with the whole 10k a year business.

Good point about origination fees and such. Didn't think of that, any idea how much that usually runs? My moms a banker so is pretty investment savy and could probably clear around 6% with relative certainty.

The main goal I guess would be closer to breaking even with the option to do loan forgiveness after 10 years. The Total COA of where I'm going is around 260k, and forgiveness could potentially save almost 100k if not more.

 

[Spector1]

not sure that you can get 6% out of safe investments like super safe bonds or mutual funds. anything with a return that high includes a nonzero level of risk which is not something I would be playing around with loan money

 

[Dr. Jan Itor]

Good point about origination fees and such. Didn't think of that, any idea how much that usually runs?

1.068% for 2015-2016

 

[Mansamusa]

Accrued interest also capitalizes, and when it does, the 5.84% interest on unsubsidized stafford loans effectively becomes 7.2% then add in origination fees.

Grad Plus has 4.2something% in origination fees

Eg. Take out $100 during 1st yr--> $5.84/yr interest--> loan becomes $123.36 when you graduate. 123.36*0.0584= 7.20--> now the interest is growing at 7.2% of the original loan

(When grad plus loans at 6.3% capitalize, the interest becomes 7.9% of the original loan)

 

[takeurmeds02]

Yea, essentially it would be much more a hassle to even break even. This was discussed in the past and the consensus was to just take out what you need and not even bother with the extra debt.

6% is fairly aggressive in this volatile market but not unrealistic if you know exactly what to invest in.

And that takes a certain level of expertise

 

[Giovanotto]

Lol, what a terrible idea. FWIW, my brother who works in business tried this for year one of his post-grad education and now for his second year he is deciding not to (n=1).

 

[235009]

This is an awful idea. Take out the absolute minimum in loans that you need to get by. Counting on loan forgiveness is foolish. Odds are your scheme won't work out.


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[Giovanotto]

6% is fairly aggressive in this volatile market but not unrealistic if you know exactly what to invest in.

I'm listening...

 

[trickydick]

I think if you have a subsidized loan and have a deferment on your loan(are in school) you don't have to pay interest on your loan during that period. You could use that money to buy US Savings bonds which are more or less guaranteed and then cash it in once you are done with school. If I am correct (which I'm probably not) you may have found an arbitrage condition in which you borrow money from the government and sell it back to them immediately to gain 0.1% on interest every 6 months for the time you are able to get a deferment.

 

[Gurby]

 

[235009]

Interest payments are deferred while the interest on the loan is still being accrued. The return on those saving bonds will be much less when compared to the interest being accrued on the loans, hence the reason OP needs to invest in strategies which return > the cost of borrowing. They would also need to maintain that return for the next four years.

Wrong. Subsidized loans do not accrue interest while you're in school BUT they are no longer available to graduate students.


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[The Knife & Gun Club]

Alright thanks guys that sounds like a pretty resounding no lol. Appreciate it.

Curious though, do you all really think it's that likely that loan forgiveness will be terminated within my time in med school?

 

[Mansamusa]

Alright thanks guys that sounds like a pretty resounding no lol. Appreciate it.

Curious though, do you all really think it's that likely that loan forgiveness will be terminated within my time in med school?

Loan forgiveness won't even start (being forgiven) until next year. It will likely exist, but be modified.

I think 100% that med schools are overcharging and that we are getting (or at) the point where med school is not financially worth it. I would also love to have my loans forgiven, but I would think the gov't is incredibly stupid if they continue the program. I would have $250K forgiven and private school kids may have $400K forgiven. The amount forgiven will keep increasing as schools feel no pressure to control their costs. People will be paying less than their principle balance over the 10 yrs before it gets forgiven
The forgiveness will keep getting more and more expensive for the gov't and would be unsustainable and make no financial sense.

 

[SpoiledMilk]

There are a couple value buys in the S&P500 (lower P/E multiples than their industry average or largest competitor) that are paying dividend yields over 3%. Apple is a decent buy at this point, it's sitting at a relatively cheap P/E of 11x and is paying a div yield of 2%. Now that's just being conservative, you could also trade options and be clocking 10+% returns

Please stay aware from options!! With any refunds you get from the school after tuition, etc. is paid and you want a "safe" and conservative return on the amount that will pay a little more interest than what is the current nominal rate being paid on interest checking or savings account, buy short term CDs from a FDIC bank or short term T-bills directly from the US Treasury Dept (no commission/fees).

I think it is a terrible idea to take out more loans than you need for living expenses to invest while in medical school and bank on getting a high return in today's very volatile stock market.

The scenario I proposed above is an option only for funds that you get after the school takes out their share and only for loans taken to cover living expenses while in med school.

 

[trickydick]

Wrong. Subsidized loans do not accrue interest while you're in school BUT they are no longer available to graduate students.


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That makes sense, I'm sure people that come with up with these policies thought of that long before I did. And I imagine there are some policies in place that will prevent in undergrad from taking out subsidized loans he/she doesn't need.

 

[SpoiledMilk]

refunds? wouldn't they just return the loan money and deduct it from the amount borrowed?

Unless medical school business offices do things differently, every educational loan that I have taken for undergrad and grad, the money from the lending institution is first sent to the school's business office. There they deduct the balance owed and whatever is left over is sent to the student via electronic deposit to the student's bank, school issued bank card, etc.

I suppose the student could tell the school's business office to return what is left over back to the lending institution, but since the student already paid the origination fee, etc. on the full amount of the loan, it is in the student's best interest to take the left over amount and use for living expenses in lieu of possibly having to go back in the future for another loan and paying another origination fee, etc.

 

[jih]

Gambling with borrowed money... hmmm...

 

[235009]

Please stay aware from options!! With any refunds you get from the school after tuition, etc. is paid and you want a "safe" and conservative return on the amount that will pay a little more interest than what is the current nominal rate being paid on interest checking or savings account, buy short term CDs from a FDIC bank or short term T-bills directly from the US Treasury Dept (no commission/fees).

I think it is a terrible idea to take out more loans than you need for living expenses to invest while in medical school and bank on getting a high return in today's very volatile stock market.

The scenario I proposed above is an option only for funds that you get after the school takes out their share and only for loans taken to cover living expenses while in med school.

If you have left over loan money after you've paid tuition and covered living expenses you should keep that in a checking account and take out less in loans the following year. Certainly do not put it in a short term CD that's going to earn 1% interest on money you're paying 6% interest on. It makes most financial sense to minimize the amount you're taking out. You simply shouldn't invest with borrowed money.

 

[SpoiledMilk]

If you have left over loan money after you've paid tuition and covered living expenses you should keep that in a checking account and take out less in loans the following year. Certainly do not put it in a short term CD that's going to earn 1% interest on money you're paying 6% interest on. It makes most financial sense to minimize the amount you're taking out. You simply shouldn't invest with borrowed money.

I think we are both in agreement that taking out maximum loans above and beyond tuition and living expenses is a bad/terrible idea. Any extra funds placed in a basic 0% interest paying checking account does provide easy liquidity and convenience. If the checking account pays interest, all the better.

But for students who know that the extra funds will not be needed immediately, it makes sense to buy short term CDs or short-term T-bills because earning 1% interest or any interest is better than earning %0 interest in a non-interest paying checking account. There is no risks to the principle on CDs (FDIC insured) and T-bills (full faith of the US Gov't). A penalty is only assessed if you 'cash in' the CD or T-bill before the time of the contract is reached.

 

[235009]

I think we are both in agreement that taking out maximum loans above and beyond tuition and living expenses is a bad/terrible idea. Any extra funds placed in a basic 0% interest paying checking account does provide easy liquidity and convenience. If the checking account pays interest, all the better.

But for students who know that the extra funds will not be needed immediately, it makes sense to buy short term CDs or short-term T-bills because earning 1% interest or any interest is better than earning %0 interest in a non-interest paying checking account. There is no risks to the principle on CDs (FDIC insured) and T-bills (full faith of the US Gov't). A penalty is only assessed if you 'cash in' the CD or T-bill before the time of the contract is reached.

Generally when money is tight you shouldn't tie up your existing funds in anything that will penalize you if you run into trouble and have to pull out the money.


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[aldol16]

Generally when money is tight you shouldn't tie up your existing funds in anything that will penalize you if you run into trouble and have to pull out the money.

You usually only forfeit the last three months of interest - it's not like you're losing hundreds of your principal. But in general, it's not a good idea to do what OP is suggesting anyway.

 

[RangerBob]

Alright thanks guys that sounds like a pretty resounding no lol. Appreciate it.

Curious though, do you all really think it's that likely that loan forgiveness will be terminated within my time in med school?

Considering that Obama proposed limiting PSLF to ~$50,000, and democrats are generally much friendlier to students than republicans (and Obama is a more liberal democrat), and also considering that no one has even gotten any forgiveness yet, I'd say yes, the program is going to change. How it changes is anybody's guess.

If I was single I'd be careful hedging my bets for PSLF. And I absolutely would never, ever, ever, borrow the money in the first place expecting forgiveness. Assume you'll have to pay every dime back (because you and I probably will!), and that will hopefully keep you from borrowing too much. I really regret not being more financially savvy as a medical student--I think my wife and I could've still lived comfortably and borrowed $10k less per year. That's almost a $60k difference when you take into account interest over the course of medical school and residency. Believe me, that's not chump change.

Learn to live on less, and be happy with less. Read the WhiteCoatInvestor website for financial education. And be more like this guy:
http://www.mrmoneymustache.com/2016...gn=Feed:+MrMoneyMustache+(Mr.+Money+Mustache)

Seriously, you'll make plenty of money as a physician. Do you really want to stress over making even more money?

 

[Mr Medschool Money]

Considering that Obama proposed limiting PSLF to ~$50,000, and democrats are generally much friendlier to students than republicans (and Obama is a more liberal democrat), and also considering that no one has even gotten any forgiveness yet, I'd say yes, the program is going to change. How it changes is anybody's guess.

If I was single I'd be careful hedging my bets for PSLF. And I absolutely would never, ever, ever, borrow the money in the first place expecting forgiveness. Assume you'll have to pay every dime back (because you and I probably will!), and that will hopefully keep you from borrowing too much. I really regret not being more financially savvy as a medical student--I think my wife and I could've still lived comfortably and borrowed $10k less per year. That's almost a $60k difference when you take into account interest over the course of medical school and residency. Believe me, that's not chump change.

Learn to live on less, and be happy with less. Read the WhiteCoatInvestor website for financial education. And be more like this guy:
http://www.mrmoneymustache.com/2016/06/08/happiness-is-the-only-logical-pursuit/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed:+MrMoneyMustache+(Mr.+Money+Mustache)

Seriously, you'll make plenty of money as a physician. Do you really want to stress over making even more money?

^ Agreed.

If you want to make money, get a job. Unless you're an investing wiz and you have no other skills to offer.
I do have a classmate who does some investing with a strict amount of his loan money.
I think the answer to your question lies in 2 things:
1. Are you the neurologist drop out guy from The Big Short? Cause then yes, you should invest because you're absolutely brilliant. If you're not him or like him, pause.
2. Are you the most disciplined person you know? Successful investors are typically very disciplined people.

Like the above quote, decreasing your expenses is much easier than increasing your income in med school. That being said, you can do anything- it depends how much you're willing to give up to invest. Are you willing to lose all your investment money and have to pay 4x the amount of the prinicipal?

 

[Goro]

Just save their time and buy lots of Lotto tickets, but because if you're going to gamble, gamble big. I'm going to leave thread now because I'm allergic to magic thinking.

They'd invest the money on my behalf, and as long as it makes >6% per year then it'd be a good deal.

 

[avatarftw]

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