Pay Now or Pay Later?

[biochemblues]

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Here's the deal:

1. Med school is going to cost a little over 60k/year for me.

2. Financial aid is loans only (full amount of staff sub/unsub and then higher interest loans to cover the rest)

3. #2 is a result of my having about 150k invested in a trust fund in my name in a variety of mutual funds (this has been money saved up from the last 15 years). (My EFC is in the 30-40k range)

4. Parents paid for all of undergrad, so no debt there, but they aren't helping out for med school

Would the best option be to use up the trust fund to pay for med school before taking out any sort of loans? I'd rather keep a nest egg however (retiring early, or at least not working alot when I get old is a goal of mine), and if the stock market continues to perform well this principal will become huge. Since education debt is "good" debt, then is it more wise to just to pay off as little now, so that I have a debt being built up in as an educational investment while maintaining my financial investment that has been slowly built up over many years?

I know this isn't exactly a bad problem, but I don't know much about money and I don't know what to do!

 

[YupGypsy]

hey biochem, what has been the annual return % on the investment?

 

[okbye]

^That's your key - is your money going to earn more where it is than you will pay in interest by borrowing.

 

[old_boy]

Here's the deal:
Would the best option be to use up the trust fund to pay for med school before taking out any sort of loans? I'd rather keep a nest egg however (retiring early, or at least not working alot when I get old is a goal of mine), and if the stock market continues to perform well this principal will become huge. Since education debt is "good" debt, then is it more wise to just to pay off as little now, so that I have a debt being built up in as an educational investment while maintaining my financial investment that has been slowly built up over many years?

I'd pay for school now with the trust fund $$$, except for any interest-free or low interest (<5%) loans you can get. Let's say your avg debt interest rate in the all-debt scenario is 8%. Are you really going to beat this in your trust fund? Maybe, but maybe not. If you use your trust fund now, instead of repaying loans in residency and as a young practicing physician, you'll have some extra money lying around. So save tax free. Max-out your 401k/403b contributions each year with the money you would have used to pay back your loans, and buy a house. Don't change your living habits, just because you don't have debt. What you'll be doing essentially is transfering your trust-fund $$$ into retirement accounts and property, in a tax-advantaged way.

 

[biochemblues]

hey biochem, what has been the annual return % on the investment?

I don't have the exact numbers on me, but its greater than 10%. Its diversified in mutual funds, international and domestic, maybe a bit large cap heavy, but its grown from under 100k to 150k in less than 4 years! It has (of course the key word is has) definitely had a greater rate of return than the interest rate on the loans I would be taking out, even the non-Stafford loans.

I'd pay for school now with the trust fund $$$, except for any interest-free or low interest (<5%) loans you can get. Let's say your avg debt interest rate in the all-debt scenario is 8%. Are you really going to beat this in your trust fund? Maybe, but maybe not. If you use your trust fund now, instead of repaying loans in residency and as a young practicing physician, you'll have some extra money lying around. So save tax free. Max-out your 401k/403b contributions each year with the money you would have used to pay back your loans, and buy a house. Don't change your living habits, just because you don't have debt. What you'll be doing essentially is transfering your trust-fund $$$ into retirement accounts and property, in a tax-advantaged way.

Doesn't the stock market historically run at 10% annually, at least when averaged over a number of years? We've had some good years lately, making me worried that some bad years may come (esp. if a Democrat gets elected as President) to bring that overall average to 10%. But then again, I ideally want this pool of money to be a long-term investment (i.e. my retirement fund). I probably seem stupid, I just don't really grasp this money stuff too well. I guess I'm scared of parting with this money that is my name when it has the potential to earn more interest than the interest that will build up from my student loans. Aren't there tax advantages to carrying debt as well (i.e. are the tax advantages from carrying debt greater or less than the tax advantages of saving income in the form of 401k's and IRAs)?

Thank you for the advice 👍

 

[YupGypsy]

I don't have the exact numbers on me, but its greater than 10%. Its diversified in mutual funds, international and domestic, maybe a bit large cap heavy, but its grown from under 100k to 150k in less than 4 years! It has (of course the key word is has) definitely had a greater rate of return than the interest rate on the loans I would be taking out, even the non-Stafford loans.




Doesn't the stock market historically run at 10% annually, at least when averaged over a number of years? We've had some good years lately, making me worried that some bad years may come (esp. if a Democrat gets elected as President) to bring that overall average to 10%. But then again, I ideally want this pool of money to be a long-term investment (i.e. my retirement fund). I probably seem stupid, I just don't really grasp this money stuff too well. I guess I'm scared of parting with this money that is my name when it has the potential to earn more interest than the interest that will build up from my student loans. Aren't there tax advantages to carrying debt as well (i.e. are the tax advantages from carrying debt greater or less than the tax advantages of saving income in the form of 401k's and IRAs)?

Thank you for the advice 👍

good point. The market is overdue for a true correction.

Not giving you financial advices or anything since I'm no expert, but I would keep on investing if I were you.

 

[Lesley]

Doesn't the stock market historically run at 10% annually, at least when averaged over a number of years? Thank you for the advice 👍[/QUOTE]

Average stock market returns over the past century ~ 5%.


The information above was garnered from a financial site and is copied below.

"Significant Swings"

"Although the compounded average annual change in the stock market is near 5% over the past century, the range of dispersion in annual returns is dramatic. This chart presents the distribution of yearly index changes within the single digit range of -10% to +10% during the past century overall and during the secular bull and bear cycles. In addition, a second range was determined to include half of the years within the range and half of the years outside of the range. More than 50% of the years ended with changes in the index exceeding +/-16%, either less than -16% or greater than +16%."

Good luck with your decisions. Lesley

 

[Doctor~Detroit]

We've had some good years lately, making me worried that some bad years may come (esp. if a Democrat gets elected as President) to bring that overall average to 10%.

haha. well let's take a moment to juxtapose the political party affiliation of the president with the economy's performance in the past twenty years.

now you should understand that the least you can say is that the president has little to do with the economy. otherwise you're just embarassing yourself with comments like this.

 

[blanche]

haha. well let's take a moment to juxtapose the political party affiliation of the president with the economy's performance in the past twenty years.

now you should understand that the least you can say is that the president has little to do with the economy. otherwise you're just embarassing yourself with comments like this.

I'd have to concur.

 

[biochemblues]

haha. well let's take a moment to juxtapose the political party affiliation of the president with the economy's performance in the past twenty years.

now you should understand that the least you can say is that the president has little to do with the economy. otherwise you're just embarassing yourself with comments like this.

I'm actually liberal...my point is that I can't predict the future of the stock market.

I really have no idea what to do....

 

[Lesley]

I can't predict the future of the stock market.

I really have no idea what to do....

Yours is not an easy decision. Partly because at an annual cost of attendance of 60g/yr, should you borrow the entire cost of attendance for all four years, you will be left with a probable debt of slightly over $300,000 including price increases and interest accrued on the unsubsidized loans. You are going to have school debt anyway. So, the question you have to ask yourself is, how much debt are you comfortable with, keeping in mind that a large a amount of interest is accruing while you are in school and not cheaply, 6.8% and 8.5%.

This is a very personal decision. While I think it is important to have a nest egg, especially, to cover any auto emergencies or to purchase of a vehicle which is a necessity during medical school, I think it may be nice not to borrow anything your first two years. If possible, slightly longer. Although making a decision to part with your money is not an easy one, to start or be in the middle of your junior year of medical school with no debt is an envious and advantageous position, both financially and mentally. Another option would be to borrow for all four years from the stafford only and subsidize any costs above that amount from your trust fund. The second option, may be more prudent especially if there are any taxes due. I don't know how trust funds work. I've never had one! Whatever you decide to do, it's got to be your decision. Good Luck.