Relentlessrook18

2+ Year Member
Nov 2, 2015
71
6
Status
Medical Student
Hey guys,

Had a quick question about PSLF and what to do with extra money I'm saving. I'm lucky enough to have a wonderful spouse working. So the money that I am making basically goes to whatever few bills I have during the month, and the left overs I can pretty easily save. Right now, I'm saving about 2k per month. I've got some of what I've saved into a Roth IRA. I'm maxing that out. As far as the rest, I'm not sure what I should do. I am expecting the public service loan forgiveness to either be capped or done away with by 2027, which is when my loans would be forgiven. And the reason I am saving this extra money, is in case I get messed over by the government on year 9 of paying the bare minimum on my loans, I can throw the money I've saved straight to my loans.

I guess my question is, where should I store this money right now? Invest in S and P 500 index fund with Vanguard? Do a balanced growth fund with Vanguard? Put my money into a money market?

I would love to know what others are doing in case the crap hits the fan with the PSLF.

Thanks!
Ryan
 
Apr 8, 2013
38
27
Status
Pharmacist
Overall you are being smart by living below your means, piling up cash, and getting educated about investing. I'm curious to know how much your loans are, but that information would not change my advice - just curious. I was doing basically the same thing you are doing now when I first got out of school. After about a year, I realized the smartest move I could make was to focus all my extra money on paying off student loans. There are multiple considerations that led me to that conclusion.

1) The interest rate on my loans was about 6.5%. For the sake of example, imagine Bob has $100K in a stock market index fund and $100K in student loans. If Bob's investment yields the historical average annual rate of return of about 10%, then he will make $10,000 per year on his $100K investment. However, the average annual rate of inflation is about 3.5%. That means that Bob's inflation-adjusted annual return is only 6.5%. Effectively, Bob earned $6,500 on his investment. Meanwhile, Bob's student loan interest for the year was $6,500 (6.5%). The math is more complicated. I'm simplifying so we don't spend all day in the mud with our calculators. The point is... Bob is going to just about break even. He thinks his investment is performing well, but he is really just keeping up with inflation. No real benefit. This example assumes Bob will achieve average historical stock market returns. Problem is, the market is almost never average in the short-term. Long-term (like 10 - 30+ years) it is reasonable to expect a 10-11% annual yield. Short-term (like 5 years or less), who knows. Could be +50%, - 50%, etc. If Bob used his $100K of investment money to pay off the principle on his loans, he would avoid the 6.5% interest on his loans going into the future. This is effectively the same as earning a 6.5% rate of return.

2) PSLR is not that great of a deal. I really hate making payments. To receive PSLR, you have to make 120 monthly payments. I would rather donate a kidney. Furthermore, you are limited to working for certain organizations for 10 years 501(c)(3), government, etc. Who knows what you'll want career-wise over the next decade. The days of working for the same employer for 40 years are gone. A really attractive career opportunity could pop up in 8 years - one that would not be in government or a 501(c)(3) etc - but you would feel extremely conflicted about taking the new job vs missing out on PSLR in two years.

3) All debt is a liability, and all liability is risk. Going forward, to be successful with money, you need to focus on maximizing your assets and eliminating your liabilities. My advice is to eliminate liabilities first, then build assets. There are a lot of people who like to toy around with debt, calling it "leverage" and "good debt." That's like calling brain cancer "an intelligence bump." Imagine you have 10 different loans (all requiring you to make regular monthly payments), then the economy takes a hit, your investments tank and you temporarily lose your job. How do you make the payments? You don't. When everything was going well for you, the debt was "leverage." When you have a financial setback, the debt destroys you like the cancer it is. Live well below your means and get rid of the debt ASAP. It's like buying freedom. Great feeling.

After you're debt-free, start building your assets with index fund investing +/- rental property. In other words, own as many high quality assets as you can.

Hope that helps. You're on the right track. If you can pay your loans off by living frugally for ~3 years, I would recommend it. Smart to max out Roth IRA, and Vanguard is an excellent place to buy your index funds (VFINX and VTSMX are good funds). I wouldn't suggest a balanced fund. Personally, I don't own bonds. They are historically proven to underperform the stock market in the long-term. It is comical to me that people think investing in stocks 100% (and bonds 0%) is too risky... the same people who carry debt around like a pet chihuahua. Invest for the long-term (10+ years). Live below your means. Never withdraw money from the stock market out of fear. Day to day, stocks are volatile and scary. Decade to decade, relatively predictable and not scary at all. Read books written by people smarter than you and me. The Intelligent Investor, The Little Book of Common Sense Investing, etc.
 

dpmd

Relaxing
10+ Year Member
Sep 14, 2006
20,944
31,870
Lazytown
Status
Attending Physician
Your rate of return calculation ignores the effects of compound versus simple interest over time. Not saying you should keep high interest rate loans and chase investment returns, but the math is a little more complex.
 
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BorntobeDO?

5+ Year Member
Nov 13, 2013
2,829
3,588
Status
Medical Student
Overall you are being smart by living below your means, piling up cash, and getting educated about investing. I'm curious to know how much your loans are, but that information would not change my advice - just curious. I was doing basically the same thing you are doing now when I first got out of school. After about a year, I realized the smartest move I could make was to focus all my extra money on paying off student loans. There are multiple considerations that led me to that conclusion.

1) The interest rate on my loans was about 6.5%. For the sake of example, imagine Bob has $100K in a stock market index fund and $100K in student loans. If Bob's investment yields the historical average annual rate of return of about 10%, then he will make $10,000 per year on his $100K investment. However, the average annual rate of inflation is about 3.5%. That means that Bob's inflation-adjusted annual return is only 6.5%. Effectively, Bob earned $6,500 on his investment. Meanwhile, Bob's student loan interest for the year was $6,500 (6.5%). The math is more complicated. I'm simplifying so we don't spend all day in the mud with our calculators. The point is... Bob is going to just about break even. He thinks his investment is performing well, but he is really just keeping up with inflation. No real benefit. This example assumes Bob will achieve average historical stock market returns. Problem is, the market is almost never average in the short-term. Long-term (like 10 - 30+ years) it is reasonable to expect a 10-11% annual yield. Short-term (like 5 years or less), who knows. Could be +50%, - 50%, etc. If Bob used his $100K of investment money to pay off the principle on his loans, he would avoid the 6.5% interest on his loans going into the future. This is effectively the same as earning a 6.5% rate of return.

2) PSLR is not that great of a deal. I really hate making payments. To receive PSLR, you have to make 120 monthly payments. I would rather donate a kidney. Furthermore, you are limited to working for certain organizations for 10 years 501(c)(3), government, etc. Who knows what you'll want career-wise over the next decade. The days of working for the same employer for 40 years are gone. A really attractive career opportunity could pop up in 8 years - one that would not be in government or a 501(c)(3) etc - but you would feel extremely conflicted about taking the new job vs missing out on PSLR in two years.

3) All debt is a liability, and all liability is risk. Going forward, to be successful with money, you need to focus on maximizing your assets and eliminating your liabilities. My advice is to eliminate liabilities first, then build assets. There are a lot of people who like to toy around with debt, calling it "leverage" and "good debt." That's like calling brain cancer "an intelligence bump." Imagine you have 10 different loans (all requiring you to make regular monthly payments), then the economy takes a hit, your investments tank and you temporarily lose your job. How do you make the payments? You don't. When everything was going well for you, the debt was "leverage." When you have a financial setback, the debt destroys you like the cancer it is. Live well below your means and get rid of the debt ASAP. It's like buying freedom. Great feeling.

After you're debt-free, start building your assets with index fund investing +/- rental property. In other words, own as many high quality assets as you can.

Hope that helps. You're on the right track. If you can pay your loans off by living frugally for ~3 years, I would recommend it. Smart to max out Roth IRA, and Vanguard is an excellent place to buy your index funds (VFINX and VTSMX are good funds). I wouldn't suggest a balanced fund. Personally, I don't own bonds. They are historically proven to underperform the stock market in the long-term. It is comical to me that people think investing in stocks 100% (and bonds 0%) is too risky... the same people who carry debt around like a pet chihuahua. Invest for the long-term (10+ years). Live below your means. Never withdraw money from the stock market out of fear. Day to day, stocks are volatile and scary. Decade to decade, relatively predictable and not scary at all. Read books written by people smarter than you and me. The Intelligent Investor, The Little Book of Common Sense Investing, etc.
Did you read Joshua Kinnon's articles or something? I completely agree with what you laid out. I take it that you are of the Dave Ramsey school of thought that debt is pretty much behavioral and good rarely comes of it? I definitely am, I didn't agree at first cause of the whole rich dad poor dad I read as a kid, but now that I watched it play out in my fathers life over the last 20 years has pretty much made me believe that debt is risk almost never worth taking. He would imitate 'rich' dad with 'good debt' and then that debt would end up turning into bad debt or forcing him to acquire bad debt during every downturn to keep up. The other peoples money folks and leverager's always get beat up bad during the downturns. If you are debt free, you make bank during the downturns and do fine during the upswings as well.

Your rate of return calculation ignores the effects of compound versus simple interest over time. Not saying you should keep high interest rate loans and chase investment returns, but the math is a little more complex.
He acknowledged the math is more complex, but he's absolutely right.
 
Apr 8, 2013
38
27
Status
Pharmacist
Thanks, man. Haven't read Joshua Kinnon. I'll have to check him out. I do agree with Dave Ramsey's advice to eliminate and avoid debt, and that debt is primarily about behavior. Rich Dad, Poor Dad was a favorite of mine for his message on owning assets, but beyond the cover Kiyosaki always struck me as a get rich quick guru. So I enjoyed that one book, but otherwise avoided him. Good that you were able to learn from someone else's mistakes and change course. Hard to stand by and watch I'm sure. You're right. Every upswing and downturn is an opportunity to make bank.
 
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