Student loans tied to 3mo LIBOR , hedge investment strategies?

[koercive]

For those of you with student loans that were refinanced to variable loans tied to the 3mo LIBOR, is it worth considering investments that would do well if interest rates continue to rise?

For context,
I have student loans in the 6 figures close to what I make as an annual salary. Refinanced to a 10 year loan that was 2.4 plus 3 mo LIBOR rate capped at 8 per (with -0.25 discount for auto pay). My plan is to pay it off in 6-7 years by using most of my annual bonuses and stocks towards the loan. I would like to have some investments that could offset some of the potential increases in monthly payments.

I'm thinking of doing this more for the psychological benefit in an environment where rates will likely continue to slowly rise rather than being worried that I won't be able to cover the higher monthly payments.

Is anyone doing this? Thoughts on what investments trend higher as the LIBOR rises?



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[sazerac]

For those of you with student loans that were refinanced to variable loans tied to the 3mo LIBOR, is it worth considering investments that would do well if interest rates continue to rise?

For context,
I have student loans in the 6 figures close to what I make as an annual salary. Refinanced to a 10 year loan that was 2.4 plus 3 mo LIBOR rate capped at 8 per (with -0.25 discount for auto pay). My plan is to pay it off in 6-7 years by using most of my annual bonuses and stocks towards the loan. I would like to have some investments that could offset some of the potential increases in monthly payments.

I'm thinking of doing this more for the psychological benefit in an environment where rates will likely continue to slowly rise rather than being worried that I won't be able to cover the higher monthly payments.

Is anyone doing this? Thoughts on what investments trend higher as the LIBOR rises?



Sent from my iPhone using SDN mobile

If you believe interest rates will rise in the future, you would want to do some combination of borrowing at fixed rates, lending at variable rates, or investing in companies that do that.

So some ideas are:
Refinance your variable loans to a fixed rate
If you own fixed rate bonds, sell them
Invest in banking stocks
Pay off your variable rate loan
Invest in a mutual fund that lends at floating rates (these usually have "Floating" in the title)
Buy corporate bonds that pay floating interest
Invest money market cash in ultra-short term bond funds
Sell treasury futures

Most of these trade one kind of risk (rising interest rates) for another risk (e.g. borrower default, Wells-Fargo scandal, etc) that you may or may not even be aware of, plus you will also have additional transaction fees. If I was in your position, I would keep it simple and just concentrate on paying off the student loan sooner than originally planned, while your rate is still in "teaser" territory.

 

[zaztong]

There are other options you may consider, such as putting your car title as an auto loan with the credit union. My CU offers 1.6% APR fixed.

 

[d2rx]

I'm also considering some options for my variable rate student loan. I refinanced it a few months ago. My loans are currently at 2.37% (2% + 1 month LIBOR). Current fixed rates I have seen are at least 4% and higher. How long do you think it will take for my variable rate to reach 4%? From what i have read, the rates will go up gradually, say 0.25% at a time and usually twice annually. At that rate, it would take at least 3 years before my variable rate loan approaches 4%. Currently, the difference between paying 2.37% and 4% in interest is $194. So my thinking is to try and pay a large chunk of my loans off within the next few years to make it worth the savings. As long as the variable rate is less that my original rate of ~6% with the government, it's a win for me. I can always re-finance to a fixed rate loan in a few years. FYI: I am maxing out my 401k contributions. My loan balance is 152k. It should be down to at least 80k in 2 years.

 

[Student Loan Planner]

My thoughts are the only scenario where the stock market would plummet and loan rates would soar is inflation, in which case your income would go up too. Just own zero bonds if you have private student debt of any kind. The after tax equivalent interest rate for attendings is 4%. The 10 year treasury is at about 2.4% pre-tax. If you're risk averse, then pay down the debt aggressively. If you're risk loving invest in the stock market. Hedging with expensive instruments makes no sense. I used to be a bond trader so I know a bit about this stuff. Bonds are terrible value compared to paying down debt.