Use investments to pay tuition?

[Irish Luck]

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I am a non-traditional student and am lucky enough to have saved quite a bit while working. I have enough to cover the first two years of tuition and living expenses currently invested in mutual funds (earning ~9% annually).

Should I use this money to pay for my expenses over the first two years, hopefully qualifiying for more institutional need based aid during years 3 & 4? Or does it make more sense to take out loans throughout all four years and keep my money invested?

I am considering paying to see a financial planner but the cost is significant. Any insight would be greatly appreciated.

 

[URMD]

your investment is earning 9%; student loan interest is @ 6.8%.

I fail to see why this is a hard decision.

 

[colbgw02]

I mean, I'm not a financial wizard, but this seems like a pretty easy calculation. If you reasonably think your ROI on your mutual funds will be higher than the interest rate on your loans, then you take out loans.

 

[SpartanWolverine]

I think you should definitely use the investments to pay for tuition if they're easily liquidated and have no early withdrawal penalty (at least I thought it was a good idea to do so in my situation). Minimize your debt while you can and avoid student loans for as long as you can.

It's been a great environment for investments these last few years and now is as good a time as any to cash in -- you certainly can't expect 9% returns to continue.

 

[heybrother]

Are these funds held in a taxable account, ROTH IRA, 401k, something else, etc.?

 

[repititionition]

@johnamo wins: You are not going to be living in a 9% real return environment for the duration of your training (medical school and residency).

If you are AT ALL risk averse, your best course of action is to use these assets to pay for tuition. NB a great benefits of using retirement funds to pay your mortgage. I'll let you figure these out, but the short version is:

appreciated IRA/401k assets + no early withdrawal penalty for qualified educational expenses (housing qualifies) = you buying a house with money that was never taxed... going in or coming out.

 

[sazerac]

Assuming you have about $100,000 in taxable liquid assets, here is what I would do. First, make sure you have 3-6 months of living expenses available, in cash. Always. How much that is depends on your lifestyle, but let's call it $20,000.

Take the rest of the money, cash it out, and spend a quarter of it each year ($20,000 a year) on medical school expenses. Pretend it is a self-funded $20K a year scholarship, if you will.

Keeping the money invested, even if you can make more than your loan interest rate, just isn't worth the reward based on the risk. The market might continue to climb, you win a few hundred to thousand dollars. The market might crash, then you lose a lot of money and have big loans too.

You might try checking out the Financial Aid or Finance / Investing forums on this board, I'm sure this question has been asked there before.

 

[PL198]

yeah 6.9 % guaranteed vs a pretty risk 9 % isn't even close. paying off student loans(or not getting them in the first place) is the best investment most people will ever have access to.

 

[Mad Jack]

your investment is earning 9%; student loan interest is @ 6.8%.

I fail to see why this is a hard decision.

There's also origination fees on student loans and the like, and PLUS loans run around a point higher, as well as investments having management fees and unpredictable returns. It's much more complicated than a simple 6.8% versus 9%.

 

[collegestud2013]

While the conventional wisdom has always been to minimize loans and take out only what you need, this is one of the cases where you would want to MAX out your loans. Although my only problem is the difference between 6-7% interest rate vs 9% investment returns is too narrow of a profit to make it worthwhile. A 9% return should be in the ballpark of junk bond mutual funds, but OP can do better if he/she reallocates his/her investments to higher-returning ones. I would suggest stock-based mutual funds, since the better stock-based mutual funds can historically give ~15% year (and probably even better if you're smart about selling before major economic downturns like the one in 2008 and buying back in low). These may be more volatile and returns more unpredictable in the short turn and require a bit more maintenance, but historically speaking they have paid off much better in the long run if you're not too risk adverse (and with med school + residency at least 7 years, OP will most likely be investing for the long run). Suddenly, a 6-7% interest rate becomes a reasonably good deal and the incentive reverses to to maximizing, rather than minimizing, your loans. Also, maxing out your loans means you can take good advantage of the PSLF down the line, which could in theory lead to another 6-figure profit on top of those from the investments.

 

[mcloaf]

While the conventional wisdom has always been to minimize loans and take out only what you need, this is one of the cases where you would want to MAX out your loans. Although my only problem is the difference between 6-7% interest rate vs 9% investment returns is too narrow of a profit to make it worthwhile. A 9% return should be in the ballpark of junk bond mutual funds, but OP can do better if he/she reallocates his/her investments to higher-returning ones. I would suggest stock-based mutual funds, since the better stock-based mutual funds can historically give ~15% year (and probably even better if you're smart about selling before major economic downturns like the one in 2008 and buying back in low). These may be more volatile and returns more unpredictable in the short turn and require a bit more maintenance, but historically speaking they have paid off much better in the long run if you're not too risk adverse (and with med school + residency at least 7 years, OP will most likely be investing for the long run). Suddenly, a 6-7% interest rate becomes a reasonably good deal and the incentive reverses to to maximizing, rather than minimizing, your loans. Also, maxing out your loans means you can take good advantage of the PSLF down the line, which could in theory lead to another 6-figure profit on top of those from the investments.

I'm really hoping I misunderstood what you're arguing here.

 

[mspeedwagon]

I don't think you are. Basically, the suggestion is to take the max loans and hope that you can produce better returns than the interest rate. I'm ALWAYS shocked about how we ended up in the financial crisis and then read suggestions like that and am reminded how the next one is just around the corner (people are just too willing to gamble with money).

OP, I'm in the same boat as you. I have about 125k invested that I plan to use toward medical school (I have some other money in retirement funds that I won't touch). I plan not to take loans in my first year and use as much as I need to be comfortable. Then, I'd divide the rest by 3 and treat it as a scholarship fund for me (as someone suggested). I would be totally risk-averse given the massive market gains in the last few years. As you know, there is no guarantee on the returns you'll make year to year, but the rate on borrowed money is fixed and it'll grow and grow.

I'm really hoping I misunderstood what you're arguing here.

 

[Irish Luck]

Are these funds held in a taxable account, ROTH IRA, 401k, something else, etc.?

something else - post tax mututal funds, i can withdraw freely but still have ot pay taxes on the gains

 

[Irish Luck]

thanks for the suggestions everyone. I was leaning towards using the investments to fully fund my first and second year, hoping to qualify for more need based aid during my third and fourth years. It's hard to make a decision to eliminate the cushion I've had for the past few years though.

 

[Obnoxious Dad]

If these investments are not in retirement accounts, I would use the investments to pay for tuition. You can't expect this bull market, which has been chugging along for six years, to last forever. However, that 6.8% interest rate on student loans will probably stay with you like a bad case of herpes. You may be able to get loan forgiveness down the line but can you count on it. Please also remember that the deductibility of student loan interest is limited while the taxability of cap gains and dividends is not. You should compare the after tax rate of return on your investments with the straight up interest rate on student loans.

It would probably make sense to start cashing out these accounts in the calendar year following your entry into medical school. That way the gains will be taxed at a very low rate. I would go to a CPA to run a tax projection just to make sure about your federal and state liability. That would probably only cost you about $350 depending on the city you're in.

Good job on saving and getting into med school.

 

[mimelim]

I don't think that it is disputable: You should take out every subsidized loan that you can (mostly limited to Stafford). It is free money. You should not take money out of your investments to pay any tuition that will be covered by those loans. Even if the investments are making 1% per year, they should simply be used to pay off tuition after your 6 month grace period at the end of your schooling, rather than paying tuition up front. Doing anything else is just throwing money away.

Everything else is a judgement call. The default should be to liquidate what you can easily and limit your loans. Certainly your higher interest rate loans like Grad Plus loans should be avoided at all costs, but it all depends on what rate your unsubsidized Staffords get locked in at as well as other loans.

 

[mspeedwagon]

I hear you there. The thought of giving up 125k of cash to pay for ONLY half of med school made me re-consider the whole thing.

It's hard to make a decision to eliminate the cushion I've had for the past few years though.

 

[PL198]

While the conventional wisdom has always been to minimize loans and take out only what you need, this is one of the cases where you would want to MAX out your loans. Although my only problem is the difference between 6-7% interest rate vs 9% investment returns is too narrow of a profit to make it worthwhile. A 9% return should be in the ballpark of junk bond mutual funds, but OP can do better if he/she reallocates his/her investments to higher-returning ones. I would suggest stock-based mutual funds, since the better stock-based mutual funds can historically give ~15% year (and probably even better if you're smart about selling before major economic downturns like the one in 2008 and buying back in low). These may be more volatile and returns more unpredictable in the short turn and require a bit more maintenance, but historically speaking they have paid off much better in the long run if you're not too risk adverse (and with med school + residency at least 7 years, OP will most likely be investing for the long run). Suddenly, a 6-7% interest rate becomes a reasonably good deal and the incentive reverses to to maximizing, rather than minimizing, your loans. Also, maxing out your loans means you can take good advantage of the PSLF down the line, which could in theory lead to another 6-figure profit on top of those from the investments.

you understand this thing called risk exists right?

investing loaned money is stupid. it's really stupid when the interest rate is 7 percent

don't you think if everyone could predict economic downturns, that they'd all be millionaires? really good piece of advice, if something appears too good to be true, it probably is.

 

[sazerac]

Since there are no subsidized loans for professional schools anymore, the advice in this thread mostly points towards cashing out investments to pay for medical school, and keeping federal loans to a minimum.

This is, in fact, the same strategy I am still following as a third year med student with investments. Don't regret a thing.

 

[Mad Jack]

While the conventional wisdom has always been to minimize loans and take out only what you need, this is one of the cases where you would want to MAX out your loans. Although my only problem is the difference between 6-7% interest rate vs 9% investment returns is too narrow of a profit to make it worthwhile. A 9% return should be in the ballpark of junk bond mutual funds, but OP can do better if he/she reallocates his/her investments to higher-returning ones. I would suggest stock-based mutual funds, since the better stock-based mutual funds can historically give ~15% year (and probably even better if you're smart about selling before major economic downturns like the one in 2008 and buying back in low). These may be more volatile and returns more unpredictable in the short turn and require a bit more maintenance, but historically speaking they have paid off much better in the long run if you're not too risk adverse (and with med school + residency at least 7 years, OP will most likely be investing for the long run). Suddenly, a 6-7% interest rate becomes a reasonably good deal and the incentive reverses to to maximizing, rather than minimizing, your loans. Also, maxing out your loans means you can take good advantage of the PSLF down the line, which could in theory lead to another 6-figure profit on top of those from the investments.

The better funds do not return 15%. Very, very few funds beat the market, and most that do so are not consistently beating it. You really suck at finance if you think you can both beat the market by 6%+ a year and that you can magically time the market in a way that not even the best brokers and hedgies can do.

 

[mspeedwagon]

It's disputable. As of July 1, 2012, only unsubsidized Federal Stafford loans are available to graduate students; however,subsidized Federal Stafford loans remain available to undergraduate students. Thanks @sazerac . I forgot I had looked into this a while ago and was bummed about it (and then proceeded to forget).

I don't think that it is disputable: You should take out every subsidized loan that you can (mostly limited to Stafford). It is free money. You should not take money out of your investments to pay any tuition that will be covered by those loans. Even if the investments are making 1% per year, they should simply be used to pay off tuition after your 6 month grace period at the end of your schooling, rather than paying tuition up front. Doing anything else is just throwing money away.

Everything else is a judgement call. The default should be to liquidate what you can easily and limit your loans. Certainly your higher interest rate loans like Grad Plus loans should be avoided at all costs, but it all depends on what rate your unsubsidized Staffords get locked in at as well as other loans.

 

[Entadus]

I don't think that it is disputable: You should take out every subsidized loan that you can (mostly limited to Stafford). It is free money. You should not take money out of your investments to pay any tuition that will be covered by those loans. Even if the investments are making 1% per year, they should simply be used to pay off tuition after your 6 month grace period at the end of your schooling, rather than paying tuition up front. Doing anything else is just throwing money away.

Everything else is a judgement call. The default should be to liquidate what you can easily and limit your loans. Certainly your higher interest rate loans like Grad Plus loans should be avoided at all costs, but it all depends on what rate your unsubsidized Staffords get locked in at as well as other loans.

There are no subsidized loans for med school anymore. And it's not free money. Even if you paid the loan back in full the month after dispersal, you would still be down a little over 1% due to the origination fee on the loan. (Borrow 10K and only receive deposit of ~$9,890)