What to do with $5000 summer stipend?

[dgu334]

---

Members don't see this ad.

I am about to finish my first year of medical school and will be working in a lab this summer where I will be getting paid a little over $5k. I will be living with my folks so I won't need to spend any of this income. I have been thinking about what I could do with this $5k and I think I have 2 options but don't know which is financially more prudent. Here are the two options:

1) put the $5k in a Roth IRA
2) use the $5k to pay off $5k of principal loan money from my first year of medical school.

Some background (dunno if any of this is relevant): I have used the AAMC MedLoands Calculator and I have/will be borrowing a little less than $40k/year every year of medical school which will end up getting me a little less than $160k in total loans unsubsidized stafford loans when I graduate. According to this calculator, this will be approximately $180k after the interest accrued on each loan capitalizes. I have no other loans or debt and I am currently 22.

Which option above do you guys think is financially better?

 

[ThoracicGuy]

Put it in the Roth. 5k is a drop in the bucket for loans. Given time, the Roth can earn far more.

 

[James Martin]

I think, option 1 is good.

 

[dpmd]

What interest rates do you have? That should factor in, but there is a good chance that the roth will still still come out ahead.

 

[dgu334]

What interest rates do you have? That should factor in, but there is a good chance that the roth will still still come out ahead.

The interest rate is 6.21% for my stafford loan this past year.

 

[Smart Money MD]

Agree with ThoracicGuy and James Martin. I'd put it in a Roth if you don't need to spend it. Compound interest is an amazing thing.

 

[dpmd]

The interest rate is 6.21% for my stafford loan this past year.

In the long term you should be able to beat that with your roth earning and compounding.

Do it as soon as you get it to avoid the temptation to spend it.

 

[Plastikos]

agree with roth. loan is finite, you wont have a lot of options for truly tax free investing going forward.

 

[Mman]

The interest rate is 6.21% for my stafford loan this past year.

That is a fairly painful interest rate, but all things being equal you'd have to assume that a low cost stock heavy mutual fund will return >6.21% over the next 30 years. In fact, it'll probably return 8-12% which would mean it would trounce the 6.21% interest rate on the loans.

 

[supremus]

Save it for interview season during MS-4.

 

[keifernny2]

This is a drop in the bucket, blow it on blackjack and the roulette wheel 🙂

Seriously, I agree with the "save it for interview expenses" idea.

 

[68PGunner]

Use it to pay down your loan. I find the advice of electing the Roth to be substantially ignorant. You guys mention compounding interest but fail to mention the compounding interest on his loan. Unless you are a financial guru who can generates a guaranteed 8%+ return for the next 10 yrs, you should save yourself the trouble and pay off that loan asap.

 

[dpmd]

Use it to pay down your loan. I find the advice of electing the Roth to be substantially ignorant. You guys mention compounding interest but fail to mention the compounding interest on his loan. Unless you are a financial guru who can generates a guaranteed 8%+ return for the next 10 yrs, you should save yourself the trouble and pay off that loan asap.

Student loans are simple interest, not compound. Interest does capitalize at specific times, but that isn't the same.

As for the financial guru thing, I think you are the one being ignorant. We aren't talking about guarantees, but the average return that anybody can acheive. It is based on historical info so of course it isn't going to be guaranteed, but it isn't over 10 yrs that we are talking, but much more than that because the idea would be to keep that roth going until he retires.

 

[68PGunner]

Student loans are simple interest, not compound. Interest does capitalize at specific times, but that isn't the same.

As for the financial guru thing, I think you are the one being ignorant. We aren't talking about guarantees, but the average return that anybody can acheive. It is based on historical info so of course it isn't going to be guaranteed, but it isn't over 10 yrs that we are talking, but much more than that because the idea would be to keep that roth going until he retires.

Is it interest on the original loan sum or is it interest on the current balance of the loan? If it's latter, it's compounding interest. I never have to take out loan so I am not aware of the current stipulations of these student loans.

I am very well aware of what you are saying. Your description is what every financial advisor tells their clients. They usually just pull up the sp500 chart for the past 50-60 years. However, it's harder to make it all back after taking a 50% shave down. Assuming 8-12% annual return in the long run is naive and unrealistic. If the OP is just a couch potato investor, he or she should just buy Bershire Hathaway shares.

 

[dpmd]

Is it interest on the original loan sum or is it interest on the current balance of the loan? If it's latter, it's compounding interest. I never have to take out loan so I am not aware of the current stipulations of these student loans.

I am very well aware of what you are saying. Your description is what every financial advisor tells their clients. They usually just pull up the sp500 chart for the past 50-60 years. However, it's harder to make it all back after taking a 50% shave down. Assuming 8-12% annual return in the long run is naive and unrealistic. If the OP is just a couch potato investor, he or she should just buy Bershire Hathaway shares.

It is simple interest (meaning interest accumulates on the original amount only) but unpaid accumulated interest will be added to the principal (capitalization) when you come out of school deferment, but if you then stay on IBR it won't capitalize.

So lets pretend we are just dealing with the 5000 for this guy with three years left of med school (I made him 25 which leaves 40 yrs until age 65). If he uses it for school now and then waits until he done with school and residency to put 5000 in an IRA (assuming a 3 yr residency, and assuming he needs to wait until finishing residency to come up with that sum) then 18971.58 is what that money would become at age 65 if we use a 4% rate of return (since you don't think the higher return is resonable, 8% makes it 68450.67)

If he takes the loan and invests in the IRA now then the IRA becomes 24005.1 at that same 4% (108622.61 at 8%). The loan of 5000 at 6.8% turns into 6020 at the end of med school (3 yrs of simple interest that presumably won't get paid and would therefore be capitalized) and then if we presume a 10 yr repayment (because at that amount your IBR repayment is going to be your 10 yr repayment) you will end up paying 2293.40 in interest plus the 1020 that already capitalized-for a total interest of 3313.40 which if you subtract from what you earned in the IRA still leaves you ahead of where you would have been in the first example. And that is just if you presume a really modest return on your investments. At the 8% you see how taking the loan leaves you so far ahead that you can even take 20 yrs to pay the student loans (with a total of 6028.73 in interest paid) and come out ahead. This doesn't even take into account student loan interest deduction (mostly because it is usually only during residency that it will help you) and the possibility of other loan repayment benefits that could be offered by employers or through PSLF.

 

[doc05]

roth. no question. good luck.