babylons

10+ Year Member
May 2, 2008
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Pre-Medical
While I am a frequent visitor of the forum. I am writing under a new username to protect my privacy.
Here is my question. I worked 2 jobs for the last 4 years while living frugally and I now have about $100,000 in savings and will be starting med school in the fall. Tuition is going to be around $40,000 and I don't have to worry about room and board. I qualified for the max of Stafford subsidized (long story but savings are mine but not under my name or SSN). What would you do with the money? Use it to pay first 2 yrs and keep the rest for emergencies? Not use it at all? I'm getting only about 3.7% interest on it.
I'll obviously take out the Stafford subsidized. Thanks for your suggestions.
 

loved

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Aug 30, 2007
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Use it to pay first 2 yrs and keep the rest for emergencies.
 

AMDFAO

AMDFAO
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May 31, 2007
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Interesting post.
Most kids are really into the "did it accrue interest or not" and a simple rate to rate comparison-- totally normal by the way.
If you were my kid, I think I'd be pushing you to think long term in all of this. First I'd tell you to consider funding a Roth IRA with some of it over the next 8 years ($5000/ year) if you could. You need to earn the money invested in a Roth and I'm going to state that if your parents own a business, get on the payroll for the 4 years of school. Have them pay you $5000 in wages and the payroll taxes and then you take the $5000 in savings and give it back to them. Your contributions during your paid residency should meet the "you earned it" test. There's $40,000 of it taken and one of the best investments out there for retirement.
The rest I would consider tie into longer term CD's: stability and growth. If you look at the rate of 3.7 and compare that to a cost of 6.8 per year on $40,000 it's not that much.
Your sub loan does have the taxpayers subsidy while in school. Your Unsub interest is your responsibility. The benefit of federally backed loans is not the rate but the other benefits: unlimited deferment if you qualify, forbearance, income contingent repayment throughout the length of repayment. A 6.8 fixed is not a horrible rate for a non-secured loan with all the safety nets.
Back to the remaining $60,000. Perhaps you will decide to buy a house (not in school though) since you will be better off with a 20% downpayment versus a 5% downpayment. Better rate and no extra insurance because you have built in equity. Equity is good. The tax savings of being able to deduct the mortgage interest will help offset the unsub interest accrued for the most part. Keep in mind everything you finance will come at a cost: house, practice, car etc... It is far riskier to have a $60,000 mortgage than a $60,000 federal Unsub loan.
Even though your mortgage may be lower, the risk if you are out of work and can't pay it is far greater: they take your house, repossess your car etc. With an Unsub you can request a forbearance: you don't write a check but you are reponsible for the extra interest. They also come with automatic forgiveness if you die or are totally disabled which will be more valuable as you start a family etc. If you die owing on your mortgage, car, etc the creditor will simply get it out of your estate so there is an added cost to those debts in the form of insurance so your widow and the kids aren't left homeless.
Seems like a lot less risk to me. Most of my kids are in this repayment for a full 30 years and aren't prepaying on any of the sub/unsub loans etc or their GradPLUS at 8.5. They are putting money in retirement, paying off the house, practice etc and eliminating the risk.
As long as you are not simply spending the money on beer and a shiney new car, I think you would find yourself further ahead. As you mentioned you don't need funds for living (I'm assuming the family is helping) I would make sure they are set for retirement and then I would choose my housing based on what the max at the school is in case something happens to them and they can't afford your rent. I've seen it before and it's not pretty: now you are moving. I would also add a concept I've dubbed "man-pride". As long as they are supporting you, they will not treat you as a man, they will treat you as a boy. Part of growing up is understanding that dynamic and deciding that your autonomy is worth the extra in interest paid along the way. Best wishes at school.
 

plauto

10+ Year Member
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Sep 16, 2007
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Attending Physician
I'd pay as much as you can while balancing the need for long term investing.
 
OP
B

babylons

10+ Year Member
May 2, 2008
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Pre-Medical
AMDFAO, thanks for the detailed reply. I get your point. However, I already own a house, well my spouse and I pay the mortgage on it. He makes about $50,000 a year and has a steady job, that's why room and board are covered. We have no loans or debts of any kind, just $100,000 in savings in addition to about $20,000 in a 401K (non-Roth) to which we already contribute $4/5000 a year. I am trying to think long term and at the same time I don't want to feel chocked during my residency. I just got my finaid package and will need $29,000 in Stafford unsubsidized. Maybe I can use my savings to pay for half that much and take a loan out for the rest. I have to learn to balance my adversity to paying interest to a bank versus long term investment goals.
 

AMDFAO

AMDFAO
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May 31, 2007
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Sorry I thought you were a boy.
I'd consider paying off the house first if you have retirement covered (check into a roth for you since you won't be working and he can gift you the funds since your married) that way there during residency you don't have the added stress of the mortgage that can't be deferrred ever (but your loans may not be either for residency but you can request a forbearance, or make small payments). Once you enter the world of work, you'll be earning too much for a roth. I'd also consider if you plan on starting a family and will be back to one paycheck (his of $50,000) later on for a period of time since you could go into an income contingent repayment for that time. Hope that made sense.
 

hawk126

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Jun 10, 2007
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Congrats... not many folks have the self-discipline needed to sock that much away.

Since you're already a married homeowner and your household income is below the Roth threshold, you should absolutely plan on on fully funding Roth IRA's for both you and your husband during the next 8 years (4 yrs school + 4 years residency): $10,000 per year ($5000 per person) x 8 years = $80,000. Finance your education, even if you have to borrow $37,000 per year...

Set aside $20,000 for emergencies. Keep this emergency cash in a money market fund. As for the rest.... due to the fact that you can contribute $10,000 to your Roth IRA's total per year, I'd make my Roth contributions for this year and then buy $30,000 worth of CDs in $10,000 increments. You want the maturation periods of the CDs to be staggered such that you have $10,000 available in each of the next 3 years to sock away in your Roths. I'd invest the remaining $40,000 in a good bond fund and let it sit for the next 4 years. After your CDs have matured, start withdrawing from the bond fund in order to make your Roth contributions in years 5,6,7, and 8.

I know that borrowing to finance your education at 6.8% while the majority of your pile of cash "idles" in CDs/bond funds sounds crazy, but if you use the cash to pay for school, then you lose the opportunity to save for retirement in a Roth (you'll make too much after residency). The idea here is to take advantage of a good interest rate (6.8%) on unsecured debt and ramp up your retirement saving in a tax-free vehicle ASAP. If you've ever seen any of the retirement calculators on-line, then you know that saving for retirement earlier on in life is almost always better than waiting until later even if you sock away a ton of $ later. It's all about opportunity cost!!!

Consider also that your unsubsidized stafford interest doesn't even capitalize until month 6 of year number 5 (the principal is just accruing simple interest while you're in school), while your Roth equity positions are compounding!!! In the long run you definitely come out ahead especially since your Roth's accrue tax free and you student loan interest is tax deductible.

If you have some other safety net, i.e. no need for an emergency fund, then use the $20,000 to supplement your family income during the next 4 years and ramp up your husband's 401(k) contributions.

Nice problem to have. :thumbup:
 

Sol Rosenberg

Long Live the New Flesh!
10+ Year Member
Feb 12, 2006
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Attending Physician
Sorry I thought you were a boy.
I'd consider paying off the house first if you have retirement covered (check into a roth for you since you won't be working and he can gift you the funds since your married) that way there during residency you don't have the added stress of the mortgage that can't be deferrred ever (but your loans may not be either for residency but you can request a forbearance, or make small payments). Once you enter the world of work, you'll be earning too much for a roth. I'd also consider if you plan on starting a family and will be back to one paycheck (his of $50,000) later on for a period of time since you could go into an income contingent repayment for that time. Hope that made sense.
Sorry, but this is horrible advice and defeats the investment purposes for owning a home (leveraged gains.) I'd be doing the opposite -- looking to see if rates on home equity loans were less than Stafford loans, and taking cash out of the house.

But to the OPs question: OP, it depends upon how risk averse you are. You can invest the money and probably make a better return than 6.8% with relatively low-risk investments like index funds. You can do this in whatever vehicle you choose (Roth IRA (best now since you are in a low tax bracket,) Trad IRA, Brokerage account, etc.)) Personally, I would probably invest in real estate right now, if I had $100k burning a hole in my pocket. But, if you are debt averse, I would just use some of it to help you take out less in loans, and the rest to have for a rainy day. It is really hard to argue with such a strategy.