Author Topic: school debts and investing  (Read 4039 times)

wallaceiii

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school debts and investing
« on: September 20, 2014, 09:56:44 AM »
Hello all,

I am trying to figure out what makes the most financial sense.  I currently have around $60k invested in the markets and am going to graduate school.  Tuition and fees are about $45k a year for 4 years.  Once I graduate my salary should start around $100k.  Should I dump all of my investments into paying for school? Or hold onto them and let them grow, and then once I graduate pay off my debt as fast as possible with my income?

GizmoTX

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Re: school debts and investing
« Reply #1 on: September 20, 2014, 11:51:13 AM »
Why will graduate school take you 4 years?
How will you feel if there's a market correction & you lose a significant amount of your investments?

rweba

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Re: school debts and investing
« Reply #2 on: September 20, 2014, 12:22:37 PM »
I am also curious what kind of grad school costs 45K a year for 4 years. Or are you talking about medical school?

As far as your question, I think the canonical answer is to compare the interest rate on your student loan with the expected market return of 7-8%.

If the interest rate is less than 5% then it probably makes financial sense to not rush to pay off the loan. More than that I'd say pay it off as quickly as possible. That's what I would do at least.

wallaceiii

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Re: school debts and investing
« Reply #3 on: September 20, 2014, 01:05:12 PM »
dental school.. first year rate was 5.4% This years rate is 6.2%...
I don't care about a market correction because I am interested in long term, not looking to make a quick buckaroo

myrax

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Re: school debts and investing
« Reply #4 on: September 20, 2014, 02:01:02 PM »
You can calculate the financial impacts over a 15 year timeline, or whatever your relevant time frame is, using your estimate of the interest rate, and possible tuition increases, and your estimated rate of return on your investments.

It looks like your interest rate is approaching a reasonable expectation of market returns (7%). At the same time, the "return" on avoiding paying interest rates is guaranteed, making it possibly more favorable than the market returns, and the interest payments are tax deductible. On the other hand, you won't be able to fall back on your investments if there is an emergency, and having debt can be limiting.

Finally, are you able to take out subsidized loans where the government covers accumulated interest while you are in school? About half of my grad school loans were subsidized. If you are in the US and are eligible for federal subsidized loans, it makes the calculations more difficult, but also the answer more obvious- use subsidized loans to the fullest extent possible.

Good luck!

clarkfan1979

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Re: school debts and investing
« Reply #5 on: September 20, 2014, 05:34:37 PM »
If you can get subsidized loans go for it. If you have to pay 6.2% interest than I would sell the investments to pay for school.

mozar

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Re: school debts and investing
« Reply #6 on: September 20, 2014, 07:49:12 PM »
Can you work part time now and pay for some classes that way? I would keep your stache for the psychological boost, and pay off the loans with your income. I accumulated $135k in student loans and my starting pay was $55k (stupid, I know). It took me 5 years to pay it off. But I'm glad I'm done. And I'm glad I kept the little bit of mutual funds I've had for a long time.

larmando

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Re: school debts and investing
« Reply #7 on: September 21, 2014, 01:14:34 AM »
I think that depends first of all on how much the interest on your student debt is and will be, how much you think the markets will give you in the next 4 years, and how you will feel if you divest to pay for school and the markets go up for 4 years straight, or, conversely, if you stay invested and the markets drop 40% or so at some point. And also how secure is your 100K job, and how risk prone or adverse you are.

Faced with a similar decision (w.r.t. a mortgage) I decided that debt well below 4% might make sense not to repay straight away, as the "safe" withdrawal rate is calculated at 4%, and basically any money in the markets *should* repay your interest on the same amount of money, plus inflation, with some risk covered by the interest being "well below" 4%. If the debt is at or above 4% the call is tighter. Definitely at 5-6% or more I would pay the debt first.

larmando

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Re: school debts and investing
« Reply #8 on: September 21, 2014, 01:18:46 AM »
Also, will you face a hefty tax bill if you sell the 60K? (is a significant part of it in gains? what's the capital gains tax where you are, do you have any tax advantaged accounts?)

wallaceiii

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Re: school debts and investing
« Reply #9 on: September 21, 2014, 11:48:35 AM »
Am in USA so would pay long term capital gains rates of 15%.  Also due to recent run up in the markets a nice slice is from gains.  What I am having trouble calculating in a projection is the opportunity cost of paying down part of my loans vs. letting my 'Stache grow with the capital gains compounding...

larmando

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Re: school debts and investing
« Reply #10 on: September 21, 2014, 12:19:53 PM »
Compounding is great, but if your debt is compounding at 5.4% and 6.2% interest "on the other side", there's no real advantage. You'd have investments *possibly* earning that rate, plus volatility and risk, and debt surely growing at a similar or higher rate.

wallaceiii

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Re: school debts and investing
« Reply #11 on: September 21, 2014, 12:38:27 PM »
The debt is unsubsidized, but the interest is non-compounding.  I have been trying to just pay the interest and leave the principal.  Whatever interest is not paid at the end of the 4 years gets tacked onto the principal.

larmando

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Re: school debts and investing
« Reply #12 on: September 21, 2014, 02:12:21 PM »
It's sort-of-compounding even if it seems it's not: whatever money you pay in interest is money that's not compounding elsewhere. So, sure, your principal is not growing like crazy, but it's dragging you down at the same level, without making you bankrupt.

And when interest is "tacked onto the principal" it's actually compounding (as you now pay interest, on that).