Advice for Graduate Student

[danielmc]

Poll: If you have savings in your account, would you rather pay off student debt accruing at 5% or invest it to get higher yield?

[MYOM]

You are absolutely correct to want to zero out your debt. Home mortgages should be paid in 13 years. If you cannot pay cash for your next car then you have not earned the right to have it.

Stay debt free!

Dan Clemons retired Certified Financial Planner

[disgruntable]

Originally Posted by danielmc

The stock market looks appealing as today you could have had an intraday (i.e. 1-day) upswing of 20% on your investment and cash out.

Or it could have been a 20% downturn. The stock market is a long term game. Unless you're better educated than the average investor, short term investing is no better than roulette.

[KGeary]

Originally Posted by danielmc

I am a student in my last year of medical school with an income on the side. I have nearly $90,000 in debt from school and as far as savings go, I have $100,000 locked in a CD at 4.0% interest rate which I can't touch, and $40,000 in savings. I also make roth ira contributions.

So with the $40,000 in my savings, I was thinking about paying off all of my UNsubsidized loans which are accuring 4.8% interest rate by the day. I'm not getting anything better by my bank or ING direct. Some say the unsubsized loans I have is considered "good debt", as the unsubizided interest that accrues is tax-deductible and that you can invest the cash-on-hand elsehwere to get a higher return on investment (I frankly can't think of anywhere else I can a higher return on investment at this critical stage of our economy). Instinctively, I'd like to pay off my loans to have clean slate.

The stock market looks appealing as today you could have had an intraday (i.e. 1-day) upswing of 20% on your investment and cash out.

What is your take? Pay off my loans, invest my money somewhere,...etc?

You need to clear that debt. It's stupid to keep it and invest against it...people who recommend that fail to calculate risk and inflation...it's not worth it. If you don't aggressively attack those student loans you'll have them forever. When the CD is unlocked, I'd use that money to wipe out the rest of the loans. Be debt free as soon as possible.

Once that's done, you'll have $10k left over...put than in a money market savings account as an emergency fund.

Then you can start investing 15% of your income into your Roth (good if you already do this).

You can also start saving a house down payment in a separate money market savings account or money market fund.

In about 10 minutes and a few clicks of the mouse you can be ahead of 90% of the people you just graduated with as long as you make the right choices.

[simpletron]

Originally Posted by KGeary

It's stupid to keep it and invest against it...people who recommend that fail to calculate risk and inflation...it's not worth it. If you don't aggressively attack those student loans you'll have them forever.

what does inflation have to do with this decision? inflation eats away at both the debt and any investmest equally. so it has no impact either way.

risk, on the other hand, has a lot to do with this decision. there are investment risks with keeping the debt. and there are risks with paying off the debt.

the investment risks will depend on what you invest in and could be anything from prinplical and return risks to currency and country risks. you need to understand what you are investing in before you decide to invest. also the expected after-tax return needs to be higher than the after-tax return on the debt(4.8*(1-marginal tax rate)%).

the risks with paying it off has to do job lost and emergencies. if you don't get a job or lose a your job quickly then how are you going to pay the bills? ...credit card most likely (if you don't have savings) which has a much higher interest rate than your student loans. what if you need access to a large sum of money in a hurry?

10 to 30 years is not forever, it is just a long time.

the safer bet is to payoff the debt, but personally I keep debts that have an after-tax return of 6% or less because I can generally beat that in the stock market. my goal is to be debt free by the time I retire, not as soon as possible.

Tax-free money market funds
this looks interesting because it would make your student loan interest basically a "free tax deduction". I haven't looked into it because I don't have much cash on the sidelines. so do some research before putting your money here.

[bjl584]

From a purely mathematical standpoint it makes sense to wipe out the debt. But, from an emotional standpoint, if you were to wipe out the debt, you will also be wiping out much of your savings. With that goes financial leverage and peace of mind. Just something to consider.

[JinCO]

I wouldn't worry about the tax deductions available for the student loan interest. It is only tax deductible if you make less than a certain amount. I have never been able to deduct any student loan interest. If I was you I would pay it off.

[disneysteve]

I'm not sure we've got enough info.

Age. Married or single. Kids. Any debt other than student loans. Do you own your home. Current income. Anticipated income during residency (and how long of a residency are you doing).

100K is a big chunk of change to be locked up in a 4% CD. What made you do that? What other savings and investments do you have? Will you be eligible for a retirement plan when you start residency?

[jIM_Ohio]

I would at minimum cut the debt in half.

I see $140k of savings in cash, plus a Roth (what is that invested in?).

I see 90k in debt.

Worst case is you have 50k in savings and no debt- I would take that worst case.
You could pay 45k and have 95 still in savings.

How did you amass such savings?

[KGeary]

Originally Posted by simpletron

what does inflation have to do with this decision? inflation eats away at both the debt and any investmest equally. so it has no impact either way.

It helps you see the the smallness of the numbers better.

the risks with paying it off has to do job lost and emergencies. if you don't get a job or lose a your job quickly then how are you going to pay the bills? ...credit card most likely (if you don't have savings) which has a much higher interest rate than your student loans. what if you need access to a large sum of money in a hurry?

Or the $10,000 emergency fund?

[Seeker]

If you make less than 65K (single) or $135k (married), then the interest paid on student loans is fully deductible (regardless of itemization; this is off the top of income earned).

Tax Topics - Topic 456 Student Loan Interest Deduction

I'd also second paying off 50% with the cd, and re-evaluating where you want to go with the remainder in the future.

In order to say anything else, I'd want to know income versus expenses as well.

[Johansen8]

You don't want to come out of school with no available savings - not in this economy. If you have a secure job after you graduate, then you've got more than enough in savings to put a down payment on a house. Housing market's down - it's a good time to buy if you qualify for a loan (which you may not...but hey). You don't want to get all out on credit after you graduate because you spent all of your savings, and then end up with 12% interest rates on that...because that would be bad...and no job can really be secure at this point in the economy.

Pay off some of your loans by paying the minimum payment, plus some. The plus some now is not accruing interest, and they will eventually get paid off (because otherwise you're just paying the interest).