Hi there,My fiancee and I are graduating from med school May 11th, and getting married May 19th. We will be entering our marriage with a TON of school loan debt. My question is whether it would pay off for us to start investing during our residency (3 yrs) program, or use every dime to pay off school loans. Our interest rate is floating somewhere around 8.25% on loans. Thanks for any advice!JLH
I'm sure there are folks on various other boards here at the Fool that can give you more detailed advice on such a situation, but it seems that you'd do well to consider how much of a return on investments you expect over the life of your loans. If you can invest while paying off loans and earn more than 8.25, then it seems you should invest. But if you were thinking more along the lines of a Money Market or CD, then it certainly seems wiser to go ahead and pay off the school loan.Good luck!
Hi harker12,My opinion is that you want top pay off the higher-rate loans. If your loans are averaging 8.25%, some are going to be higher. Remember, the momey that you use to pay off the loans is after tax, so you need a higher rate of return from your investments just to match it.One of the things that sticks in my head is the article about Buffett in Forbes, where he expected a 7% return over the next 20 years. Now, he could well be wrong, but would you like to have the possibility of a compounded 7% return whilst your loans have been compounding at 8.25%?To my mind, loans under 5% can be considered to be optional, but over that, I tend to think of clearing them off as soon as I can afford to.Just a thought,Lost
One other thing to keep in mind is that school loans often offer some tax breaks that you won't find with most types of debt. So while your interest rate is 8.5%, if you get to write off that interest then you effectively have a somewhat lower rate.The best approach is probably one of balance. Put away some savings in a rainy-day type of account, put some money away in longer-term savings/investments, and maybe pay some extra on your school loans to help pay them off sooner. And don't forget to spend at least a little on yourselves- I like my doctors happy! ;-)I reckon the folks over at the "Fools and their Money" or the "Taxation Strategies" boards could go into more detail for you, especially on the tax issues around student loans. -JG3
jg3jlo wrote:One other thing to keep in mind is that school loans often offer some tax breaks that you won't find with most types of debt. So while your interest rate is 8.5%, if you get to write off that interest then you effectively have a somewhat lower rate.This is true, but there are quite a few restrictions. Probably the worst is that student loan interest paid is not deductible if AGI is over $60,000 (filing single) or $75,000 (married, filing joint), yet another example of the marriage penalty.For more info, check the details on the IRS Web site at:http://www.irs.gov/prod/tax_edu/teletax/tc456.html---MountainGuy (who gets excluded from this deduction and so rolled a hunk of his wife's student loan into a HELOC)
Thank you all for your input. In addition to the original question I posted, I'd like to know what you advise me to invest in. I know we should max out our Roth IRA's. I also have figured out a good budget for us to pay off our loans in a 10 yr period, so that is also covered. Any advice if I have an additional $100/month or so to invest? Thanks,JLH
Do you have an emergency fund setup? If not, that $100 month would work well in a money market. You never know when the money could be needed. The usual rule of thumb is 3-6 months income.Smitty
No, I have budgeted myself money for an emergency fund, and still find I have about $100 per month above all budget categories. I have even given myself a generous entertainment budget. Where should that money go as far as investing? It isn't a lot, but it adds up over time.
Where should that money go as far as investing?Send it to me. That would yield the maximum return on investment.
In addition to the original question I posted, I'd like to know what you advise me to invest in. I know we should max out our Roth IRA's. I also have figured out a good budget for us to pay off our loans in a 10 yr period, so that is also covered. Any advice if I have an additional $100/month or so to invest? Well, I don't think anyone will be too keen on giving you advice as to what to invest in...that has to be your decision.With $100/mo. you can open an account with Buy&Hold and either put the money into individual stock(s) or index shares. If you have the minimum investment available, you could also open an index fund and put the money in there. (Most index funds have fairly high minimum investments, though--Vanguard's is $3000. The other alternative is to invest in index shares like SPY, QQQ, or DIA through a brokerage such as Buy&Hold...)Ellen
A lot of your decision depends on what you are saving for. If you are going for long-term savings with no definite plans for it (therefore you can afford some risk), stocks and mutual funds (index fund) are usually a good bet, although at $100/month the brokerage fees would be taking a pretty hefty chunk so you might want to save it in a money market account in the mean time and buy shares every 6-12 months.If you have a goal for the money, like saving for a down payment on a house, then where you save it depends on your risk tolerance and time frame. Money market funds and CD accounts aren't glamorous, but they return a decent rate, are low risk (often FDIC insured), and are certainly nothing to sneeze at.One other thing to consider, if you haven't already, is some sort of disability insurance. Your ability to work is your greatest asset, especially when you are first starting out. Again, disability insurance isn't at all glamorous, but it can really save the day when you need it. The folks over at the Insurance board can give you more details about where to look, how much to buy, etc. -JG3
You might want to check out some of the funds at T. Rowe Prices. They have no load funds and can take the money out of your account monthly and put it in the funds with no transaction costs. There are other places that will do that too (putnam, fidelity, guinness flight). That way you never are tempted to spend the money and it also helps with dollar-cost averaging to help with the volatility in today's market.Smitty7
I have been using T Row Price for about two years now. I'm only putting in $50 per month into an index fund (saving for the emergency fund in my first priority). It's convenient, and so far I have been happy with the service (although not the returns, but you can't hold them accountable for the market). They take it right out of my checking account on payday. I don't think about it. And even with the market down, I have still gotten some good returns.
Thanks for the advice. As a novice investor, I am finding there are quite a few options out there, even for a small time investor such as myself.
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