24 years old, have 170k in savings, about to begin medical school

[docfinad]

I'm a 24 years old who will be starting medical school soon. I'm fortunate enough to have 170k in savings, but because I'm the resident of a state without any public medical schools it looks as if I will be paying out 280-300k for medical school (which includes cost of living for those 4 years). If you could give me any insights as to how to best manage my current money to minimize my loan repayment time it would be greatly appreciated.

Because I graduated college early and have worked in clinical care/research for the last few years, I feel with reasonable certainty that I will go into one of two related sub-specialties. Of course this is subject to change once I start rotations, but these specialties are not all that competitive and I have >6 years of experience in them, so I feel reasonably certain I will pursue and end up in one of the two. Thus, my plans would be 6-8 years of residency/fellowship, followed by an estimated attending salary of between 200-400k/year. To be conservative, I would like an idea of what a plan would look like based off of something like 7 years of ~50k/yr salary followed by a 200k attending salary.

P.S. I also have a relatively new car (very reliable model) that should be good for at least the next ~6 years. Also, just to be completely clear, I do not currently have any debts of any kind.

Thank you so much for your insights!

[AlexxT]

Put the money into laddered bank CDs until it almost runs out.  In other words, assuming that you will need 45k each year for tuition and 15k for living expenses,then keep 30 k in cash, and another 30k in a six month bank CD, another 30 k in a 12 month CD, another 30 in an 18 month CD, and so on, until you run out of money.

When you're down to the last 20k, keep it as an emergency fund, and start living on student loans.

[G]

AlexxT wrote:

Put the money into laddered bank CDs until it almost runs out.  In other words, assuming that you will need 45k each year for tuition and 15k for living expenses,then keep 30 k in cash, and another 30k in a six month bank CD, another 30 k in a 12 month CD, another 30 in an 18 month CD, and so on, until you run out of money.

When you’re down to the last 20k, keep it as an emergency fund, and start living on student loans.

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Hard to argue against this plan; it is definitely safe and would work.  For me, I put my student loans in Vanguard Star and actually made a little money.  You might budget to have some money available to put into a Roth if you make any money in first or second year summer work.

[AlexxT]

G wrote:

For me, I put my student loans in Vanguard Star and actually made a little money.  You might budget to have some money available to put into a Roth if you make any money in first or second year summer work.

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I agree with the Roth option if he earns income.

As far as investing the money, I'm glad you did well with that choice, but it's risky.  He's essentially investing with borrowed money, since we know that he will need that money in 2 or 3 years.  So, if the market goes down, he'll have to borrow additional money at 6.8% to make up the difference, and he won't be able to pay that money back for 4 to 10 years, during which time it will be compounding at 6.8%.   The possibility of an average return on the investment of 7% for 2 or 3 years, vs the risk  of paying 6.8% for 10 years, makes the investment not worth the risk, in my opinion.  Of course, it just means that he'll have to borrow more.  It wouldn't be a catastrophe, but he would be essentially investing on margin, and that's  something I would never recommend.

[mamead]

AlexxT wrote:

G wrote:

For me, I put my student loans in Vanguard Star and actually made a little money.  You might budget to have some money available to put into a Roth if you make any money in first or second year summer work. 

Click to expand…

I agree with the Roth option if he earns income.

As far as investing the money, I’m glad you did well with that choice, but it’s risky.  He’s essentially investing with borrowed money, since we know that he will need that money in 2 or 3 years.  So, if the market goes down, he’ll have to borrow additional money at 6.8% to make up the difference, and he won’t be able to pay that money back for 4 to 10 years, during which time it will be compounding at 6.8%.   The possibility of an average return on the investment of 7% for 2 or 3 years, vs the risk  of paying 6.8% for 10 years, makes the investment not worth the risk, in my opinion.  Of course, it just means that he’ll have to borrow more.  It wouldn’t be a catastrophe, but he would be essentially investing on margin, and that’s  something I would never recommend.

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While I agree with your statement, just wanted to point out that nobody has been taking out new federal loans at 6.8% for 2-3 years. Student loans are now calculated based off the 10 year treasury note. for graduate loans, this is (10-year treasury note yield)+3.6%. For the past 3 years, this has been:

2012-2013: 6.8%

2014: 5.41%

2015: 6.21%

2015: 5.21%

2016: (?)

We find out the 2016-2017 loan rates in a few weeks, as the rate is based off the last 10 year treasury note auction before June of each year. It's been hovering around 1.8% the last month, so ~1.8+3.6 is ~5.4%.

My point is that sure, beating a guaranteed 6.8% return is hard to do. However, beating a 5.4% return isn't as difficult and with REPAYE, your effective interest rate is more likely to be 3.5-4% over the life of the loan.

With that in mind, I say invest the $170,000. Get it into a Roth while you are able. And pursue PSLF during residency and fellowship as it sounds like your career goals in research will have you practicing at an academic/nonprofit institution.

[AlexxT]

mamead wrote:

My point is that sure, beating a guaranteed 6.8% return is hard to do. However, beating a 5.4% return isn’t as difficult and with REPAYE, your effective interest rate is more likely to be 3.5-4% over the life of the loan.

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Thanks for the update on the student loans.  I was not aware that they now varied.

However, I strongly disagree on the issue of investing the money.

The figures you cite would  apply if it were a question of investing vs paying back an existing loan.  In that case,  I might invest the money in index funds rather than paying back the loan.  But this is a different situation.  This is the situation that prompts the standard advice you read about, over and over again: " Invest in index funds, but if you will need the money in 5-10 years, you should be in cash or fixed income".  This is the type of situation you will face as you approach retirement, or one you will face with 529 money as your children enter high school.  That's when you start to move money out of "risky" ( i.e. volatile ) investments and move them to more stable investments ( i.e. short term notes or bank CDs).  OP will need this money in two years.  That's extremely short term.

As I noted above, the risk of losing half your money over the next two years ( go look at the stock market in 2000 or 2008;  you may not have been following the stock market then, but I was! ) will result in his needing to borrow extra money, which he will be paying interest on for the next 10 years or so.  In other words, his potential average gain over the two years is about $10,000, and his potential  loss is $50,000 to $80,000, PLUS interest.    That's different than someone who is just investing that money for the long term, where the risk of a loss over the next 20 years is extremely low, close to zero.

 

[Zaphod]

mamead wrote:

AlexxT wrote:

G wrote:

For me, I put my student loans in Vanguard Star and actually made a little money.  You might budget to have some money available to put into a Roth if you make any money in first or second year summer work.

Click to expand…

I agree with the Roth option if he earns income.

As far as investing the money, I’m glad you did well with that choice, but it’s risky.  He’s essentially investing with borrowed money, since we know that he will need that money in 2 or 3 years.  So, if the market goes down, he’ll have to borrow additional money at 6.8% to make up the difference, and he won’t be able to pay that money back for 4 to 10 years, during which time it will be compounding at 6.8%.   The possibility of an average return on the investment of 7% for 2 or 3 years, vs the risk  of paying 6.8% for 10 years, makes the investment not worth the risk, in my opinion.  Of course, it just means that he’ll have to borrow more.  It wouldn’t be a catastrophe, but he would be essentially investing on margin, and that’s  something I would never recommend.

Click to expand…

While I agree with your statement, just wanted to point out that nobody has been taking out new federal loans at 6.8% for 2-3 years. Student loans are now calculated based off the 10 year treasury note. for graduate loans, this is (10-year treasury note yield)+3.6%. For the past 3 years, this has been:

2012-2013: 6.8%

2014: 5.41%

2015: 6.21%

2015: 5.21%

2016: (?)

We find out the 2016-2017 loan rates in a few weeks, as the rate is based off the last 10 year treasury note auction before June of each year. It’s been hovering around 1.8% the last month, so ~1.8+3.6 is ~5.4%.

My point is that sure, beating a guaranteed 6.8% return is hard to do. However, beating a 5.4% return isn’t as difficult and with REPAYE, your effective interest rate is more likely to be 3.5-4% over the life of the loan.

With that in mind, I say invest the $170,000. Get it into a Roth while you are able. And pursue PSLF during residency and fellowship as it sounds like your career goals in research will have you practicing at an academic/nonprofit institution.

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While loans will capitalize the accrued interest one time before you start paying them back, outside of that one time they do not compound. There is a cost to the loan which will be a number and known up front what it will be. Loans are simple interest, not compound. I still cannot believe how often people say statements in regards to this as if they are the same or you'd need a similar investment return on a consistent basis to do better than x% of a simple interest instrument. They are very different.

That doesnt mean one should invest their student loans, that is extremely risky for something you will need in short order.

[G]

Alexx and Zaphod, I don't disagree--your logic is sound.  I took on risk and came out ok.  Definitely lucky...the IRA that I created in med school in 1999 was negative by 2009!  Good thing I won't need that money for several more decades.

OP is significantly ahead of most matriculating med studs.  Heck...I don't think I had earned 170k in total before I was 30, let alone saved up that much!

[docfinad]

Thank you all for the help so far!

 

So if I'm understanding the general consensus correctly, it is that I should immediately pay for the first 1/2 of medical school in cash, then take out loans and pay as much as possible into them during residency/fellowship? I'm asking because I've also been told I should keep the 170k (in something like low risk index funds), take out loans for all 4 years, and pursue PSLF given the length of my residency/fellowship plans, but I'm not sure I would be allowed to take 300k in loans before burning through my liquid assets.

[jfoxcpacfp]

Our general advice is to invest only money that you will not need in the short term, defined as the next 5 years. In the case of OP, I would lengthen to the duration of residency/fellowship. Historically, we have experienced a bear market every 5.5 years. The last bear market ended in 2009. While we may go another 6 - 8 years w/o one (not unheard of), I would absolutely not bet on it. There are many readers of this forum who were listening to the news only during the last one (if at all) and so do not have the gritty experience of what it was really like to watch the value of your portfolio be cut in half. We are also near the tail end of one of the greatest bond bull markets in history - sure wouldn't bet it will be replicated.

otoh, the OP didn't say what the plans are for the $170k in savings. Fund school until it runs out and graduate with $110k - $130k in loans? Buy a house? My answer could change based upon that significant factor. Definitely will be able to contribute to Roth during school and set aside enough for that. Stongly agree with AlexxT's plan at this point.

[docfinad]

jfoxcpacfp wrote:

Our general advice is to invest only money that you will not need in the short term, defined as the next 5 years. In the case of OP, I would lengthen to the duration of residency/fellowship. Historically, we have experienced a bear market every 5.5 years. The last bear market ended in 2009. While we may go another 6 – 8 years w/o one (not unheard of), I would absolutely not bet on it. There are many readers of this forum who were listening to the news only during the last one (if at all) and so do not have the gritty experience of what it was really like to watch the value of your portfolio be cut in half. We are also near the tail end of one of the greatest bond bull markets in history – sure wouldn’t bet it will be replicated.

otoh, the OP didn’t say what the plans are for the $170k in savings. Fund school until it runs out and graduate with $110k – $130k in loans? Buy a house? My answer could change based upon that significant factor. Definitely will be able to contribute to Roth during school and set aside enough for that. Stongly agree with AlexxT’s plan at this point.

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My plans are to utilize the 170k in whatever way would allow me to minimize the amount of time I'm in debt. I'd be fine not buying a house for as long as necessary to accomplish this. What I don't know how to do is best utilize the money for means of this debt elimination. Do I pay for the first half of medical school in cash, graduate with 130k in loans, and pay into them as much as possible during residency/fellowship? Do I save it all in low-risk index funds, take loans for all 4 years, pay the minimum monthly payment and pursue PSLF because of the significant length of my residency/fellowship? etc

[jhwkr542]

I like the laddered CDs as well.  Your plans can change once you get into medical school and really get exposed to all the specialties (i.e. nobody ever goes into medical school planning on pathology, but that's what happened to me).  Also, don't take the maximum in loans allotted if you take out loans.  This was very important for me and it has saved me massive amounts of money.  LBYM and then see if you can cut back a little more 

[AlexxT]

Sorry, I hadn't considered the issue of loan forgiveness.  That makes this a more complicated question.

If your question is about relying on PSLF, you should realize that jobs which qualify for PSLF are not all that common.   While a physician might get a job working for a non-profit hospital, the actual employer  will often be the medical group, which is for-profit, and not the hospital itself.  This will be the case regardless of the specialty you go into.  Also, you don't want to be in a situation in which the tail ( your loans ) wag the dog ( your entire career ).

So, here are the variables to consider:

PSLF might be eliminated or changed, perhaps limiting the amount that can be forgiven or the income which would qualify.  You might change your career plans to a specialty less amenable to PSLF ( a specialty change is more likely than not ).  Your best job offer might not qualify for PSLF ( highly likely ), or the salary at the PSLF eligible job might be so much lower than the salary and a non-PSLF job that the loan forgiveness isn't worth the salary cut.

So I can certainly envision a situation in which you would be better off accumulating loans which will be paid off by PSLF.  However, I would be very wary about taking that chance.  Also, as you pointed out, you might not be given loans if you have 170 k sitting in the bank.  If you do have that option, and you have considered the points I raised in the preceding paragraph, then you could consider putting all that money into the Vanguard total index fund, and take your chances.  That way, you can go with PSLF if you qualify, but if not, just wait until the market is up and then you may want to pay off your loans with that money.   Given the PSLF option, which I hadn't considered, you may indeed want to go ahead and take that risk.  In that situation, if the market falls, you can just leave the money there for 10 years or so until it recovers.

Also, consider that you will be making payments on the PSLF loan for several years, so you will end up paying a considerable amount towards those loans even if you qualify for PSLF.  You'll need to do the math and figure out how much you'll end up paying and then run the numbers before you make a decision.

All things considered, I think it's a wash.  Either choice would be reasonable.  Personally, I would just pay for the tuition now.  This discussion came up here recently in a slightly different context, in a discussion about paying off a 3% mortgage early, vs investing.  The conclusion was that in addition to the guaranteed return of 3% you achieve by paying off the debt, there's the emotional satisfaction of being debt-free that adds to the benefits of paying off the loan.  I think that would push me towards using the money now for tuition.  But given the issue of PSLF, I would not criticize you if you chose to borrow the full amount and invest the loans.

Either way, given that you have already saved so much money, I expect that you will do very well financially in the future.

[docfinad]

AlexxT wrote:

Sorry, I hadn’t considered the issue of loan forgiveness.  That makes this a more complicated question.

If your question is about relying on PSLF, you should realize that jobs which qualify for PSLF are not all that common.   While a physician might get a job working for a non-profit hospital, the actual employer  will often be the medical group, which is for-profit, and not the hospital itself.  This will be the case regardless of the specialty you go into.  Also, you don’t want to be in a situation in which the tail ( your loans ) wag the dog ( your entire career ).

So, here are the variables to consider:

PSLF might be eliminated or changed, perhaps limiting the amount that can be forgiven or the income which would qualify.  You might change your career plans to a specialty less amenable to PSLF ( a specialty change is more likely than not ).  Your best job offer might not qualify for PSLF ( highly likely ), or the salary at the PSLF eligible job might be so much lower than the salary and a non-PSLF job that the loan forgiveness isn’t worth the salary cut.

So I can certainly envision a situation in which you would be better off accumulating loans which will be paid off by PSLF.  However, I would be very wary about taking that chance.  Also, as you pointed out, you might not be given loans if you have 170 k sitting in the bank.  If you do have that option, and you have considered the points I raised in the preceding paragraph, then you could consider putting all that money into the Vanguard total index fund, and take your chances.  That way, you can go with PSLF if you qualify, but if not, just wait until the market is up and then you may want to pay off your loans with that money.   Given the PSLF option, which I hadn’t considered, you may indeed want to go ahead and take that risk.  In that situation, if the market falls, you can just leave the money there for 10 years or so until it recovers.

Also, consider that you will be making payments on the PSLF loan for several years, so you will end up paying a considerable amount towards those loans even if you qualify for PSLF.  You’ll need to do the math and figure out how much you’ll end up paying and then run the numbers before you make a decision.

All things considered, I think it’s a wash.  Either choice would be reasonable.  Personally, I would just pay for the tuition now.  This discussion came up here recently in a slightly different context, in a discussion about paying off a 3% mortgage early, vs investing.  The conclusion was that in addition to the guaranteed return of 3% you achieve by paying off the debt, there’s the emotional satisfaction of being debt-free that adds to the benefits of paying off the loan.  I think that would push me towards using the money now for tuition.  But given the issue of PSLF, I would not criticize you if you chose to borrow the full amount and invest the loans.

Either way, given that you have already saved so much money, I expect that you will do very well financially in the future.

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I tend to be conservative when it comes to long-term financial plans. Thus, unless there was a HUGE advantage to doing PSLF, I think I'd rather have the peace of mind of knowing exactly how much I have to pay and when I will have the loans paid for, rather than worrying if the government will cancel PSLF leaving me with all the debt I accrued by paying the minimum payments, etc.

In the case of not doing PSLF, would I minimize debt by paying 100% of the first two years of school upfront followed by taking out loans for 100% of the next two years, or would some type of "intermediate" payment plan be better? I'm guessing interest accrual would be minimized by the first option, but just making sure.

[AlexxT]

I would pay for tuition up front, until I run out of money, but I don't think it will make much difference.   But as you suggested, perhaps you won't be able to get loans while you still have so much in assets.  Ask at your school first.  You may not have a choice.