Best use of $40k – student loans, taxable account, or 529?

[Nebulus2012]

Hi all,



I am looking for advice regarding the best way to utilize some extra cash from a recent real estate sale.



A bit about myself – I am a resident who has ~ 15 months left in my training, and my wife is a pharmacist currently at home with our new daughter. We have 340k of student loans between us, consolidated a variable rate that is currently ~5%.



Our roth IRAs are both fully funded for 2017, and my 401k will be fully funded by the end of the year. These are our only current investments.



Question #1 – From the home proceeds, we are planning on putting a large chunk aside for a down payment on our next home. So, my first question for is what would be the best place to park this money for ~12 months? I was thinking a high-interest savings account (maybe via an online-only bank?) or a 12-month CD.



Question #2 – After the down payment is put aside and we put some cash towards student loans, we’ll have ~$40k extra left over from the sale. Should we just put more towards our student loan principal? Or should we start a 529 for our daughter? Or should we start a new, post-tax/taxable retirement savings account with Vanguard? Maybe a mixture of these options?



Thanks guys! Any and all advice is appreciated!

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[sazerac]

What a nice problem to have. And how refreshing to get questions from somebody who knows what they are doing.

1. High interest savings internet account like Ally or Capital One 360. Reasoning: you need the money in 12 months, so risk of investment loss won't justify reward of investment gain.

2a. Wow, you maximized your tax advantaged accounts and still have $ left over? Nice. Do you have 3 months of expenses saved up for emergencies yet? If not, set aside that much in the same kind of bank as question 1.

2b. Do you qualify for an HSA? If so, open one for the amazing tax free investing.

2c. The next step would be to open that 529 but only to maximize any tax deductions or state matching funds (i.e. free money). Here in Louisiana that is only $4800 per year per child per married couple.

2d. Now pay off those student loans.

Oh, and set aside a few bucks to buy a copy of The White Coat Investor book. There is a whole chapter devoted to the question of where best to put excess savings, with a nice ordered list.

 

[Nebulus2012]

Sazerac,

Thank you for your detailed response!

1.) I agree - given the benefits liquidity in this situation, I'm favoring a high interested savings account over a CD.

2.) We will have 30k in checking and 10k in savings, so no worries on the emergency fund.

3.) Honestly, I haven't looked into a HSA yet. Will check to see if I qualify under my health insurance now.

4.) I'm in MA, so no state matching for 529, and only $2000 state income tax deductions per year per child for a married couple

5.) I'm an avid WCI fan - read the book as soon as it came out, and currently posted this very same question on his forums. However, I'll have to go re-read it again since I seem to have forgotten his investment ordering!

Thanks!!

 

[Smart Money MD]

I agree with @sazerac with the recommendations. Do you plan to purchase a home in the same area after graduation? If you end up moving elsewhere after your training, I would still strongly recommend renting unless you have strong ties to the area and you know that you're going to stay put for a few years.

 

[The White Coat Investor]

$340K at 5% variable and you're thinking about parking it in a 1% savings account? Say that out loud once or twice and I'm sure you'll come to the right decision. (This assumes you're not going for PSLF of course.)

Pay for your education before paying for that of your kids. And I think a 5% guaranteed return is awfully attractive in comparison to a taxable account.

I'd put the whole wad toward student loans and if you need to buy a house before you can pay those off and save up a down payment, use a doctor mortgage loan.

 

[Nebulus2012]

$340K at 5% variable and you're thinking about parking it in a 1% savings account? Say that out loud once or twice and I'm sure you'll come to the right decision. (This assumes you're not going for PSLF of course.)

Pay for your education before paying for that of your kids. And I think a 5% guaranteed return is awfully attractive in comparison to a taxable account.

I'd put the whole wad toward student loans and if you need to buy a house before you can pay those off and save up a down payment, use a doctor mortgage loan.

WCI - thanks for the response! I love your website, book, and forums - currently have this question listed over there as well.

For a host of reasons, we certainly want to buy a home in 15 months once we move and I begin my work as an attending. With that in mind, we wanted to keep a chunk of the cash liquid for the year, so that we can move on a house in the Spring of 2018 once we know where we are heading.

I've been convinced, at this point, to put more towards students loans. We'll probably just hold 175-200k aside for a down payment, and put 125-150k towards the loans.

Forget the taxable account, I agree.

For the 529 - we get a small tax benefit in MA, and wouldn't it be nice to let some cash compound for a full 18 years?

Lastly, we were thinking about putting almost all of it towards student loans and doing a doctor mortgage. However, those are much less common these days, and they depend on the lender/state. In addition, even if we found one, by only putting 5-10% down, wouldn't that (1) INC the chance of not getting the mortgage approved, (2) worry the sellers and perhaps convince them to take someone else's offer with 20%+ down, and (3) have increased costs due to PMI??

Thanks!

 

[The White Coat Investor]

WCI - thanks for the response! I love your website, book, and forums - currently have this question listed over there as well.

For a host of reasons, we certainly want to buy a home in 15 months once we move and I begin my work as an attending. With that in mind, we wanted to keep a chunk of the cash liquid for the year, so that we can move on a house in the Spring of 2018 once we know where we are heading.

I've been convinced, at this point, to put more towards students loans. We'll probably just hold 175-200k aside for a down payment, and put 125-150k towards the loans.

Forget the taxable account, I agree.

For the 529 - we get a small tax benefit in MA, and wouldn't it be nice to let some cash compound for a full 18 years?

Lastly, we were thinking about putting almost all of it towards student loans and doing a doctor mortgage. However, those are much less common these days, and they depend on the lender/state. In addition, even if we found one, by only putting 5-10% down, wouldn't that (1) INC the chance of not getting the mortgage approved, (2) worry the sellers and perhaps convince them to take someone else's offer with 20%+ down, and (3) have increased costs due to PMI??

Thanks!

They're not rare at all. It seems every couple of months I find a new bank doing them. I wouldn't expect it to significantly change the likelihood of getting approved nor would it worry the sellers much. There is no PMI with a doctor loan. Fees and interest rates can be a little higher though. No free lunch.

Seems silly to me to hold 6%+ non-deductible student loans when you could be holding 3% deductible mortgage debt. But you're doing so well this is all likely a temporary issue. 5 years from now this will all be far in the rear view mirror. The student loans will be gone and you'll be on track to paying off the mortgage very early.

 

[Nebulus2012]

They're not rare at all. It seems every couple of months I find a new bank doing them. I wouldn't expect it to significantly change the likelihood of getting approved nor would it worry the sellers much. There is no PMI with a doctor loan. Fees and interest rates can be a little higher though. No free lunch.

Seems silly to me to hold 6%+ non-deductible student loans when you could be holding 3% deductible mortgage debt. But you're doing so well this is all likely a temporary issue. 5 years from now this will all be far in the rear view mirror. The student loans will be gone and you'll be on track to paying off the mortgage very early.

Thanks for the advice, Jim! To be honest, the fact that I am even attempting to pay down this debt so aggressively (and to then subsequently take out a 15-year fixed rate mortgage and pay it down early) is largely due to your writing.

I'm going to look into the physician mortgage loans a bit more. We bank with BOA, and it looks like they offer them (per your website, anyway). I'll probably email Cindy and ask for the relevant contact information so that we can learn more.

I assume that, for most of them, a signed employment contract will work (rather than pay stubs)?

Also, when you say "higher interest rates", any idea how much higher? Looks like fixed 15-year jumbo is around 3% these days, and 4% for the 30-year. I wonder if the doc loans are just a bit higher, or truly 1-2% more....

Will need to do some more research.

Thanks again!

 

[The White Coat Investor]

Yes. Contract is good for most doctor loans. And many times it's only 1/4% hgher.

 

[fahimaz7]

Nvm