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Does it always make sense to forego loans if they aren't needed?

Discussion in 'Financial Aid' started by kubyx, Sep 2, 2017.

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  1. kubyx

    kubyx

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    Oct 2, 2016
    I'm starting to gear up for my interviews and I'm trying to get my financial house in order. One thing that has me confused is whether or not loans always make sense.

    I'm pretty fortunate to have a fairly high-paying job right now. I'm a nontrad ~6 years out of college, and I have been heavily investing since college. I'm at a point where I can likely pay off all 4 years of medical school out of my investments if I can sell my house for the value I'm estimating it to be next year, but it will be tight.

    My concern here is that there might be certain perks of having loans that I'm not aware of. For example, I would hate to burn through my investments to pay for tuition, only to find that a job offering loan reimbursements is no longer an available perk. Then again, rates for loans are like 7% right now, so I'm not sure it makes any sense to not pay them off immediately. Am I missing anything?
     
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  3. BorntobeDO?

    BorntobeDO? SDN Bronze Donor Bronze Donor 2+ Year Member

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    Nov 13, 2013
    You can always make it a sign on bonus instead of 'loan repayment' anyway. They tax them both the same, so I don't see what you have to lose. Not having debt will put you so far ahead its not even funny.
     
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  4. hipsnontrad

    hipsnontrad

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    Aug 24, 2016
    I have been trying to figure this out as well. I will probably run out of money my last year and I'm scared to live without a savings buffer. I've thought about doing some loans to give me options and if I end up having enough money at the end to just pay them off.
    It will be a balancing game for sure with loan rates, cash flow, savings, and time. I'm also slightly concerned about after med school to support a family on a residents salary which was why I was also thinking I would get some loans just to have a buffer through the whole process.
    I do plan on selling a lot of my investments while in school because long term capital gains tax is 0% for federal if you make less than 73k a year and are married filing jointly.
    After that it jumps up to 15% to 25%
    One other thing I am not sure on is if having assets and investments disqualifies you from some financial aid options.


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  5. BorntobeDO?

    BorntobeDO? SDN Bronze Donor Bronze Donor 2+ Year Member

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    Nov 13, 2013
    Remember that you can supplement your income after the first year of residency thru moonlighting. Investment assets will disqualify you from need-based aid, but many schools don't do much of that anyway. Some schools will try and force you to liquidate assets (including retirement accounts) before they will give loans, so make sure you don't report 401k on your FASFA (its not required for FASFA, but the schools will sometimes ask you to list it, don't do it, not required and can only hurt you!). You do have to list regular investments tho. But with the way the interest rates are on the debt (6%+) its hard to beat with investments anyhow (well, maybe not a really good REIT).

    I understand the appeal of compound interest, but it is working against you with student loans as well. There may be a slight mathematical advantage of investing if you can perform above the average investor, but the market may tank also. The argument for not paying out of pocket is that the student loans are in deferment, so they aren't allow to capitalize during school. Also if you consolidate and use REPAYE as soon as you graduate, it will pay half of whatever interest is left over after your minimum monthly payment. Exp: you have 1000 of interest a month, your required payment is 250, the government will pick up the tab on half of the remaining 750, effectively lowering your interest rate. So taking all that in account, you maybe able to beat the debt with growth.

    Personally, I know from my past loans that they are a PITA to get rid of, if I had the option, I wouldn't get them at all. That is perhaps a slight emotional decision, but its one that would make your life easier after residency. If you are planning a really long residency, perhaps it is worth it to keep investments, but it depends on the amount you have to start with. There is a decent chance the loans will grow faster, and you may have say 400k in investments in 10 years, but 500k in loans. That would be a poor outcome IMO, because you basically need to leave the money in to keep getting the benefits of compounding, but your debt beat you out. You still end up with a small starter home and living like a resident for even longer while you try and knockout the loans.
     
  6. hipsnontrad

    hipsnontrad

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    1
    Aug 24, 2016
    Thanks, that's good info. I've also thought about selling current investments to pay down a mortgage a bunch. Primary residence is also not counted, however, investment properties do count. I have switched the extra I was paying on my rental to the minimum and moved it to primary residence.


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  7. BorntobeDO?

    BorntobeDO? SDN Bronze Donor Bronze Donor 2+ Year Member

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    Nov 13, 2013
    So you are trying to sell a rental and keep your current house? Are you in a school where you can use your current residence? If you are I would consider keeping it, but I wouldn't let it bias me towards residency (i.e. if I wanted gas, and there is no anesthesia in my town, I wouldn't pick a different specialty just to keep the house). Houses that you live in are nice because you can qualify for a lot of non school aid (not just financial, but think food stamps if you have family since no income) and they don't count as assets. I trust real estate more then the market, but some people say now that derivative swapping is back and triple B bonds that real estate is gonna tank again in a couple years. That doesn't matter if you bought before this summer, and I would argue that it risk is alleviated if you are able to sell your rental 'high.' Good problems to have.
     

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