How should I tackle future student loan debt?
I am 22 years old and currently applying to pharmacy schools. I've been accepted to one school and waiting to hear back from a few others. I'll likely incur somewhere from $150K-$200K in student loans after graduation. That number is incredibly daunting. I'd like advice on investment or savings strategies, so I can begin making headway on the loans before I graduate. I've opened a Roth IRA and am currently investing in ETFs. I also invest in lending club loans and a real estate crowdfunding site. How else can I further prepare myself for student debt?
Get ready for plenty ramen noodles ahead. Jokes aside, I admire your thinking and planning ahead. Advancing for further education helps boost income, but the initial hurdle to overcome a big student loan is intimidating. So, here are some suggestions to consider after working with many resident/fellow physicians:
1) Continue your Roth contribution every year and use low-cost broad index funds. Try to have only a couple of funds if you have a limited amount as over-diversification does not help the return.
2) Have a budget to know your expense and keep an eye on your credit score. Having a high credit score will help you refinance later with the private lenders. Believe it or not, your high GPA in finance is your advantage in negotiating a lower interest rate from those private lenders who want your business.
3) As soon as you’re eligible for an employer’s sponsored retirement plan, sign it up and fully fund it. It will help your tax. Best to you!
As a rule of thumb, it's best to keep your student loan debt less than or equal to what you will make upon graduation. With that being said, here is the answer to your question.
If you earn an income while you are in pharmacy school, you can set aside 10% of what you earn each year and you can start paying the loans back each year, before you graduate. (I am going to assume that you will have unsubsidized loans, which start accruing interest when you get the loan. If you have subsidized loans, wait until after you graduate to start paying them back.) If you aren't going to earn an income while in school, don't worry, you will be able to graduate and pay the loans off within 10 years if you do some proper financial planning. (Put 30% of your gross income towards your loans each year after graduating.) If you are a retail pharmacist, you will be earning around $100K per year, and if you choose to do residency, you will make $50K for a year or two, and then around $80K. (This obviously depends on the state in which you work.) Either one of these incomes will allow you to pay the loan back within 10 years.
As for investing the money to pay for your school, I would advise against it. Since you will start paying back your loans within 3 years or so, you run too great a risk of investing and having a poor result. It's best to save the money and keep it in a safe place, like a money market or cds. Proper growth investing should allow for at least 7 years without having to touch the funds, as this allows for a market cycle which in turn, allows for the best chance of having more money than what you started with. When it comes to investing, the shorter the time period, the more luck that is involved with the result. Thus, it wouldn't be wise to gamble with your Pharmacy school student loan funds.
Something else to consider about student loans is the manner in which you will start paying them back and what options are available for student loan forgiveness.
Questions you'll want to ask yourself: Should I consolidate them after graduating (i.e. rolling multiple loans into one)? Should I take a payment plan other than 10 years? There are Income Based or Repay As You Earn options available. Am I going to be working for a non-profit or in the private sector? Most, if not all, loan forgiveness programs are connected to public/non-profit organizations.
One of the nation's student loan gurus is Heather Jarvis and here is a link to her Resource & Tolls page on her website: http://askheatherjarvis.com/tools
More information that you may not even need, but more is better than not enough =) Good Luck!