I want to invest some of my savings with a long-term strategy to use to pay back the loans I will be taking out for school; what kind of investment strategies or accounts should I consider?
I’m a 19-year-old college student who’s going into pre-med and then medical school without access to FASFA. I want to invest some of my savings with a long-term strategy to use to pay back the loans I will be taking out for school. What kind of investment strategies or accounts should I consider?
When investing long-term for higher potential returns, stock funds historically have an excellent yield. A Roth IRA account can provide tax-free growth while an individual taxable account will allow flexible withdrawals. You can diversify risk with a properly allocated ETF portfolio.
Congratulations on the choice to pursue medicine and on thinking so proacively about your long-term finances. I am sure you have done a lot of research on financial aid, but you may find talking with a specialist could identify additional financial aid opportunities to offset the costs of your education. School financial aid officers rarely understand financial planning and all the opportunities to maximize financial aid. Although it's great you are thinking about using investment returns to offset student loan costs, it would be even nicer to have fewer loans.
For the account type, if you want the money to be available for repaying student loans, you will need to use a normal (taxable) investment account. If you use a retirement account, you'll owe taxes and a penalty for withdrawing the money early. And unfortunately 529 plans must be used to pay current college expenses rather than pay off loans from previous years' expenses. Taxable investment accounts can be opened at any brokerage company, through a financial adviser, or even directly with a mutual fund company.
The downside of this is you will owe taxes on the returns, which will reduce your profits from the strategy. Depending on your student loan interest rate, your marginal tax rate, and of course the investment returns, you may actually make less money after taxes than the interest the loans are charging you. You will want to carefully calculate all of this to see if paying down the loans right away is the better option. Of course, if the loans are subsidized (based on your question I don't think they will be) then this strategy will be more likely to succeed.
Regarding the investments, since you are looking at probably 10 years before you finish medical school, then a broadly diversified stock portfolio would be appropriate. Even if a market downturn happens, you will have many years to recover while you are going through medical school. Keep in mind, this is only if the math works out on the investments being a better strategy than a guaranteed 'investment' in taking out less loans and paying less interest.
Another option is to split the difference. Use 80% to 90% of your savings to pay for med school and lower your interest costs by taking out less in loans. Then take a small amount (10% to 20%) of your savings and go with a very aggressive portfolio to try to overcome the taxes and interest rates. With this strategy, the vast majority of your money is guaranteed to help you by lowering your loan amount, but a small amount can be used for your strategy with higher returns by taking on more risk. Your high-risk portfolio could include funds which investment in small cap stocks, emerging markets, high-yield bonds, or even a few individual stocks.
This is one of those questions where I would want to talk with you more before giving any specific direction. If you'd like to schedule a consultation, we can talk over the pone a bit and I can give a little more advice. There will be no charge.
Over the long-run, you might expect to earn 8% - 10% when you invest. This isn't guaranteed though and you could go through long periods of time where your investments don't grow at all for you. Just to use a recent example, the S&P 500 lost an average of 1% per year from 2000-2009. I would hate for you to invest money now and have a similar experience over the next 10 years.
But let's assume you do earn 8% over the next several years while you are in school. That's a decent rate of return, but it's all before taxes are taken into account. Once you're out of school you're likely going to be in a high tax bracket considering your career track. So 8% pretax might be the equivalent of 6.5% or so after-tax. Is this enough to offset the interest you will be paying on your student loans? If your student loan interest rate is 6.5% or more then it's probably not.
If I were you then I would strongly consider using your savings to pay for tuition and other expenses along the way. This money won't be growing for you of course, but it will reduce the amount you have to borrow as well as the amount that you accrue interest on along the way.
You're going to be in a position in a few years to make significant contributions to your long-term investment accounts. In the meantime, I think the best thing you can do is reduce the amount of debt that you take on over the next several years.
If you do decide that you are going to invest then just be sure to stay away from any type of retirement account. You can't typically access money in retirement accounts until age 59.5 without penalty and taxes, so look to open up an individual investment account and invest in low-cost index funds.