$101,000 to 'play' with...what would you do?

[Cancun]

First time poster here.

The stats:

- I'm 39

- I make $93,000 per year in secure career in Florida (No state sales tax) ... or $7,750 monthly gross / $6,045 monthly net ... or $72,540 yearly net.

- My rent and ALL living expenses is $2,400 per month (including the student loan) ... or $28,800 per year.

- No wife/kids or girlfriend at the moment.

- I'm maxing out my 401k, Roth and HSA (mostly Vanguard funds)... @ $23,000 yearly net

- I save @ 45% of my take home pay after maxing out the tax-deferred accounts ... @ $20,000 yearly net

- I live frugally.

- I only have one debt...a school loan costing $700 per month for the next 22 years. The remaining balance of $176,000 at 5.1% has already been federally consolidated and I'm in the IBR (Income Base Repayment) plan (not employed by a non-profit). According to my tax attorney, It's unwise to make additional payments and reduce the balance since anything remaining after 22 years will be forgiven.


The bottom line:

- I have $80,000 in an online savings account. ... I could purchase other assets with this money.

$50,000 is reserved for purchasing rental properties.
$30,000 is for 'emergencies'

- I have $3,000 in Prosper.com. I may place more.


The reason for the post....

I have $101,000 in cash (or $151,000 total spendable cash) sitting in a taxable TD Ameritrade account, ready to go.
Again, I could purchase other assets with this money.


What would you do?


Thank you in advance!

[WHL]

I don't understand your student loan situation. $700 / month * 12 months * 22 years is $184,800 - are you saying that after those payments, there is an additional 176k that will be forgiven? Or is the current balance 176k @ 5.1% interest?

I also don't understand your retirement contributions. $17,500 for a 401k, $5500 for a Roth IRA, and $3250 for a HSA is a total of $26,250. I can understand you factoring the Roth IRA with net dollars, but not the other two contributions.

Now, more to your question: I would move the taxable dollars to Vanguard I know nothing about TD but I know that Vanguard has all of my money...it will also be impossible for anyone here to tell you what to do without knowing the current asset allocation you're contributing to with your retirement investments. A basic 3-fund portfolio should serve you well, however.

[dimdum]

You need to determine what AA you want.

Are you conservation, moderate or aggressive ?

For conservative 40/60 bonds/stocks
Aggressive 20/80 bonds/stocks.

Once you determine that, you need to decide, whether you want to enter market slowly or all in one go.
Dipping your feet in mkt slowly is always good.

Let's start with 15K.

One correction- For taxable account, you should buy state or national Muni Intermediate term.- 6k (40%)
Total US stock mkt index - 5.25k (35%)
Total intl mkt - 3.75k (25%)

[Cancun]

Hi WHL. Sorry for any confusion regarding the loans and tax-deferred accounts.

The loan balance remaining is $176,000 at 5.1%. The IBR and how it's calculated is based upon my AGI. It fluctuates with the current tax years AGI. My tax attorney said to pay the minimum.

My 401k, ROTH, and HSA are mainly Vanguard funds already. That appears to be your preference as well...Vanguard. Thank you!

********

Hi dimdum. I'm a aggressive investor based on my lifestyle or lack thereof.

The 80/20 AA is my current allocation for the tax-deferred accounts and will be the same for the taxable TD account.

I plan on entering the market slowly. Historically, February is a bear month based upon my findings so I'm waiting a few weeks to see if I'm right. 15k is exactly what I allocated for my first band. I'm in no hurry.

You like Muni's aye...hmm...I already have VTI and the Intl/Emerging funds earmarked. Thank you for the quick response!

[HomerJ]

I wouldn't "play" with half of my assets, that's for sure.

If you're an 80/20 investor, buy a Vanguard Bond index fund in your 401k and/or IRAs (keep it tax-sheltered so you don't have to pay taxes on the dividends), and invest the taxable money in the Vanguard Total Stock Market Index Fund... It's very tax-efficient... No capital gains to speak off, and the dividends are about 2% a year, which you pay 15% tax on... And the fees for TSM are amazingly low... $100,000 in TSM costs $60 a year in fees... 0.06% fees... compare that to many active funds that charge 1% or more...

$1000 a year in fees, or $60?

[Karamatsu]

Actually the first thing I would do is pay off the student loans. There is the moral argument, first and foremost, of course, but as a lender yourself I'm sure you don't need someone telling you that. Just from a financial point of view, though, eliminating that 5.1% drag on your earnings is worth something, as is being free and clear of all debts. It's a very good feeling. Of course, you don't have to do it all at once. Spread it out over few years, maybe.

Beyond that, as people have said, you need to work out an asset allocation plan. If you read some of the books, like The Bogleheads Guide to Investing, they'll get you going. I'd also read Zvi Bodie's Risk Less and Prosper. There is something to be said, at your age, and with your savings rate, for building a solid inflation-proof financial foundation for the rest of your life first, then think about playing around with added risk. But there are experts here who can help once you have ideas about an AA.

[fcox85]

Also, someone correct me if I'm wrong, but whatever balance is forgiven at the end of your student loan repayment term will be treated as taxable income in the year it is forgiven, right? Something else to consider.

[NYBoglehead]

I'd make a huge payment toward getting rid of the loans. 5.1% is at least 6 times what you could find at the best online bank offering the best promotional interest rates right now. Why hang on to them if you don't need to? You are running a large monthly surplus and it seems you've got plenty of cash aside from the $101k.

[Cancun]

Thanks for responding HomerJ. I was looking at consolidating the ROTH and 401k account into bonds since I now have a large taxable account. I'm going to really look at this now. Thank you for posting!

****

Thanks Karamatsu!

****

Yes fcox, the forgiven amount is taxed as income...today. I'm no fortune teller, but it could be different 22 years from now, who knows? Good point! Thank you!

****

NY, I simply want to get a head start on investing and not lose any more time that the funds can (could) compound. My tax attorney said it would be best to pay the minimum.

I'm going to personally look into the tax ramifications and long term aspects of my student loans. Thank you!

[HomerJ]

Actually the first thing I would do is pay off the student loans. There is the moral argument, first and foremost, of course, but as a lender yourself I'm sure you don't need someone telling you that. Just from a financial point of view, though, eliminating that 5.1% drag on your earnings is worth something, as is being free and clear of all debts. It's a very good feeling. Of course, you don't have to do it all at once. Spread it out over few years, maybe.

Well, at $700 a month for 22 years, he will pay off the entire amount ($184,000), just not at the 5.1% interest rate, but instead at something like 0.1% interest. So that COULD take care of the moral argument

However, I would worry about the forgiven amount being taxed at the end... $700 a month isn't even enough to pay the interest on $176,000 at 5.1%... so basically the principal owed is actually going to grow...

You're going to still owe like $200,000 in 22 years, and when forgiven, that's taxable income... So there's a big $70,000 tax bill in 22 years...

I think you should talk to your tax guy again.

[trudy]

I would use it to pay down that loan. You're just paying interest now, so you;'e a cash cow for the lender. Plus it would drive me crazy to have that hanging over my head for decades making no progress on paying off the principal.

Plus, I think you need a new tax guy.

[OneDay]

I would echo getting a second tax guy to look at the situation. For me personally I would not want a 700 dollar payment hanging around for that long when I know I could pay it off and move on.

[athrone]

Would you take out a $176,000 personal loan at 5.1% in order to invest in the stock market? No? So why are you trying to do the same thing with your student loan?

Pay off the debt.

[Rainier]

Pay off the student loan and get a new tax attorney. Even better, unless you are going to tax court, don't get a new tax attorney.

[henry A]

Well, I would hate to pile on to the earlier comments but I recently ran into a situation like this. A close friend had roughly $50k in debt and $45k in what he thought was savings and investments. Surprisingly enough, this was advice given by a man eerily similar to the 'Tax guy' described above. I am sure this is not the case with you, as you seem to have a fairly firm grasp of things. However, just to verify.. your 'tax guy' isn't the same as your 'financial planning' guy right? i.e. He sees no bonus in his paycheck from commissions when you invest?

[Cancun]

Hello henry A, No he is a tax attorney and a friend-of-a-friend. He has no financial stake in anything and I manage my own investments.

[market timer]

What is your earnings potential going forward? How did you rack up so much debt? How soon do you plan to retire?

Assuming your earnings don't have much upside from this point, I think there's a good argument to be made for making the minimum payment, as specified by IBR. For many people with tremendous loan debt, IBR is effectively a 15% surtax on earnings.

[Toons]

Pay off debt. Done deal .

[Cancun]

>>> What is your earnings potential going forward?

The same. 93k per year plus 1-2% inflation raise per year


>>> How did you rack up so much debt?

Post-post grad degree


>>> How soon do you plan to retire?

20 years


>>> I think there's a good argument to be made for making the minimum payment, as specified by IBR. For many people with tremendous loan debt, IBR is effectively a 15% surtax on earnings.

That's exactly what I'm thinking. This person looked at my tax situation globally and gave me his opinion. In addition to that I did my own due diligence.

I simply need to consult with (and pay) a tax professional that is knowledgeable on how this amount of fixed debt affects my long term prospects and run through some scenarios. Thank you for replying.

[henry A]

In that case, I believe you still need to share the what the minimum payment is calculated on.. I think for most school loans it is 35 years ( ) After calculating the total payments made, you need to have an extremely accurate calculation of what the principle debt amount will grow to over the time you make minimum payments. Are you sure this isn't going to get out of hand? Finally calculate the amount of income tax owed upon the expected date of forgiveness with your (expected/guessed) tax bracket. Make sure you can cover this enormous 1 year hit.

Then, I also believe that the loan must fit into a very distinct category to qualify for forgiveness. There are many stipulations. The government doesn't just say, "oh sure, don't worry about that money you owe us." I believe being a federal student loan is one of the requirements. To my knowledge most other forms of student loans are not forgivable. Furthermore, you will most likely have to enroll in a plan that is based upon your income. Your 'minimum' payment may increase with a job raise.

Finally, there is a moral dilemma here. Should you pay off what you used, or let someone else pick up the tab for your (plausible) financial gain?

Honestly, wouldn't it just be easier to pay it off? Less stress, no weight on your shoulders, nothing holding you down..

I am not a professional, however. This is just my honest opinion based upon my understanding of the process and your situation.

[market timer]

Are you teaching at a college or working at some other nonprofit? You may be eligible for Public Service Loan Forgiveness, which is like IBR, but results in debt forgiven after 10 years. Also, the forgiven debt is not taxed under PSLF.

[michaelsieg]

Cancun

If I understood you well, you have about 180k in liquid assets and you owe 170k for a school loan. You currently pay interest only on your loan, which is about $700/month. This is what I would do: I would keep about 30k of an emergency fund (about one year of living expenses) and I would spend the vast majority of the rest to pay off the loan. I ethically have a problem if a loan that you can pay back within a few years doesn't get paid back - even though from a strictly mathematical standpoint it might cost you less. The advice of your tax lawyer seems just wrong to me. (The next logical argument would then, mathematically speaking, be to stop paying interest as well and hiding your assets...I am surprised he didn't suggest that - just kidding).
Getting rid of the $700 payment per month will make you feel much better than the ups and downs that your portfolio will have in the initial years - and if will grow much faster over time if you will be able to contribute $700/month more to your savings. I think it would be reasonable to read some of the above mentioned books about investing and start a passive portfolio that you like and maybe invest 10K/year in it until the school loan is fully paid - once it is paid off, you would be able to put about 28k/year into it.
Be careful with the 50k investment in a rental property, and unless you really have an unique opportunity it might not be a good idea to go that risky route.

[rfburns]

I would set my priority to be debt free ASAP. Keep maxing out your retirement accounts. Keep your emergency fund beefed up. The rest will fall into place.

[henry A]

Sorry for the extra comment, but you must also be aware that sometimes policy changes. Without getting political, there is a chance that the government could decide to no longer forgive federal student loans. Nobody knows what the world will look like 22 years from now. This is an additional risk you are taking.

[letsgobobby]

How long have you had $101k in cash sitting around? Why? Why do you want to invest it? Why now?

[Cancun]

Henry A said :

"I believe being a federal student loan is one of the requirements. To my knowledge most other forms of student loans are not forgivable. Furthermore, you will most likely have to enroll in a plan that is based upon your income. Your 'minimum' payment may increase with a job raise."

*** It's a federal loan and it is forgivable. On the flip side, if my 'stable' career goes south in the next 5-10 years due to Medicare reimbursement changes I could go from making 93K per year to 70K (for example). Then, those $700 per month payments would be @ $450 and I would be kicking myself for the early repayment.

I wonder if it's worth not paying the debt off, and having $151,000 cash (minus the $30k for emergencies) compounding. It sure is nice knowing if anything happens those funds are available and not spent 'prematurely' to reduce a debt.

Anything can happen in the next 22 years and you never know what opportunities arise, right?


Micheal said:

"Getting rid of the $700 payment per month will make you feel much better than the ups and downs that your portfolio will have in the initial years."

*** Good point.
I like knowing the $180,000 (cash total) is there.
I like knowing that the funds are invested in Vanguard funds and are growing.
I can handle the $700 per month payment.
I can handle the ups/downs of the market.
I have a 20 year retirement timeline.
I don't mind 'having that debt over my head.'
I don't have any kids or responsibilities.
I only have one debt and I live frugally.

I want to pay the loan back! I just don't want to narrow my options.


Henry A said:

"Without getting political, there is a chance that the government could decide to no longer forgive federal student loans. Nobody knows what the world will look like 22 years from now."

Again, on the flip side, what IF if went the other way. We see these stories in the daily newspapers, magazines and on the news talk about the 'student loan bubble.'

Years from now another pro-student loan administration could say, "IF you have been paying your debts for X years, everything over that time period is forgiven."...?

The laws could get better for the many large debt holders like myself, not worse. Who knows?


letsgohobby said:

How long have you had $101k in cash sitting around? Why? Why do you want to invest it? Why now?

*** Actually letsgo, with $50,000 earmarked for real estate the grand total is $151,000 spendable cash.

3 months. Windfall. I only have two options 1. pay off the debt 2. invest it, know that it's there, make the minimum loan payments which isn't a drain on my monthly budget and see what happens. Thank you for replying letsgo.



Great comments everyone, thank you! In 9 hours I have 1320 views and 22 comments.
Please keep your knowledgeable opinions coming!

Again, what would you do?

[TT]

How about paying off your financial obligations that you personally incurred ?

[NYBoglehead]

Cancun,

In regards to the student loan "bubble," you are absolutely dreaming if you think someone with your income and assets would ever have a loan extinguished from the books in some sort of amnesty program.

[Rainier]

Cancun,

In regards to the student loan "bubble," you are absolutely dreaming if you think someone with your income and assets would ever have a loan extinguished from the books in some sort of amnesty program.

We have a client who has a $200m trust, but since he has no substantial taxable income he gets the child tax credit.

[EmergDoc]

First time poster here.

The stats:

- I'm 39

- I only have one debt...a school loan costing $700 per month for the next 22 years. The remaining balance of $176,000 at 5.1% has already been federally consolidated and I'm in the IBR (Income Base Repayment) plan (not employed by a non-profit). According to my tax attorney, It's unwise to make additional payments and down since anything left after 22 years will be forgiven.

- I make $93,000 per year in secure career in Florida (No state sales tax) ... or $7,750 monthly gross / $6,045 monthly net ... or $72,540 yearly net.

- My rent and ALL living expenses is $2,400 per month (including the student loan) ... or $28,800 per year.

- No wife/kids or girlfriend at the moment.

- I'm maxing out my 401k, Roth and HSA (mostly Vanguard funds)... @ $23,000 yearly net

- I save @ 45% of my take home pay after maxing out the tax-deferred accounts ... @ $20,000 yearly net

- I live frugally.


The bottom line:

- I have $80,000 in an online savings account. ... I could purchase other assets with this money.

$50,000 is reserved for purchasing rental properties.
$30,000 is for 'emergencies'

- I have $3,000 in Prosper.com as of today. I may place more.


The reason for the post....

I have $101,000 in cash (or $151,000 total spendable cash) sitting in a taxable TD Ameritrade account, ready to go.
Again, I could purchase other assets with this money.


What would you do?


Thank you in advance!

I saw the thread title and thought "First World Problem."

Remind me again what it is about a guaranteed 5.1% return you don't like? How much of that money do you expect to be forgiven, and how much will you pay in the meantime? Let's add it all up:

If you were actually going to pay off the loan in 22 years, your payment would be $1110 a month, so you're underpaying by $410 per month. Just the interest on the loan that first year would be $748. So it looks like it will be a negative amortizing loan. You'll have much more than $176K forgiven (assuming your income doesn't go up.)

In order to get that $176K forgiven, you'll need to pay how much money? $700*22*12= $184,800 over the 22 years.

So it's basically like you're going to pay the loan back, but at a very low interest rate (far lower than 5.1%) over those 22 years. So, can you invest and do better than that rate? Probably.

I'd just fold it into my predetermined asset allocation/investment plan and drag out the payments as you are doing (but I'd be 100% sure that the entire balance qualifies to be forgiven. Remember if the program changes or goes away sometime in the next 22 years you're going to owe even more than you started with.)

I'm not convinced that those guys who are saying "just pay the debt" actually understand how IBR works.

http://whitecoatinvestor.com/income-based-repayment/

http://whitecoatinvestor.com/public-ser ... rgiveness/

http://whitecoatinvestor.com/how-much-c ... -via-pslf/

[Grt2bOutdoors]

Cancun,

In regards to the student loan "bubble," you are absolutely dreaming if you think someone with your income and assets would ever have a loan extinguished from the books in some sort of amnesty program.

We have a client who has a $200m trust, but since he has no substantial taxable income he gets the child tax credit.

Time to change the tax code!

[NYBoglehead]

Cancun,

In regards to the student loan "bubble," you are absolutely dreaming if you think someone with your income and assets would ever have a loan extinguished from the books in some sort of amnesty program.

We have a client who has a $200m trust, but since he has no substantial taxable income he gets the child tax credit.

Time to change the tax code!

+1

No kidding. That is absurd. That said, the child tax credit is $1,000/yr. Quite different than having 170k in student loans forgiven.

[EmergDoc]

Attitudes like that are why I tell docs not to count on the PSLF program still being there in 10 years. I can see the news headlines now "Rich Doctors Have $500K in Student Loans Forgiven!"

The way I look at it is this is the program instead of letting people have reasonable rates on students loans and not allowing them to refinance at lower rates. Why I can get a mortgage at 2.75% but can't get a medical student loan better than 6.8% is beyond me.

[RobInCT]

"I believe being a federal student loan is one of the requirements. To my knowledge most other forms of student loans are not forgivable. Furthermore, you will most likely have to enroll in a plan that is based upon your income. Your 'minimum' payment may increase with a job raise."

*** It's a federal loan and it is forgivable. On the flip side, if my 'stable' career goes south in the next 5-10 years due to Medicare reimbursement changes I could go from making 93K per year to 70K (for example). Then, those $700 per month payments would be @ $450 and I would be kicking myself for the early repayment.

I wonder if it's worth not paying the debt off, and having $151,000 cash (minus the $30k for emergencies) compounding. It sure is nice knowing if anything happens those funds are available and not spent 'prematurely' to reduce a debt.

Anything can happen in the next 22 years and you never know what opportunities arise, right?

I'm not going to tell you to pay off the debt because it's a deeply personal decision that you need to decide for yourself after consideration of factors--many of them unique to you and unknowable by us. I, personally, would probably pay off the debt. But here are some of the factors I would urge you to consider, some of which have already been mentioned by others.

1. Is your income likely to remain in the qualifying range for the next 22 years? You mention that your income could drop to $70k next year from $93k. You say you would by "kicking yourself" because your payments would be $450. But realize that federal loan forgiveness doesn't mean that the federal government forgives your loans on a yearly basis. Rather, they just add whatever you don't pay to the total due, and at the end of 22 years, they write off the balance. So if your payments drop to $450, your total balance due will just go up. You say you have 22 years left, which I take to mean you're only 3 years out of school. Most people 3 years out of school aren't at their max lifetime earning potential. If your income goes up--due to the effects of promotions, raises, or even just plain old inflation/COL--and exceeds the qualifying range, you may end up paying back all of that money you are "saving" now, but with interest added. That's how the program is designed. Assuming your opening balance was roughly the same as it is now, you may end up paying as much as $1900 a month for as long as it takes (capped at 22 years) to pay off the balance in full, including that portion you think of yourself as "saving" now.

2. Are you likely to get married in the next 22 years to someone who also has an income? If so, you may fall out of the qualifying range and see above re: payment consequences.

3. Unless the laws change, you will have to pay taxes on the amount of debt forgiven at the end of 22 years, currently projected to be about $200k, assuming your income stays the same for the next 22 years.

4. "Anything can happen in the next 22 years" can go both ways. One of the things that can happen is that assets will begin to factor into required payments instead of income alone. This move would not be without precedent. Federal financial aid programs consider both assets and income, and many schools that ran their own versions of IBR long before the current IBR came into existence considered assets in addition to income. IBR is a very new program, and the kinks are not yet worked out. I agree with you that it is very likely to change in the next 22 years. I just don't know why you'd assume those changes are likely to benefit you, rather than the reverse, particularly since by your own admission you could afford to pay your loans if you wanted to. It seems unlikely to me that re-examination of the program will result in changes favorable to those who actually have the ability to pay.

All this to say that at the end of the day, I'd likely repay the loan. You're not a school teacher making $35k with $200k in student loan debt and on the 10-year non-taxable forgiveness plan. In that situation, I'd likely not repay the loan, even if I had the cash on hand to do it. You're really at the very upper end of IBR eligibility. I don't personally think of IBR as a "good deal" for those most likely to income-out of the program.

[Meg77]

I am not sure I'd pay off the debt either. First of all it would take 100% of your liquidity. That's dumb. Secondly if your income drops in the next 22 years you will be worse off . Hell, you're 39 - you could have health issues in your 50s that cause you to have to leave work for an extended period or retire early. How would that effect your payments? If they'd be waived then I definitely wouldn't pay it off. You just never know what can happen over 2 decades. And anyway 5.1% isn't a bad rate. Just a few years ago mortgages were at 7%+. If you're even thinking about buying real estate ever, then I wouldn't consider paying that debt off - your mortgage may end up higher than that loan rate (and therefore you could use your resources to prepay that instead if you want to prepay a debt, or even to pay cash for a home or rental property). If your windfall had been $500K my advice may be different. But I'm all about maximizing flexibiliy.

That said, it appears that you don't have a solid time horizon in mind since you currently don't need this money. So I'd keep $50K in cash in addition to whatever you plan to spend in the next 3 years (rental property down payment, automobile, etc). The rest I'd stick in a Vanguard fund account. Max out all possible retirement accounts and put the rest in a balanced Admiral fund like the VBIAX (you can be more aggressive in your retirement accounts to balance it out, but seeing as this money would be cashed in first if you needed funds I'd keep the taxable money more conservatively allocated - the time horizon on it is shorter).

Good luck and congrats!

[Cancun]

Thank you for the links Emergdoc. I have been going through your site.
Thank for your valuable input Meg and Rob.

... What would you do?

[paper200]

Right now you are not playing with all the money (note 50K is reserved for rental property - not yet invested) - it has taken a time out. If you want to get into the game and get the scoreboard moving, you need to invest with associated risks. Since you have been saving diligently but not invested in the market, i.e risk averse, the best scenario is where N=2, i.e. 1/2 stocks and 1/2 intermediate muni bonds