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?
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Congratulations on the choice to pursue medicine and on thinking so proactively 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.
Using a Standard Taxable Investment Account
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 like myself, 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.
Consider Investing in Lower Loans
Depending on your student loan interest rate, your marginal tax rate, and of course the investment returns, you may actually make less money on investments after taxes than the interest the loans are charging you. If this is the case, you would be better off using the savings to just pay off the loan right away. You will want to carefully calculate the after tax investment return verses the after tax loan interest to see if paying down the loans right away is the better option verses investing. Of course, if the loans are subsidized (based on your question I don't think they will be) then an investing strategy will be more likely to succeed.
Portfolio
Regarding the investments, since you are looking at probably 10 years before you finish medical school, then a broadly diversified stock portfolio could be appropriate. You will need to examine your own risk tolerance, the potential need for the money (other than paying down the loans), and the rest of your financial plan to see if taking on that much risk is appropriate. The reason it could be appropriate is you are going to be in med school for years. Even if a market downturn happens right after you invest, you will have many years to recover the loss while you are going through medical school. Keep in mind, this is only a consideration if the math works out that the investments are a better strategy than a guaranteed 'investment' in taking out less debt and paying less interest.
Or Do a Little of Each
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. In this scenario, it could be appropriate for your high-risk portfolio to include funds which invest in small cap stocks, emerging markets, high-yield bonds, or even betting on a few individual stocks.