Berkeley (sticker) vs. UT (full ride) vs. NU (full ride) Forum

[clone22]

In other news, OP, you coming to the ASW friday?

[bigben]

Now try this: take the payments on 225k for 10 years at fed rates - about 2600. Move those forward 20 years at your chosen rate and you get about 850k. So like I said, for the difference between 225k and $0 to be equal to only one more year of work at retirement, you'd have to be making nearly a million dollars a year. More if you use a higher interest rate or a period of more than 20 years. So yes, a programmer did some bad math.

No, you forgot that my portfolio is making money too. You can do extended, graduated payment on 30 years, so the debt service is still on going in 20 years (and not full value as you assumed).

So if my portfolio is making 300-400k a year, plus the extra year of income (300-400k assuming standard increases) it will more than offset the lost investment from previous debt service (even at standarized payment schedule).

So I guess you are right that I will be making like a million a year. But not my earned income, but my total income (earned + portfolio). If I could realize more than 8% a year, it would even be earlier/sooner.

...so I am right. For what you said to be correct, you have to be earning a million dollars a year. That's good enough for me, I'm not going to argue about whether you are actually going to be making a million dollars a year. More power to you.

[r6_philly]

...so I am right. For what you said to be correct, you have to be earning a million dollars a year. That's good enough for me, I'm not going to argue about whether you are actually going to be making a million dollars a year. More power to you.

If you want to be that technical, then no, 700k would cut it.

Sorry for misunderstanding.

[juliachild-ish]

In other news, OP, you coming to the ASW friday?

Yes, I am! Actually, I'm getting into Berkeley Thursday afternoon, staying through Saturday afternoon.

I think it's funny but entertaining that this thread has become a serious discussion about investment returns...

[bigben]

Of course just in case my math is fuzzy, I did another spreadsheet.

Standard 120 month payment plan on 200k v. extended graduated.

If loan interest is 6.8% and you invest every dollar of the payment differences at 8.5% interest, compounded monthly, at the end of 10 years, you will have $201,000 saved up from the difference. In the mean time, you did already paid down some of the principle (not sure how much because I can't find an amortization table on the student aid website). But the point is you will have some money left over after paying off the balance at the end of 10 years. But if you went with standard payment plan you will have no money and no principle.

So if the assumption that you will earn 8.5% is correct, then it pays to push off debt service into the future (obviously because you earn more than you are being charged).

So again if 8.5% is assumed, earnings from the savings will outpace the debt service by year 11. So you will only be paying the debt service out of pocket on the extended/graduated plan for 10 years. Total? $149,615. Also since you will have some left over after paying off the principle, you can add that to your retirement fund and let it grow for another 10 years helping to achieve earlier retirement.

Period (M) | Monthly Payment | Std Payment|Diff|Rate|Earning|Balance

1 $1,133.33 $2,301.00 $1,167.67 8.50% $0.00 $1,167.67
2 $1,133.33 $2,301.00 $1,167.67 8.50% $8.27 $2,343.61

year 10:
13 $1,365.66 $2,301.00 $935.34 8.50% $1,236.07 $176,675.64
14 $1,365.66 $2,301.00 $935.34 8.50% $1,251.45 $178,862.44

Year 10 month 11-12
23 $1,365.66 $2,301.00 $935.34 8.50% $1,394.88 $199,253.94
24 $1,365.66 $2,301.00 $935.34 8.50% $1,411.38 $201,600.66


formula:
earning = prev. balance * rate/12
Balance = difference + earning + prev. balance

This is rather silly, r6_philly. You forgot taxes, which would alone eviscerate your earnings on the delayed debt repayment. You also did not discount for risk, and there should certainly be a risk discount on assumed earnings of 8.5%.

Of course, 6.8% student loans are also capped around 120k, and that's only if you qualify for Stafford subsidized. So while your portfolio earnings assumption is at least arguable, your student loan interest assumption is not.

Suffice to say that in reality, anyone who voluntarily delays repaying student debt, even at 6.8%, to purchase typical investment instruments is either a fool or happens to know something that NOBODY else knows.

[sarahlawg]

...so I am right. For what you said to be correct, you have to be earning a million dollars a year. That's good enough for me, I'm not going to argue about whether you are actually going to be making a million dollars a year. More power to you.

If you want to be that technical, then no, 700k would cut it.

Sorry for misunderstanding.

lol r6. it is good to have goals.

[r6_philly]

This is rather silly, r6_philly. You forgot taxes, which would alone eviscerate your earnings on the delayed debt repayment. You also did not discount for risk, and there should certainly be a risk discount on assumed earnings of 8.5%.

Gains are not realized until you sell. So you can use your earned income to make debt service while delaying the tax liability until you sell/withdraw from the investment. I said buy low tax burden EFTs which usually don't carry much tax because there is no active trading on your part.

Risk: read my comment about 30 year return on market ETFs. Hold long positions, avoid market up/downs. The biggest recession since Great Depression didn't kill the market. Stick to S&P or Dow you should be fine.

Of course, 6.8% student loans are also capped around 120k, and that's only if you qualify for Stafford subsidized. So while your portfolio earnings assumption is at least arguable, your student loan interest assumption is not.

Not true. 120 for Stafford, but many schools (like Penn) offers Perkins and institutional loans that are subsidized. (8k a year at Penn). So that's only 50k or so at PLUS rate of 7.8% (while the Perkins and other subsidized is at 5-6%, don't have it right now). Still earning more if you get 8.5%, which is still conservative pre-tax.

Suffice to say that in reality, anyone who voluntarily delays repaying student debt, even at 6.8%, to pursue investments is either a fool or happens to know something that NOBODY else knows.

You really don't know that munis used to borrow (issue bonds) at 5-6% and buy investments at higher percentages to make money? That's why I mentioned arbitrage.

Actually student loan services were doing this (Borrowing at lower rate and loaning it to students).

Borrowing at 6.8% to earn anything higher than 6.8% is the definition of arbitrage. How do you think banks make money? They borrow from you at a lower rate to lend it out to others at a higher rate. When there is a rate spread, then it is a good idea, it doesn't matter whether it is at 1%, or 5%, or 8%.

[r6_philly]

lol r6. it is good to have goals.

I don't know if you are sarcastic, but it isn't really unrealistic to earn 350+ on 2 salaries, save 1 salary, and manage your investment well. I don't know why people get all surprised about this. Every student at Wharton is 10 times more ambitious.

[bigben]

...so I am right. For what you said to be correct, you have to be earning a million dollars a year. That's good enough for me, I'm not going to argue about whether you are actually going to be making a million dollars a year. More power to you.

If you want to be that technical, then no, 700k would cut it.

Sorry for misunderstanding.

No, 850k if you assume 6.5%. Probably 1M+ if you assume 8.5% as you are doing now. But yes I was speaking roughly.

[bigben]

I know how taxes work. You still didn't account for them. Gradplus loans were 8.5% and just changed to 7.9%.

r6_philly, paying off student debt at 6.8%, 7.9% or 8.5% is equal to getting a guaranteed, risk-free, tax-free return of that amount. I'm sorry, but you as an individual would be foolish to assume that you can beat those returns on an after-tax risk-adjusted basis. I understand you think otherwise. Happy gambling.

[r6_philly]

Fair enough. If I didn't want to gamble, I wouldn't quit my job and go to law school.

[rayiner]

Not true. 120 for Stafford, but many schools (like Penn) offers Perkins and institutional loans that are subsidized. (8k a year at Penn). So that's only 50k or so at PLUS rate of 7.8% (while the Perkins and other subsidized is at 5-6%, don't have it right now). Still earning more if you get 8.5%, which is still conservative pre-tax.

The relevant cap for Stafford is 20k per year, or 60k over 3 years. You probably don't qualify for Perkins loans if you had a real job before law school (they're need based). If you pay full freight, the vast majority of your loans will be 7.9% PLUS loans.

[r6_philly]

The relevant cap for Stafford is 20k per year, or 60k over 3 years. You probably don't qualify for Perkins loans if you had a real job before law school (they're need based). If you pay full freight, the vast majority of your loans will be 7.9% PLUS loans.

I got close to maximum need from schools that give needs, including perkins and instutional loans when they offer them.

[cucullu]

I think it's funny but entertaining that this thread has become a serious discussion about investment returns...

Agreed. I had something similar happen (with a discussion of LRAPs) on a thread I started. Kind of fun to see a bunch of other people are getting some utility out of the thread beyond what we originally started it for.

Anyway, have fun in Berkeley! I'm jealous. Drink a bubble tea and go for a stroll in the eucalyptus grove for me.