5k Loan What to do

I have about 5k of student loans to pay off, and I have about 25k cash in my bank account after my first year. Because the rate on the loans is less than 4% I don't just want to pay it off right away.

Are there any low risk ways to profit from this or should I just pay it off?

 

Right now, there is nothing that is very low risk that will earn you better than 4%. The 30 year Treasury is yielding less than 2%. There are many things that could earn you better than 4%, but wouldn't call any of them very low risk. What's the most you could lose (percentage-wise) and still be ok?

 
SirPoopsaLot:
Right now, there is nothing that is very low risk that will earn you better than 4%. The 30 year Treasury is yielding less than 2%. There are many things that could earn you better than 4%, but wouldn't call any of them very low risk. What's the most you could lose (percentage-wise) and still be ok?

I have low expenses and make enough that 5k (all of it) is ok for me to lose. I guess I should have been clearer when I said low risk - I wasn't talking treasury bonds, even risk at the blue chip stock level is fine. Ok so maybe not low risk at all :-)

I'm looking into MLP as short suggested, never heard of it before.

 
Best Response

I have low expenses and make enough that 5k (all of it) is ok for me to lose. I guess I should have been clearer when I said low risk - I wasn't talking treasury bonds, even risk at the blue chip stock level is fine. Ok so maybe not low risk at all :-)

I'm looking into MLP as short suggested, never heard of it before.[/quote]

I love MLPs, but they're really for rich people. MLPs are usually oil & gas pipelines that do not pay corporate income taxes, since they are publicly traded partnerships. Because of this, they issue partnership K-1 statements which can be problematic without a good accountant. Depreciation flows through to you, shielding some of the distributions from current income taxes, but becomes a huge pain in the ass when you sell, because it is all recaptured causing a huge tax bill and making it difficult to sell. Also, you are supposed to file state tax returns in every state that each MLP you invest in does business. You will most likely be ok if you buy a few, because I believe there is a $1,000 or so state tax exemption for individuals.

Importantly, do not buy any MLP ETF or mutual fund, because they pay corporate income taxes before they distribute anything to fund holders. They underperform the index by 5-8% on average per year.

My suggestion is to look into 'low-volatility investing'. This shows that high-risk stocks return less than low-risk stocks over very long periods of time, essentially invalidating CAPM, which is or should be surprising to virtually anyone who has studied finance. This study should help you understand why this seems compelling.

http://pages.stern.nyu.edu/~jwurgler/papers/faj-benchmarks.pdf

SPLV is an example of an appropriate ETF to express this investment view.

 
qweretyq:
SirPoopsaLot:
Right now, there is nothing that is very low risk that will earn you better than 4%. The 30 year Treasury is yielding less than 2%. There are many things that could earn you better than 4%, but wouldn't call any of them very low risk. What's the most you could lose (percentage-wise) and still be ok?

I have low expenses and make enough that 5k (all of it) is ok for me to lose. I guess I should have been clearer when I said low risk - I wasn't talking treasury bonds, even risk at the blue chip stock level is fine. Ok so maybe not low risk at all :-)

I'm looking into MLP as short suggested, never heard of it before.

I love MLPs, but they're really for rich people. MLPs are usually oil & gas pipelines that do not pay corporate income taxes, since they are publicly traded partnerships. Because of this, they issue partnership K-1 statements which can be problematic without a good accountant. Depreciation flows through to you, shielding some of the distributions from current income taxes, but becomes a huge pain in the ass when you sell, because it is all recaptured causing a huge tax bill and making it difficult to sell. Also, you are supposed to file state tax returns in every state that each MLP you invest in does business. You will most likely be ok if you buy a few, because I believe there is a $1,000 or so state tax exemption for individuals.

Importantly, do not buy any MLP ETF or mutual fund, because they pay corporate income taxes before they distribute anything to fund holders. They underperform the index by 5-8% on average per year.

My suggestion is to look into 'low-volatility investing'. This shows that high-risk stocks return less than low-risk stocks over very long periods of time, essentially invalidating CAPM, which is or should be surprising to virtually anyone who has studied finance. This study should help you understand why this seems compelling.

http://pages.stern.nyu.edu/~jwurgler/papers/faj-benchmarks.pdf

SPLV is an example of an appropriate ETF to express this investment.

Sorry -- I don't know how to use this yet...so reposting my message without your text embedded in mine or whatever the hell that is called.

 
junkbondswap:
Given the current environment, you should pay off the loan and lock in that 4% return. Save the balance of the money in a low yielding checking or savings account for emergency situations (i.e. unemployed and unplanned pregnancies).
or even not-so-low yielding savings accounts - AMEX is paying 0.85%, TIAA is paying 1.25%. too lazy to link TIAA, but here's AMEX (recently moved most $ from AXP to TIAA)

http://personalsavings.americanexpress.com

 

Freedom from the shackles of student loans liberates more than just the account; it liberates the soul. When one man finds himself free from the oppressed ownership of all others, he can truly explore his potential without regard for an observant, ominous Palantír in the shadows waiting to pounce. This liberation needs no tangible, quantifiable evidence for the reward pays off serendipitously through spontaneity. One simply needs to find himself in that position, which stems from a road not taken. I refer to this road as, liberty.

Just my .02

 

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