Student Loans as Bond Distribution

Discussion of the Bond portion of the Permanent Portfolio

Moderator: Global Moderator

User avatar
4x4
Associate Member
Associate Member
Posts: 41
Joined: Mon Aug 04, 2014 3:30 am

Student Loans as Bond Distribution

Post by 4x4 » Sat Feb 07, 2015 1:34 pm

If one were in the building, accumulation phase of life to middle age, what might the group consensus be toward devoting 25% towards paying student loans instead of buying bonds / LTL? 

Obviously the student loans won't appreciate like a bond will with decreased interest rates to allow the portfolio balancing, and this might be the simple answer...

However with student loans ranging from under 2.5% to 7.9%, where does this fit in, IF at all?  One could simply think of these as separate, a fixed contribution towards student loans, fixed contribution towards PP, done, nice, clean, smooth. 

However, with some people accumulating six figures in debt and essentially no assets, this becomes more relevant.  I would think someone just starting out with loans towards the upper end of this spectrum, it would be a no brainer to contribute more towards the loans initially.  In time, switch towards retirement.  However, what about someone with six figures in student loans, a resulting six figure income, and in interest rate of maybe a more reasonable 2.6%?  Would this "sure thing" of eliminating a debt growing at 2.6% per year be better than an after tax, inflation adjusted PP return, that has a degree of uncertainty??

http://www.direct.ed.gov/calc.html
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Student Loans as Bond Distribution

Post by Pointedstick » Sat Feb 07, 2015 2:02 pm

Are you talking about lending money to students as your bond allocation? Or borrowing money for college as your bond allocation?

In any case, no! Your bond allocation should be allocated to long-duration sovereign debt.

If you still have any student loans, I would consider it an emergency and shovel every last penny into them to get them paid off ASAP before you started really seriously investing. A large amount of student loan debt is one of the closest things modernity has to selling yourself into slavery.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
User avatar
4x4
Associate Member
Associate Member
Posts: 41
Joined: Mon Aug 04, 2014 3:30 am

Re: Student Loans as Bond Distribution

Post by 4x4 » Sat Feb 07, 2015 2:12 pm

Thank you for your input PS!

I was proposing a concept of student loans in relation to bonds for-

Current Students - paying tuition instead of buying bonds, probably unlikely
People who have graduated and still in repayment, those w 100-300k in student debt (professional degrees), contributing extra towards student loans instead of a Bond distribution.

Some with student loans at low rates, prefer to keep their student debt and instead contribute towards home ownership when the student loans are at a lower rate that home loans.  This applies to those who picked up student debt in the past, now home mortgages are close or cheaper than many student loan options.

Thanks again for your reply!
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Student Loans as Bond Distribution

Post by Pointedstick » Sat Feb 07, 2015 2:29 pm

4x4 wrote: Current Students - paying tuition instead of buying bonds, probably unlikely
For these people, I would recommend paying off the debt before investing.

4x4 wrote: People who have graduated and still in repayment, those w 100-300k in student debt (professional degrees), contributing extra towards student loans instead of a Bond distribution.
For these people I would recommend considering it a HAIR ON FIRE EMERGENCY and paying it off AS ASAP AS POSSIBLE! :P six figures of high-interest undischargeable debt is a life-altering emergency. If the sum is not possible to quickly pay off (due to being a star lawyer or neurosurgeon or director-level manager or something) I would honestly recommend that such people flee the country and start life over somewhere else. $100-300k in debt for higher education is an astonishingly, alarmingly, mind-joltingly large amount of money to owe. You cannot live a normal life in the USA when you are in that much undischargable debt if you cannot easily pay it off. It is crippling, and people who find themselves in this circumstance IMHO have made major life mistakes that they need to take stock of and ask themselves how they could have possibly fucked up so badly so they they never make such a colossally life-changing mistake again.

4x4 wrote: Some with student loans at low rates, prefer to keep their student debt and instead contribute towards home ownership when the student loans are at a lower rate that home loans.  This applies to those who picked up student debt in the past, now home mortgages are close or cheaper than many student loan options.

Thanks again for your reply!
Interest rate arbitrage like this is too risky for my taste. I prefer to be as debt-free as possible, especially if the interest rate on the debt is even remotely close to low to average investment returns. Investment returns are variable and unpredictable; debt payments are not.

If you have a bunch of debt, the correct approach is to pay it off, not thank your lucky stars that you retain the option of taking on even more debt that would be lower-interest.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
User avatar
sophie
Executive Member
Executive Member
Posts: 1959
Joined: Mon Apr 23, 2012 7:15 pm

Re: Student Loans as Bond Distribution

Post by sophie » Sat Feb 07, 2015 2:49 pm

Agree with PS.  I also think that your well-intended analysis amounts to playing with fire.  In fact, debt is very simple:

If the interest rate is higher than a mortgage (after tax deduction; somewhere in the 2-3% range), then paying it off takes priority over EVERYTHING else except basic shelter, food, job-related expenses, and emergency fund. This goes double for student loans, as they cannot be discharged in bankruptcy.

If the interest rate is low and it cannot be increased, you might have a rationale for dividing savings between investments like the PP and paying down the loan, as in the long term (>= 3 years) the PP is expected to return more than the interest on the debt.  Just realize that this is still a gamble, though.

There is no role for anything except US long treasury bonds in the bond allocation of the PP.
"Democracy is two wolves and a lamb voting on what to have for lunch." -- Benjamin Franklin
User avatar
4x4
Associate Member
Associate Member
Posts: 41
Joined: Mon Aug 04, 2014 3:30 am

Re: Student Loans as Bond Distribution

Post by 4x4 » Sat Feb 07, 2015 3:52 pm

Thank you for all the replies.  I don't think the situation is as unusual as it might seem, I talked with a medical student recently who claimed to be borrowing nearly 100k PER YEAR!  I don't know how this could be, but I would believe they are borrowing over 50k easy as many schools tuition approaches this.

I agree with the sentiment that comparing a fixed loan rate with the hypothetical future return of any portfolio is comparing apples to oranges.  And the value of paying off debt can not be under estimated going forward.

Also open to other thoughts, ideas?
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Student Loans as Bond Distribution

Post by Pointedstick » Sat Feb 07, 2015 4:21 pm

4x4 wrote: Thank you for all the replies.  I don't think the situation is as unusual as it might seem, I talked with a medical student recently who claimed to be borrowing nearly 100k PER YEAR!  I don't know how this could be, but I would believe they are borrowing over 50k easy as many schools tuition approaches this.
I would be very worried for this person. What if they decide medicine isn't for them after a few years? What if their starting salary isn't as high as they hope and they struggle to make the massive payments? What if they have to take a leave of absence during school for unforeseen reasons, delaying the start of their career while the balance increases? Med school is what, 4 years? So that's $400k? I dunno man, I really hope this person becomes a brain surgeon or something. At 4%, that's $1300 a month in interest alone without making a dent in the principal. You need to be making shitzillions of dollars a year to deal with something like that, forgetting entirely other financial obligations like housing and savings (perish the thought ::)). This lifestyle seems insane to me. Then again I have an uncle who's a doctor and just bought a million dollar 4,000 square foot house, so maybe the salary really is ludicrously high. Or maybe he's a missed paycheck away from financial ruination and his net worth is lower than mine. Who knows?
Last edited by Pointedstick on Sat Feb 07, 2015 5:00 pm, edited 1 time in total.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
User avatar
4x4
Associate Member
Associate Member
Posts: 41
Joined: Mon Aug 04, 2014 3:30 am

Re: Student Loans as Bond Distribution

Post by 4x4 » Sat Feb 07, 2015 4:27 pm

Good for your Uncle!  Medicine is changing, the financial situation of the future physicians will be markedly different than the past imho, with Obama care, the rise of Advance Practice Nurses, Physicians Assistants, etc.

PS (Is it heresy to post a BH link :)
http://www.bogleheads.org/wiki/Paying_d ... _investing
User avatar
sophie
Executive Member
Executive Member
Posts: 1959
Joined: Mon Apr 23, 2012 7:15 pm

Re: Student Loans as Bond Distribution

Post by sophie » Sat Feb 07, 2015 4:36 pm

Physician salaries aren't necessarily as high as you all think, and in any case it's not going to stay that way.  Neurosurgeons still earn big bucks, but radiologists just got hit hard by new Medicare rules.

My specialty is one of the most poorly paid ones unfortunately (but still WAY better than pediatricians who earn far less than most of you do), but I was lucky enough to get into an NIH student loan repayment program for physician scientists.  That program still exists but it's harder to get into now.

P.S.'s points are well taken.  Many physicians do indeed feel trapped by their loans.  However, there's almost no way to avoid having to take that gamble, as medical school financial aid is very, very limited apart from loans. 
"Democracy is two wolves and a lamb voting on what to have for lunch." -- Benjamin Franklin
User avatar
MachineGhost
Executive Member
Executive Member
Posts: 10054
Joined: Sat Nov 12, 2011 9:31 am

Re: Student Loans as Bond Distribution

Post by MachineGhost » Sat Feb 07, 2015 9:59 pm

4x4 wrote: I agree with the sentiment that comparing a fixed loan rate with the hypothetical future return of any portfolio is comparing apples to oranges.  And the value of paying off debt can not be under estimated going forward.

Also open to other thoughts, ideas?
Many Baby Boomer retirees are still paying off their student debt and the government is garnishing their SS checks to pay it off.  Debt for the higher education industrial complex is one of the great scams of our time.

I think as long as debt repayments take up only a small portion of your income, you could rely on inflation to whittle down the real value of the debt relative to the real returning PP.  But you should have a backup plan to keep paying it while unemployed.
Last edited by MachineGhost on Sat Feb 07, 2015 10:04 pm, edited 1 time in total.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
User avatar
MachineGhost
Executive Member
Executive Member
Posts: 10054
Joined: Sat Nov 12, 2011 9:31 am

Re: Student Loans as Bond Distribution

Post by MachineGhost » Sun Feb 08, 2015 9:12 am

MangoMan wrote: Can you site a reputable source for that statement? It was my understanding that the student debt crisis is a problem of the millenials, not the boomers. I was born near the end of the boomer era, so I know lots of people close to retirement all the way up to people 15 years from collecting SS, virtually all of them with college degrees and many with advanced degrees. Not one single person I am aware of still owes even a penny in student debt of their own.
Your wish, is my command!  I actually posted about it a few yers ago, but here's a more updated article:

http://www.bloomberg.com/bw/articles/20 ... -loan-debt
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Student Loans as Bond Distribution

Post by Pointedstick » Sun Feb 08, 2015 9:51 am

MangoMan wrote:
MachineGhost wrote:
4x4 wrote: I agree with the sentiment that comparing a fixed loan rate with the hypothetical future return of any portfolio is comparing apples to oranges.  And the value of paying off debt can not be under estimated going forward.

Also open to other thoughts, ideas?
Many Baby Boomer retirees are still paying off their student debt and the government is garnishing their SS checks to pay it off. 
Can you site a reputable source for that statement? It was my understanding that the student debt crisis is a problem of the millenials, not the boomers. I was born near the end of the boomer era, so I know lots of people close to retirement all the way up to people 15 years from collecting SS, virtually all of them with college degrees and many with advanced degrees. Not one single person I am aware of still owes even a penny in student debt of their own.
Image

https://www.tuition.io/blog/2013/05/stu ... -isnt-ros/

Doesn't look like there are a lot of over-65-ers who are still paying student loan debt, but the share of student loan debtors who are 40s and above is surprising.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
User avatar
MachineGhost
Executive Member
Executive Member
Posts: 10054
Joined: Sat Nov 12, 2011 9:31 am

Re: Student Loans as Bond Distribution

Post by MachineGhost » Sun Feb 08, 2015 10:08 am

2.2 million aged 60+ borrowers as of Q4 2012.  Avg amount is almost $20K.  No doubt its more now.

So is this "good debt" as Suze Orman would say?  Is it critical to Monetary Realism working?
Last edited by MachineGhost on Sun Feb 08, 2015 10:10 am, edited 1 time in total.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
User avatar
l82start
Global Moderator
Global Moderator
Posts: 1291
Joined: Sun Apr 25, 2010 9:51 pm

Re: Student Loans as Bond Distribution

Post by l82start » Sun Feb 08, 2015 10:40 am

i have never heard of them garnishing SS, it is not surprising i suppose.. i have heard of them taking tax returns.
-Government 2020+ - a BANANA REPUBLIC - if you can keep it

-Belief is the death of intelligence. As soon as one believes a doctrine of any sort, or assumes certitude, one stops thinking about that aspect of existence
User avatar
MachineGhost
Executive Member
Executive Member
Posts: 10054
Joined: Sat Nov 12, 2011 9:31 am

Re: Student Loans as Bond Distribution

Post by MachineGhost » Sun Feb 08, 2015 1:46 pm

MangoMan wrote: Thank you. It's not clear from the article why most of the seniors owe the debt, but I highly doubt it's because they took out huge loans in their early 20's to pay for their original college education and have been making payments this whole time, yet still owe money. And although you never stated that was the case, it was implied [IMO].
Well, implied or not, I'm sure at least 1 of those 2.2+ million 60+ are still paying off their student loans they acquired in their youth, for whatever reason.  My impression is the majority acquired it during their adult life and just didn't have enough time to pay it off or they ran into employment difficulties.  But talk about a ham fisted government!  If kids/adult understood the horrible consequences of never being able to discharge their student debt under any circumstance and the tax rebate and SS garnishment, they might not drink the Kool Aid so much.  Just as with the NCAA, the education-industrial complex is fully exploiting the widespread naivety of the situation.  I have the same thing to say about this as Kessler does about the NCAA.
Last edited by MachineGhost on Sun Feb 08, 2015 1:51 pm, edited 1 time in total.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
User avatar
sophie
Executive Member
Executive Member
Posts: 1959
Joined: Mon Apr 23, 2012 7:15 pm

Re: Student Loans as Bond Distribution

Post by sophie » Sun Feb 08, 2015 2:27 pm

I remember reading something about this a while ago.  It's mainly parents who cosigned for their kids. 
"Democracy is two wolves and a lamb voting on what to have for lunch." -- Benjamin Franklin
User avatar
KevinW
Executive Member
Executive Member
Posts: 945
Joined: Sun May 02, 2010 11:01 pm

Re: Student Loans as Bond Distribution

Post by KevinW » Mon Feb 09, 2015 2:26 am

sophie wrote: There is no role for anything except US long treasury bonds in the bond allocation of the PP.
+1

The bond allocation should be comprised of long term sovereign (Treasury) bonds and nothing else. There are very good reasons for this. Loan prepayments are not T-bonds. They just aren't.

I agree with the advice to pay down all debt, except perhaps a prudent home mortgage, before starting serious investing. That's what I did and I don't regret it. Operating on a cash basis makes it easier to be clear-headed about finances, in a lot of ways.
Last edited by KevinW on Mon Feb 09, 2015 2:27 am, edited 1 time in total.
User avatar
4x4
Associate Member
Associate Member
Posts: 41
Joined: Mon Aug 04, 2014 3:30 am

Re: Student Loans as Bond Distribution

Post by 4x4 » Wed Feb 18, 2015 1:44 am

Question to the group, excess $ would you recommend allocated to

1. Paying off student loans with interest rate at 2.6%?

Or

2. Contributing to a PP in a taxable account?
(Assume Retirements maxed)

Or

3. Take on more debt to Buy home/condo/place to live?
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Student Loans as Bond Distribution

Post by Pointedstick » Wed Feb 18, 2015 9:39 am

I can tell that you're a person who likes debt. I can't tell you what to do since what I would advise due to my very anti-debt attitude might not be appropriate for you and your feelings. What's right for you depends on your goals, the timeframe for achieving those goals, and what financial arrangements make you feel best.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
User avatar
4x4
Associate Member
Associate Member
Posts: 41
Joined: Mon Aug 04, 2014 3:30 am

Re: Student Loans as Bond Distribution

Post by 4x4 » Wed Feb 18, 2015 10:28 am

@ PS I agree debt is the devil in finance.  Hate it, might not be providing enough details to make this apparent online...
@TenPaGa I can understand your reasoning, w real estate I have been holding off for years for all of those reasons, there is a tax consideration w/ real estate that factors in to complicate the otherwise simple

Thanks to everyone for their thoughts
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Student Loans as Bond Distribution

Post by Pointedstick » Wed Feb 18, 2015 10:37 am

Personally, this would be my priority list:

-1. Quit smoking/taking drugs
0. Pay off loan shark debt
1. Pay off credit card debt
2. Pay off car loan debt
3. Pay off student loan debt
4. Max out retirement accounts
5. Save all remaining monthly income in a taxable account for the purpose of buying a house in cash
6a. If the money will be here for 5 years or more (i.e. because your income is small or you want to buy a house that's too big), structure this account as a PP; otherwise, use a high-yield savings account
7. Buy the house in cash
8. Save the now very large monthly income surplus in a taxable accounts structured as a PP
9 Retire in less than 10 years! :)
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
User avatar
4x4
Associate Member
Associate Member
Posts: 41
Joined: Mon Aug 04, 2014 3:30 am

Re: Student Loans as Bond Distribution

Post by 4x4 » Wed Feb 18, 2015 10:54 am

LMAO  For a moment I thought you were implying my posts were so irrational as to be influenced by drugs :)
Interesting progression, I like the idea of including a -1 for those not all here :)
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Student Loans as Bond Distribution

Post by Pointedstick » Wed Feb 18, 2015 11:05 am

4x4 wrote: LMAO  For a moment I thought you were implying my posts were so irrational as to be influenced by drugs :)
Interesting progression, I like the idea of including a -1 for those not all here :)
Haha no way! Just a list of relative emergencies and the order to fix them in.  :)
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
User avatar
Xan
Administrator
Administrator
Posts: 4392
Joined: Tue Mar 13, 2012 1:51 pm

Re: Student Loans as Bond Distribution

Post by Xan » Wed Feb 18, 2015 11:13 am

Looks like I picked the wrong week to quit sniffing glue!
User avatar
sophie
Executive Member
Executive Member
Posts: 1959
Joined: Mon Apr 23, 2012 7:15 pm

Re: Student Loans as Bond Distribution

Post by sophie » Wed Feb 18, 2015 11:55 am

If you are seriously asking for advice, it would help to see the full picture.  you might consider posting a "case study", but that's potentially a serious compromise of your privacy...

Here's my suggested priority list:

1. Max out any tax-advantaged space that gets you a matching contribution, if any.
2. Pay off any debts in excess of 5% interest, starting with the highest interest loan.  Regard as a "hair on fire" emergency.
3. Max out whatever tax-deferred space you have.  This includes starting a solo 401K and throwing in "profit sharing" contributions out of any self-employment income you may have.  If your income tax bracket is high relative to your loan interest rates, you might switch #2 and #3.
4. Save an emergency fund - minimum 6 months, preferably 1 year of expenses.
5. Simultaneously save for home downpayment and pay down all other debt, including the student loan.  You could split your savings 50/50 between these two goals.  If you aren't earning enough to qualify for a mortgage with the student loan debt, then bring that down first - you might want to talk to a mortgage broker to see where you stand.  Keep the downpayment fund in cash.  Do not invest it.
6. Buy a house when you have a 20% downpayment saved PLUS enough to cover, realistically, closing costs, moving, any improvements you want to do before moving in, cost of new furniture etc.  Also you should beef up your emergency fund to cover mortgage + taxes + home maintenance + insurance, as these will likely be much higher than your current rent.  (The tax deduction is great as long as you're working but if you lose your job, you'll lose that as well.)  In addition to that, I needed to show two years of mortgage and maintenance payments in the bank in order to qualify for a coop purchase - it's a good rule.
7.  Split savings between the PP and paying down first the student loan, then the mortgage. 

Even though I dislike debt, this is exactly my own priority list - if you want to buy a house and it makes sense financially, you shouldn't have to put it off for the sake of a low-interest loan.  I got my student loans (2.1%) down to a manageable level before I bought, then finished paying them off a year ago.  I've paid down about 1/3 of my mortgage since buying my place 6 years ago, as the interest rates I had initially were higher than the student loan so I focused on that.  I am much happier with the lower debt level, but also happy to own rather than rent.
"Democracy is two wolves and a lamb voting on what to have for lunch." -- Benjamin Franklin
Post Reply