I'm smart about some things, but this is not one of them
July 13, 2010 6:25 PM   Subscribe

Going to grad school and just received an inheritance - how do I best manage my money?

You are obviously not my lawyer or financial planner, but maybe you have some suggestions or advice on the situation at hand. I am in my early 30s and am going to grad school beginning in August. I have about 31k in existing, consolidated loans from undergrad, which are currently locked in at a 4.125 interest rate and which will be deferred while I am in school.

When I applied to grad school, I also applied for federal student aid and was offered and accepted around $20k for the 2010-2011 school year. I had planned to also take on additional loans during my second year of school.

In June, I became the unexpected beneficiary of an inheritance to the tune of 180k. Other than my student loans, I have no other debt. I am very newly married, and my husband does have a home with a mortgage, so we have bandied about using some of the money to pay that down as well, but he is very clear about this being my decision.

Am I wisest to bank most of the money and/or try to make some additional money through investments, or should I just use the cash to pay off my existing loans and pay in cash for grad school? I am planning to work part time while in school, but this money has given me a lot to think about in areas that I don't have any experience. Thanks for any advice you can offer.
posted by anonymous to Work & Money (11 answers total) 2 users marked this as a favorite
Are the student loans you are putting into deferment subsidized, or not? If they are accruing interest, pay them off to the point where you are not getting back all of your interest ($2500 interest accrual over the year).

Will the loans you are taking out accrue interest while you are in school, or will they start accruing interest as soon as you take them out?

If they are accruing interest, don't take them out. If they aren't, that frees up your other money to invest. Pay them off as soon as they start accruing interest.

If you don't have a roth, start a roth- $5k a year. Max out your 401k, if you have one.

6 months living expenses if everything goes south and you have NOTHING coming in- make sure it's in a liquid, high yield, money market account- my credit union offers 1.5% right now, which is as good as it gets. I think ING and Orange have about the same.

Spend a little, maybe a nice vacation before starting back to school, and put the rest into a vanguard account.
posted by TheBones at 6:36 PM on July 13, 2010 [3 favorites]

There is no better way to use this money than to wipe out your loans and pay for your future education. That's an absolutely guaranteed 4.125% return - not average, not possible, but certain.

As for the remainder, if it was me, I'd throw that at the mortgage and/or dump the bulk of it into a highly diverse set of mutual funds, keeping a nice big chunk (say, $20k) in cash for the future, and treat myself to a vacation or somesuch with a couple of grand.

But definitely, kill off those damn student loans.
posted by Tomorrowful at 6:39 PM on July 13, 2010

Wow, that's great! 180K is nothing to snort at.

You should talk with a trusted financial adviser. That said, I think you could earn more than 4.125% by investing the 31K you're considering paying off. Further, I think you could earn more on the full principle than you will end up paying in interest on your grad school loans, assuming they are Federal loans (Direct Loans). Depending what field you're going into, you could qualify for loan forgiveness (of Federal loans) once you're out of grad school, if you go into public service/public interest/non-profit work. I do not encourage deception, but I believe in the benefit of shifting assets around in order to preserve them for your own (and maybe kids'?) future.
posted by turtlewithoutashell at 6:49 PM on July 13, 2010

Bearing in mind Tomorrowful's comment about the fixed return on paying off your loans, you should weigh that against the possibility that you can get a higher return elsewhere. It's a very volatile market these days so nothing is certain there, but in normal times it's reasonable to expect a return higher than 4.125% on your investments. If you think you can get a return of higher than 4.125% on a given investment, then that should take priority over paying off your loan in full; just continue to make the minimum monthly payments until it runs out. Just remember that any expectation of a higher return is just that- an expectation, not a guarantee. Lots of factors weigh here: certainty versus uncertainty, "burden" of debt weighing over your head versus feeling free and clear of that obligation, and others. There's no one right answer for those things; you need to go with what makes you feel most secure.
posted by holterbarbour at 6:51 PM on July 13, 2010

Pay off the loans.
posted by dfriedman at 6:52 PM on July 13, 2010

I would allocate from fastest-accruing interest to lowest-accruing interest. (I'm pretty sure that's the right term.)
So, take the 4.125 interest rate on your loans. (I know payment of the loans is deferred--but I'm assuming interest will still be accruing?)
-Do you have debts with interest accruing at a higher rate? If yes--pay those first.
-Will your new school loans have interest accruing at a higher rate? If yes--use the 180K to not take out new loans.
-Do you have a savings or investment plan in mind with interest accruing in your favor at a higher interest rate? If yes--consider investing.

One major reason to see a financial planner would be to help figure out these questions. Is there some investment strategy (I don't mean like "investment opportunity" as in "pyramid scheme," I mean a legitimate plan) that you'd overlook? Also, the choice you make might affect the amount of taxes you'll have to pay on the $180K, and a financial professional or lawyer could help you consider that.
posted by sallybrown at 6:53 PM on July 13, 2010

Just wanted to put in a plug for making some sort of donation to charity.

I also came into a (much smaller) inheritance during grad school, and every time I get a small windfall, it makes me really happy to earmark about 10% of it for charitable donations to wonderful causes. It's not everyone's bag, I know, but in terms of feeling warm and fuzzy about how you've spent your money, there's little you can do that will pay off as well. :-)

Of course, I also aggressively pay on my student loans and think that probably, you should pay your loans down. Sure you COULD invest it and probably make more, but the peace of mind you'll get when you have no debt is pretty priceless from what I hear (I'm nowhere near it).

You may also enjoy the posts on how to spend a windfall at Get Rich Slowly, plus there's a lot of other great info there if you want to learn about finance! http://www.getrichslowly.org/blog/2006/05/30/what-to-do-with-a-windfall/
posted by treehorn+bunny at 6:58 PM on July 13, 2010

Sallybrown- if it is an inheretince, then taxes have already been paid on it.
posted by TheBones at 7:55 PM on July 13, 2010

Keep in mind that student loan interest is tax-deductable. If you're filing jointly with your mortgage-owning husband, your student loan interest is effectively decreased further.

Really, with this sum of money, you would be well advised to spend a very small percentage of it (i.e. 0.02%) on a financial adviser who can help you parse your situation. If your grad program will likely lead to a higher paying job, you may be best off maxing out your Roth contributions for the length of time you're in grad school. If your grad school is not likely to lead to a higher paying job, you may be better off not having the weight of loans to burden you. There are too many factors here to trust to ask.me.
posted by u2604ab at 9:34 PM on July 13, 2010

Bearing in mind Tomorrowful's comment about the fixed return on paying off your loans, you should weigh that against the possibility that you can get a higher return elsewhere.

...though if you consider this option, you should also bear in mind that your interest earnings may be taxed. I don't know if your interest payments would be equivalently tax deductable (where I live they wouldn't be).

I think part of that 180k should go to a decent financial advisor who can tell you about the tax treatment of each option within your jurisdiction.
posted by pompomtom at 10:59 PM on July 13, 2010

If you're the sort of person who doesn't like to fuss with money -- doesn't enjoy the game of buying/selling/learning/investing -- then pay off your student loans, set aside a chunk as "pin" money, give the rest to a financial advisor and specify "long term growth" and have a nice but not extravagant vacation. I'd let the mortgage ride as-is, although I'd certainly be paying extra principal per month (in the early part of your loan, a few hundred bucks extra can knock entire payments off the back end).

If you like fussing and playing with money and investments, by all means have a great time playing that game, but know that it's really a part time job from a couple days a month to a couple days a week. If you're not willing to give it that much time, please don't bother -- just hand the money over to someone who does it as a full time job, and enjoy the things you already enjoy.

Thumbnail: people who aren't serious about their investing are the fields tilled by people who are serious.
posted by seanmpuckett at 6:01 AM on July 14, 2010

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