Savings vs. more loans

Discuss various money matters here. Loans (federal and private), scholarships, lottery winnings, or other school finance related information and queries.
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LSATmakesMeNeurotic
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Savings vs. more loans

Postby LSATmakesMeNeurotic » Sat Jun 25, 2011 3:03 pm

I have a decent amount of savings that I could use for COL for at least two years if I just take out just the subsidized and unsubsidized loans. My question is, should I use my savings, or should I take out a GradPLUS loan to cover COL and keep my savings squirreled away and invest them? What about interest? I estimate my budget to be about 10k under what the school estimates for COA, but would it be a good idea to take out a bit more in loans and pay off the interest right away with the excess?

I never had to take out loans in UG, so this is a completely new experience for me.

blsingindisguise
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Re: Savings vs. more loans

Postby blsingindisguise » Sat Jun 25, 2011 3:21 pm

LSATmakesMeNeurotic wrote:I have a decent amount of savings that I could use for COL for at least two years if I just take out just the subsidized and unsubsidized loans. My question is, should I use my savings, or should I take out a GradPLUS loan to cover COL and keep my savings squirreled away and invest them? What about interest? I estimate my budget to be about 10k under what the school estimates for COA, but would it be a good idea to take out a bit more in loans and pay off the interest right away with the excess?

I never had to take out loans in UG, so this is a completely new experience for me.


Wait I don't understand -- you're thinking about taking out extra loans to pay the interest on your loans? That makes no sense.

Conventional wisdom says that unless you can earn a higher rate of return on the money you have saved than your loan interest rate, it's better to pay out of your savings. OTOH, if you can get subsidized stafford loans that's basically free money for three years (no interest accrues until after you graduate, assuming they still work the same way) so taking those doesn't seem like a bad idea. Of course I'd make sure you keep a bit of savings for an emergency fund.

duckmoney
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Re: Savings vs. more loans

Postby duckmoney » Sat Jun 25, 2011 3:27 pm

What are your plans?

If you're planning to go to a school and do PI and use LRAP/IBR, then borrow as much money as you can! The loans will be forgiven, and you get FREE MONEY.

If not, then use as much savings as you can to pay costs first. GradPLUS loans are quite terrible really. Honestly the ONLY thing that makes them better than private loans is that you can put them on IBR if you have to, which unfortunately ITE is a really big plus. But compared to stafford loans they're garbage.

HWS08
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Re: Savings vs. more loans

Postby HWS08 » Sat Jun 25, 2011 3:45 pm

Unless you think you can get return on your invested savings that is greater than the interest you'll be paying on your loans I'd use the savings. I think the interest on GradPLUS is currently close to 8%. I think it would be tough to consistently get that good of a return by investing your savings.

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swc65
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Re: Savings vs. more loans

Postby swc65 » Sat Jun 25, 2011 3:51 pm

I wrestled with this myself. I decided to take out as much money as possible and hoard cash. That way, if I were to graduate without a job, I would have nice buffer of cash for the job search. If I don't need the money once law school is over, then I can just pay it back. Of course, this costs money (interest) for the security of knowing I would not be homeless upon graduation. Also, if you do not have the discipline to not spend the cash once you have it, this is probably not a good idea.

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AreJay711
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Re: Savings vs. more loans

Postby AreJay711 » Sat Jun 25, 2011 4:02 pm

swc65 wrote:I wrestled with this myself. I decided to take out as much money as possible and hoard cash. That way, if I were to graduate without a job, I would have nice buffer of cash for the job search. If I don't need the money once law school is over, then I can just pay it back. Of course, this costs money (interest) for the security of knowing I would not be homeless upon graduation. Also, if you do not have the discipline to not spend the cash once you have it, this is probably not a good idea.

This is the right idea IMO. Basically what you pay in extra interest compared to ROI is just insurance in case you have a > 6 mo. job search and have to start repaying without a job. Having 50K less in loans won't help you if you are unemployed with no savings but 50K in cash would.

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EarlCat
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Re: Savings vs. more loans

Postby EarlCat » Sat Jun 25, 2011 4:49 pm

If you had just graduated, and had to make this decision back in June 2008, which option would you have regretted doing?




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