To loan or not to loan?

Discuss various money matters here. Loans (federal and private), scholarships, lottery winnings, or other school finance related information and queries.
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bretby
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To loan or not to loan?

Postby bretby » Wed May 20, 2015 9:27 am

I am trying to decide whether or not to take out federal loans. Here's my situation:

I have a full tuition scholarship, but will need to pay for living expenses in a high COL area. My annual COL will be, at minimum, 25k, probably closer to 28k. I have assets that I could liquidate to cover my full COL BUT that would wipe out over 1/3 of said assets. I currently do not have any debt. I have been thinking about at a minimum taking out the Stafford. So, my questions are:

1. Should I take out just the Stafford?
2. Should I take out additional federal loans to cover the shortfall?
OR
3. Should I liquidate assets and pay my living expenses out of pocket?

Thanks for your insights!

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RareExports
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Re: To loan or not to loan?

Postby RareExports » Wed May 20, 2015 9:31 am

What kind of assets? How liquid are they?

I would probably not do option 2 unless your assets would be pretty tough to liquidate. I would only do option 1 if your rate of return on the assets is above 7 or 8 percent.

ETA: You probably already know all of this, and without knowing more about your situation, we can't really give you any information you don't already have.

jepper
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Re: To loan or not to loan?

Postby jepper » Wed May 20, 2015 9:33 am

I am in a very similar situation and I have decided to just pay it. Although, it really comes down to personal preference. I place a lot of value on being in 0 debt and the peace of mind that comes with that. Sure there are other things you could do with that money but I'm not sure there is a great probability that you will offset the interest you have to pay on those loans. I dunno... I just can't justify taking out loans when the money is sitting there and it won't even wipe out half of your assets..

FloridaCoastalorbust
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Re: To loan or not to loan?

Postby FloridaCoastalorbust » Wed May 20, 2015 10:12 am

I'm not a financial advisor. But I'm in the same position as you, and will use my already-liquid assets to cover my COL. The reason for this is that the interest on my liquid assets is significantly lower than the interest rate on loans is. It doesn't make sense for me to take out loans when my assets are generating virtually zero interest. I think you simply need to consider the size and interest of your assets and determine if such interest is higher/lower than the available student loan rates. If you for example have a 10% index fund I wouldn't pull it for your loans. But if you're sitting on 3% bonds with a no-penalty withdrawal, I would pull it and forgo loans.

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starry eyed
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Re: To loan or not to loan?

Postby starry eyed » Thu May 21, 2015 9:42 am

FloridaCoastalorbust wrote:I'm not a financial advisor. But I'm in the same position as you, and will use my already-liquid assets to cover my COL. The reason for this is that the interest on my liquid assets is significantly lower than the interest rate on loans is. It doesn't make sense for me to take out loans when my assets are generating virtually zero interest. I think you simply need to consider the size and interest of your assets and determine if such interest is higher/lower than the available student loan rates. If you for example have a 10% index fund I wouldn't pull it for your loans. But if you're sitting on 3% bonds with a no-penalty withdrawal, I i would not liquidate your assets.


The rate of return you would receive if it were invested in index fund would be above 7% long-term and the earlier you have it invested, the more it can compound, i would just live like a pauper when you graduate and pay down the debt aggresively OP

but i don't know your current investment situation to really have a helpful opinion (op)

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JohannDeMann
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Re: To loan or not to loan?

Postby JohannDeMann » Thu May 21, 2015 10:43 am

If you are at a school that virtually guarantees biglaw, you want biglaw for more than 3+ years, then maybe pay out of pocket. If you are not in that situation, you should take out the loans in case you go PSLF or PI.

Edit - I would take the loans in both cases. Ime, it is a lot harder to build assets than people think, and having your money/assets make money is a shitload easier than having your individual mind and body make money.

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iamgeorgebush
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Re: To loan or not to loan?

Postby iamgeorgebush » Thu May 21, 2015 11:00 am

starry eyed wrote:
FloridaCoastalorbust wrote:I'm not a financial advisor. But I'm in the same position as you, and will use my already-liquid assets to cover my COL. The reason for this is that the interest on my liquid assets is significantly lower than the interest rate on loans is. It doesn't make sense for me to take out loans when my assets are generating virtually zero interest. I think you simply need to consider the size and interest of your assets and determine if such interest is higher/lower than the available student loan rates. If you for example have a 10% index fund I wouldn't pull it for your loans. But if you're sitting on 3% bonds with a no-penalty withdrawal, I i would not liquidate your assets.


The rate of return you would receive if it were invested in index fund would be above 7% long-term and the earlier you have it invested, the more it can compound, i would just live like a pauper when you graduate and pay down the debt aggresively OP

but i don't know your current investment situation to really have a helpful opinion (op)

uh the stock market has a long-term CAGR b/t 6-7% when adjusted for inflation, which is right around the interest rate on federal student loans (a little higher than the rate for direct unsubsidized, a little lower than the rate for direct PLUS loans). if you don't adjust for inflation, the long-term CAGR is around 9%.

i am not a financial adviser (just a law student who thinks about her debt), but some things to keep in mind:

-the current 5.84% interest rate for direct unsubsidized loans and 6.84% interest rate for direct PLUS loans
-capital gains or other taxes that you may have to pay on returns from your investments
-a substantial portion of tuition payments are tax-deductible, but a smaller portion of interest payments on student loans are tax-deductible (i believe)
-if you get biglaw (and this is an *if* --- i wouldn't rely on this contingency unless you go to a top school, maybe T6 + penn), you may be able to refinance your student loans at a lower rate, see https://www.sofi.com, which could be an attractive option if you know you want to do private practice (which could certainly be hard to know at this point---in which case you may not want to take the possibility of refinancing into account when deciding whether to take out loans)

but OP, it sounds like you are loaded ($25,000 annual COL x 3 years x 3 = $225,000 in assets), so why not just go and ask your financial adviser about these things rather than a bunch of law students, 0Ls, and (if you're lucky) a young att'y or two who probably knows little about personal finance.

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bretby
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Re: To loan or not to loan?

Postby bretby » Thu May 21, 2015 11:34 am

iamgeorgebush wrote:
starry eyed wrote:
FloridaCoastalorbust wrote:I'm not a financial advisor. But I'm in the same position as you, and will use my already-liquid assets to cover my COL. The reason for this is that the interest on my liquid assets is significantly lower than the interest rate on loans is. It doesn't make sense for me to take out loans when my assets are generating virtually zero interest. I think you simply need to consider the size and interest of your assets and determine if such interest is higher/lower than the available student loan rates. If you for example have a 10% index fund I wouldn't pull it for your loans. But if you're sitting on 3% bonds with a no-penalty withdrawal, I i would not liquidate your assets.


The rate of return you would receive if it were invested in index fund would be above 7% long-term and the earlier you have it invested, the more it can compound, i would just live like a pauper when you graduate and pay down the debt aggresively OP

but i don't know your current investment situation to really have a helpful opinion (op)

uh the stock market has a long-term CAGR b/t 6-7% when adjusted for inflation, which is right around the interest rate on federal student loans (a little higher than the rate for direct unsubsidized, a little lower than the rate for direct PLUS loans). if you don't adjust for inflation, the long-term CAGR is around 9%.

i am not a financial adviser (just a law student who thinks about her debt), but some things to keep in mind:

-the current 5.84% interest rate for direct unsubsidized loans and 6.84% interest rate for direct PLUS loans
-capital gains or other taxes that you may have to pay on returns from your investments
-a substantial portion of tuition payments are tax-deductible, but a smaller portion of interest payments on student loans are tax-deductible (i believe)
-if you get biglaw (and this is an *if* --- i wouldn't rely on this contingency unless you go to a top school, maybe T6 + penn), you may be able to refinance your student loans at a lower rate, see https://www.sofi.com, which could be an attractive option if you know you want to do private practice (which could certainly be hard to know at this point---in which case you may not want to take the possibility of refinancing into account when deciding whether to take out loans)

but OP, it sounds like you are loaded ($25,000 annual COL x 3 years x 3 = $225,000 in assets), so why not just go and ask your financial adviser about these things rather than a bunch of law students, 0Ls, and (if you're lucky) a young att'y or two who probably knows little about personal finance.


Thanks everyone for the input. I am personally not that involved in my investments and have really left them to my advisor in the past, but I know I need to remedy this. My average annual return has been roughly 10%, and I am planning on asking my financial advisor but, sadly, my long time financial advisor recently died and I don't have much experience with the new guy, so I am gathering opinions as widely as possible.

I should have clarified that I have zero interest in big law, and am going to school for PI. The LRAP cap at my law school is pretty low, but even if I am able to squeeze a year or two out of it, I think loans make more sense. This experience is really exposing my financial illiteracy.......

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starry eyed
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Re: To loan or not to loan?

Postby starry eyed » Thu May 21, 2015 11:43 am

iamgeorgebush wrote:
starry eyed wrote:
FloridaCoastalorbust wrote:I'm not a financial advisor. But I'm in the same position as you, and will use my already-liquid assets to cover my COL. The reason for this is that the interest on my liquid assets is significantly lower than the interest rate on loans is. It doesn't make sense for me to take out loans when my assets are generating virtually zero interest. I think you simply need to consider the size and interest of your assets and determine if such interest is higher/lower than the available student loan rates. If you for example have a 10% index fund I wouldn't pull it for your loans. But if you're sitting on 3% bonds with a no-penalty withdrawal, I i would not liquidate your assets.


The rate of return you would receive if it were invested in index fund would be above 7% long-term and the earlier you have it invested, the more it can compound, i would just live like a pauper when you graduate and pay down the debt aggresively OP

but i don't know your current investment situation to really have a helpful opinion (op)

uh the stock market has a long-term CAGR b/t 6-7% when adjusted for inflation, which is right around the interest rate on federal student loans (a little higher than the rate for direct unsubsidized, a little lower than the rate for direct PLUS loans). if you don't adjust for inflation, the long-term CAGR is around 9%.

i am not a financial adviser (just a law student who thinks about her debt), but some things to keep in mind:

-the current 5.84% interest rate for direct unsubsidized loans and 6.84% interest rate for direct PLUS loans
-capital gains or other taxes that you may have to pay on returns from your investments
-a substantial portion of tuition payments are tax-deductible, but a smaller portion of interest payments on student loans are tax-deductible (i believe)
-if you get biglaw (and this is an *if* --- i wouldn't rely on this contingency unless you go to a top school, maybe T6 + penn), you may be able to refinance your student loans at a lower rate, see https://www.sofi.com, which could be an attractive option if you know you want to do private practice (which could certainly be hard to know at this point---in which case you may not want to take the possibility of refinancing into account when deciding whether to take out loans)

but OP, it sounds like you are loaded ($25,000 annual COL x 3 years x 3 = $225,000 in assets), so why not just go and ask your financial adviser about these things rather than a bunch of law students, 0Ls, and (if you're lucky) a young att'y or two who probably knows little about personal finance.


i didn't adjust for inflation, but is that including dividends as well?

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iamgeorgebush
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Re: To loan or not to loan?

Postby iamgeorgebush » Fri May 22, 2015 2:08 am

starry eyed wrote:
iamgeorgebush wrote:
starry eyed wrote:
FloridaCoastalorbust wrote:I'm not a financial advisor. But I'm in the same position as you, and will use my already-liquid assets to cover my COL. The reason for this is that the interest on my liquid assets is significantly lower than the interest rate on loans is. It doesn't make sense for me to take out loans when my assets are generating virtually zero interest. I think you simply need to consider the size and interest of your assets and determine if such interest is higher/lower than the available student loan rates. If you for example have a 10% index fund I wouldn't pull it for your loans. But if you're sitting on 3% bonds with a no-penalty withdrawal, I i would not liquidate your assets.


The rate of return you would receive if it were invested in index fund would be above 7% long-term and the earlier you have it invested, the more it can compound, i would just live like a pauper when you graduate and pay down the debt aggresively OP

but i don't know your current investment situation to really have a helpful opinion (op)

uh the stock market has a long-term CAGR b/t 6-7% when adjusted for inflation, which is right around the interest rate on federal student loans (a little higher than the rate for direct unsubsidized, a little lower than the rate for direct PLUS loans). if you don't adjust for inflation, the long-term CAGR is around 9%.

i am not a financial adviser (just a law student who thinks about her debt), but some things to keep in mind:

-the current 5.84% interest rate for direct unsubsidized loans and 6.84% interest rate for direct PLUS loans
-capital gains or other taxes that you may have to pay on returns from your investments
-a substantial portion of tuition payments are tax-deductible, but a smaller portion of interest payments on student loans are tax-deductible (i believe)
-if you get biglaw (and this is an *if* --- i wouldn't rely on this contingency unless you go to a top school, maybe T6 + penn), you may be able to refinance your student loans at a lower rate, see https://www.sofi.com, which could be an attractive option if you know you want to do private practice (which could certainly be hard to know at this point---in which case you may not want to take the possibility of refinancing into account when deciding whether to take out loans)

but OP, it sounds like you are loaded ($25,000 annual COL x 3 years x 3 = $225,000 in assets), so why not just go and ask your financial adviser about these things rather than a bunch of law students, 0Ls, and (if you're lucky) a young att'y or two who probably knows little about personal finance.


i didn't adjust for inflation, but is that including dividends as well?

pretty sure it does.




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