Do I drain my savings or take out a loan?

Discuss various money matters here. Loans (federal and private), scholarships, lottery winnings, or other school finance related information and queries.
snarfing
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Do I drain my savings or take out a loan?

Postby snarfing » Tue Apr 25, 2017 1:17 pm

Hi, I need to take about 15k out a year for law school living expenses. I do have the ability to completely drain my savings to do this, alternatively I can take out a stafford loan to cover this. What would make more sense? I'm leaning towards loans so I am not at 0 dollars when I graduate, even if it means it ends up costing me a bit more

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waldorf
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Re: Do I drain my savings or take out a loan?

Postby waldorf » Tue Apr 25, 2017 1:18 pm

I actually have the same question so I'm just gonna wait..

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poptart123
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Re: Do I drain my savings or take out a loan?

Postby poptart123 » Tue Apr 25, 2017 1:21 pm

I have savings that will be going towards school and I plan to keep 10k of it at all times for emergencies. My final year at school I plan to take out the 'full' cost of living and use the 10k + those extra funds for living expenses up until employment.

snarfing
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Re: Do I drain my savings or take out a loan?

Postby snarfing » Tue Apr 25, 2017 1:22 pm

poptart123 wrote:I have savings that will be going towards school and I plan to keep 10k of it at all times for emergencies. My final year at school I plan to take out the 'full' cost of living and use the 10k + those extra funds for living expenses up until employment.


interesting idea to mix it up, I should add I am living in nyc so the extra 10k wont last me that long if I cant find a job.

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poptart123
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Re: Do I drain my savings or take out a loan?

Postby poptart123 » Tue Apr 25, 2017 1:31 pm

snarfing wrote:
poptart123 wrote:I have savings that will be going towards school and I plan to keep 10k of it at all times for emergencies. My final year at school I plan to take out the 'full' cost of living and use the 10k + those extra funds for living expenses up until employment.


interesting idea to mix it up, I should add I am living in nyc so the extra 10k wont last me that long if I cant find a job.


Oh yeah plan accordingly. I will be in a lower COL area so I figured that amount + extra loans my last year should carry me six months to a year at least.

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bretby
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Re: Do I drain my savings or take out a loan?

Postby bretby » Thu May 11, 2017 12:26 am

snarfing wrote:Hi, I need to take about 15k out a year for law school living expenses. I do have the ability to completely drain my savings to do this, alternatively I can take out a stafford loan to cover this. What would make more sense? I'm leaning towards loans so I am not at 0 dollars when I graduate, even if it means it ends up costing me a bit more


I would take out loans and invest your savings. Keep your loans as minimal as possible, though.

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twiix
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Re: Do I drain my savings or take out a loan?

Postby twiix » Thu May 11, 2017 2:13 pm

bretby wrote:
snarfing wrote:Hi, I need to take about 15k out a year for law school living expenses. I do have the ability to completely drain my savings to do this, alternatively I can take out a stafford loan to cover this. What would make more sense? I'm leaning towards loans so I am not at 0 dollars when I graduate, even if it means it ends up costing me a bit more


I would take out loans and invest your savings. Keep your loans as minimal as possible, though.

+1.

Stafford is 5.4% I think? Take your savings and set aside a small bit of a rainy day fund, just so you have it accessible in case of an emergency. Then put the rest in an investment account. Put it in an etf or index fund that tracks the market and it will outperform the 5.41% that you will owe in interest.

YTD is 7.71% fwiw

silenttimer
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Re: Do I drain my savings or take out a loan?

Postby silenttimer » Thu May 11, 2017 2:44 pm

If you get Stafford Subsidized, then take the loan because you do not pay interest while in school!!!

cavalier1138
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Re: Do I drain my savings or take out a loan?

Postby cavalier1138 » Thu May 11, 2017 3:43 pm

silenttimer wrote:If you get Stafford Subsidized, then take the loan because you do not pay interest while in school!!!


No such thing as subsidized loans for grad school.

mathaddict
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Re: Do I drain my savings or take out a loan?

Postby mathaddict » Thu May 11, 2017 3:51 pm

TWiiX wrote:
bretby wrote:
snarfing wrote:Hi, I need to take about 15k out a year for law school living expenses. I do have the ability to completely drain my savings to do this, alternatively I can take out a stafford loan to cover this. What would make more sense? I'm leaning towards loans so I am not at 0 dollars when I graduate, even if it means it ends up costing me a bit more


I would take out loans and invest your savings. Keep your loans as minimal as possible, though.

+1.

Stafford is 5.4% I think? Take your savings and set aside a small bit of a rainy day fund, just so you have it accessible in case of an emergency. Then put the rest in an investment account. Put it in an etf or index fund that tracks the market and it will outperform the 5.41% that you will owe in interest.

YTD is 7.71% fwiw


Whoa now. Three years is virtually no time in the market. Therefore, you can't expect to attain an average market yield. You could very well lose money over that three year period, especially given how high everything is right now, and a 5.4% yield going forward may very well just not happen.

OP, if you want to invest the money, ball out. But if you're looking for a surefire >5.4% yield, good luck.

EDIT: Furthermore, I think it was Buffett who said to only invest money you would never need again.

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twiix
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Re: Do I drain my savings or take out a loan?

Postby twiix » Thu May 11, 2017 4:02 pm

mathaddict wrote:
TWiiX wrote:
bretby wrote:
snarfing wrote:Hi, I need to take about 15k out a year for law school living expenses. I do have the ability to completely drain my savings to do this, alternatively I can take out a stafford loan to cover this. What would make more sense? I'm leaning towards loans so I am not at 0 dollars when I graduate, even if it means it ends up costing me a bit more


I would take out loans and invest your savings. Keep your loans as minimal as possible, though.

+1.

Stafford is 5.4% I think? Take your savings and set aside a small bit of a rainy day fund, just so you have it accessible in case of an emergency. Then put the rest in an investment account. Put it in an etf or index fund that tracks the market and it will outperform the 5.41% that you will owe in interest.

YTD is 7.71% fwiw


Whoa now. Three years is virtually no time in the market. Therefore, you can't expect to attain an average market yield. You could very well lose money over that three year period, especially given how high everything is right now, and a 5.4% yield going forward may very well just not happen.

OP, if you want to invest the money, ball out. But if you're looking for a surefire >5.4% yield, good luck.

EDIT: Furthermore, I think it was Buffett who said to only invest money you would never need again.


I definitely didn't guarantee an outcome. Obviously the market can go to shit. And while 3 years is no time in the market, you don't need a long "time in the market" to track the gains. 6 of the 8 last years have resulted in >6% returns year over year. While it is a risk, it isn't a HUGE hit by having to repay the interest at such a small % if you did lose money on the market.

2009 25.94%
2010 14.82%
2011 2.10%
2012 15.89%
2013 32.15%
2014 13.52%
2015 1.38%
2016 11.74%

At the end of the day if you are comparing the possibility of >5.5% returns on the market, I'll take my chances.

mathaddict
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Re: Do I drain my savings or take out a loan?

Postby mathaddict » Thu May 11, 2017 4:12 pm

TWiiX wrote:
I definitely didn't guarantee an outcome.


"It will outperform the 5.41%"

TWiiX wrote:Obviously the market can go to shit. And while 3 years is no time in the market, you don't need a long "time in the market" to track the gains.


Yes, you do. Small sample sizes are bad for anything, but they're a great way to lose money in the market. According to the Intelligent Investor, Benjamin Graham once didn't invest in a security because he only had twenty years of data. I can cherry-pick a few years of almost any security in the world and show why it's the greatest thing since sliced bread.

TWiiX wrote:6 of the 8 last years have resulted in >6% returns year over year.


Out of curiosity, what happened immediately before that? Say, 2007 and 2008?

TWiiX wrote:While it is a risk, it isn't a HUGE hit by having to repay the interest at such a small % if you did lose money on the market.

2009 25.94%
2010 14.82%
2011 2.10%
2012 15.89%
2013 32.15%
2014 13.52%
2015 1.38%
2016 11.74%

At the end of the day if you are comparing the possibility of >5.5% returns on the market, I'll take my chances.


Your argument: because the market has done well for the last several years, it will do well in the near future. That boils down to buy high, sell low.

Yeah, sure, it's not a permanently life-changing amount of money one way or the other, so if OP wants to invest, go ahead. But in terms of OP's financials, there's more than enough reason not to. Besides, the "it's not a lot of money" argument goes both ways, and personally, I'd rather have the liquidity associated with a savings account than the potential excess return. Again, that's OP's choice.

Edit: accidentally sounded like a huge douche in the last paragraph. My bad.

Necho2
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Re: Do I drain my savings or take out a loan?

Postby Necho2 » Thu May 11, 2017 6:38 pm

Also remember that if you have any plans to attempt a non-Biglaw career in FedGov or LRAP-eligible employment, assign that possibility (and the fact that you probably wouldn't have to pay back the 45-50k) some value. I'm in the same boat as you, and a decent part of my final decision to role w/ not exhausting savings and investments is that even if there's only a 15% chance I don't do Biglaw, that's still a pretty nice expected value relative to the interest buildup+origination fees. And at least for now my investments are well-exceeding 5.3% return!

SpookySalem92
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Re: Do I drain my savings or take out a loan?

Postby SpookySalem92 » Fri May 12, 2017 5:38 pm

I have a similar question (debt vs. liquidating assets), but different circumstances. Upfront: I recognize I'm in a very fortunate position.

I'll be paying half cost (half everything, tuition/COL/etc...) for law school; I will most likely be in NYC, and while my postgrad plans aren't definite am assuming at least a few years of BigLaw. Based on my understanding, I should expect law school to cost around $90k p.a. , so taking my $45k portion I'll likely need to shell out ~$140k altogether.

My circumstances are such that I could cover this without needing to incur debt, but I would have to drawn down a sizable (but sub-majority) portion of a brokerage account that's essentially my life's savings. Alternatively I could take out a loan for a portion of the $140k--with the note that in addition to other loans, through my broker I have access to a LOC at 4.867% but only if I take out above $100k.

Should I just bite the bullet and shell out the $$$, or would some combination of cash and debt make sense (in order to allow my investments to earn interest while in school)?

Note: one factor I just considered a bit more is timing. The allocation of the covered vs. uncovered portion of law school costs is (in my understanding) pretty flexible, so one option could theoretically be to just have the first 1.5yrs of costs covered, then assume 100% of the the costs of the latter half. This would obviously give me a shorter window between school and employment, and therefore a shorter window during which I'd either accrue interest due on loans and/or be able to start replenishing my savings. The fundamental question of cash vs. debt still remains tho.

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dannyswo
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Re: Do I drain my savings or take out a loan?

Postby dannyswo » Sun May 14, 2017 4:41 am

If the investment returns are greater than the interest on the loan, keep the investment.

JC2017
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Re: Do I drain my savings or take out a loan?

Postby JC2017 » Mon May 15, 2017 3:11 pm

I don't think I saw talk about capital gains tax in this post. Don't forget that you'll pay that on any investment profit, so its not as simple as saying "if I earn X% and its greater than the Y% interest rate on the loans I should do it".

Also, isn't there an initiation fee for getting a student loan? I have no personal experience, but I'm pretty sure its something like 3-4% of the total loan. Pretty hefty sum, depending on the size of the loan, that also needs to be factored in to any talk of investment profit vs. taking out loans.

Here is my plan: I'm looking at about a $40k total cost for my law school, including COL (which is free for me). I'm planning to invest $30k of my savings into a 529 investment account right now, and hope that I make enough from that to cover the extra $10k over the course of the 3 years (or just pay the difference in cash when I owe it). For those who don't know, a 529 account is essentially like investing in a mutual fund, except you don't have to pay capital gains tax on profits as long as you use the money for education. Pretty sweet deal if you know you're going to have to shell out the money anyways and already have it. Anything is better than the .1% or whatever you earn in a savings account.

I will caveat by saying this is all theoretical knowledge based on my understanding of the 529 and from meeting with a dude at bank of america. If anyone has any personal experience with this, please share!

SpookySalem92
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Re: Do I drain my savings or take out a loan?

Postby SpookySalem92 » Wed May 24, 2017 9:44 am

For the sake of argument, assume that capital gains taxes are immaterial in my case; precedent suggests I could be fortunate enough to have those covered while in school. So it does potentially reduce to a matter of pitting rates against each other. How would I go about predicting a reasonable annualized rate of return to assume on a portfolio over the next three years? I would have to think a 6% return each year would be tremendously optimistic...

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dannyswo
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Re: Do I drain my savings or take out a loan?

Postby dannyswo » Mon Jun 05, 2017 8:40 am

SpookySalem92 wrote:For the sake of argument, assume that capital gains taxes are immaterial in my case; precedent suggests I could be fortunate enough to have those covered while in school. So it does potentially reduce to a matter of pitting rates against each other. How would I go about predicting a reasonable annualized rate of return to assume on a portfolio over the next three years? I would have to think a 6% return each year would be tremendously optimistic...

6% is probably right for an estimate, but also realize that you'll have ups and downs. Having the flexibility to hang on to an investment in a down year so you can sell it when it's back up is key.

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cub1014
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Re: Do I drain my savings or take out a loan?

Postby cub1014 » Mon Jun 05, 2017 10:13 am

Way to conveniently leave out the effects of the great recession of 2008. Sure investing in an equity etf over the long term will beat the Stafford rate, but intending to invest for 3 years with the idea of taking money out right after the third year for emergency expenses, that's pretty risky. There are better options if you're trying to maintain in the short term.




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