Find all School-related info fast with the new School-Specific MBA Forum

It is currently 23 Aug 2014, 12:01

Close

GMAT Club Daily Prep

Thank you for using the timer - this advanced tool can estimate your performance and suggest more practice questions. We have subscribed you to Daily Prep Questions via email.

Customized
for You

we will pick new questions that match your level based on your Timer History

Track
Your Progress

every week, we’ll send you an estimated GMAT score based on your performance

Practice
Pays

we will pick new questions that match your level based on your Timer History

Not interested in getting valuable practice questions and articles delivered to your email? No problem, unsubscribe here.

Events & Promotions

Events & Promotions in June
Open Detailed Calendar

Financing vs. Cash -- how much cash to use?

  Question banks Downloads My Bookmarks Reviews Important topics  
Author Message
Intern
Intern
avatar
Joined: 05 Feb 2010
Posts: 14
Location: San Francisco
Schools: CBS 2012
Followers: 0

Kudos [?]: 1 [0], given: 1

Financing vs. Cash -- how much cash to use? [#permalink] New post 10 Jun 2010, 15:29
I'm new to college financing since I didn't need any for undergrad, so GMAT Club's fantastic stick-ied post about financing (here: http://gmatclub.com/forum/financing-your-mba-41568.html) was excellent help. But I'm still struggling to balance financing against cash.

Paying cash is obviously more cost effective than financing, but I'd also like to retain a cushion for unexpected difficulties (e.g. higher costs than anticipated, difficulty landing a position after school ends). So how much cash do you use, and how much do you keep?

Does anyone have a rough heuristic / thoughts about how to balance this?

My thinking goes something like this. I've been saving up cash, but I'm also attending one of the most expensive programs in the world:
Tuition: ~$53k per year
Total CoA: ~$84k per year (living in NYC ain't cheap)

I could...
1) Finance all CoA
$168k in student loans
Pay only to prevent capitalized interest (rough ballpark: $14-20k total)
Pro: Plenty of funds during school
Con: Costly

2) Finance all tuition only
$106k in student loans
Paying interest to prevent interest capitalization would be less costly (rough ballpark: $8-12k)
Pro: Cheaper
Con: Would finish school with little cash left over

3) Something inbetween

I am also considering hedging my loan rates with some private loans -- and if we turn into deflating Japan, I'll keep them, and if conventional wisdom holds and we inflate like Brazil in the 80s, then I can just pay off the private loans immediately with cash. (Remember, most good private loans out there don't compound while you're in school.)

Some assumptions:
1) No prepayment penalties on (both gov't and private) loans. I'm fairly certain there are none, but I haven't seen it confirmed anywhere yet.
2) Gov't and private lenders will still allow me to finance so much $$$ despite my cash reserves. Will they try to deplete me first before lending me too much money?

A lot in this post... sorry :)
Kaplan GMAT Prep Discount CodesKnewton GMAT Discount CodesManhattan GMAT Discount Codes
Director
Director
User avatar
Status: Badgerine!
Joined: 04 Oct 2008
Posts: 894
Location: United States (CA)
Concentration: Entrepreneurship, Strategy
Schools: Michigan (Ross) - Class of 2013
GMAT 1: 770 Q50 V44
GPA: 3.3
WE: Project Management (Aerospace and Defense)
Followers: 61

Kudos [?]: 262 [0], given: 86

GMAT Tests User Reviews Badge
Re: Financing vs. Cash -- how much cash to use? [#permalink] New post 11 Jun 2010, 16:45
I like to hold on to my cash like a safety blanket, so I would choose to finance mostly everything and use my cash to pay the non-deferred interest. Having some cash available post-MBA might be helpful for settling down in a new location, so keep that in mind too.

If I had enough cash to pay living expenses, non-deferred interest, and still have a little left over, I'd probably follow plan #2 that you've described.
_________________

Get the best GMAT Prep Resources with GMAT Club Premium Membership

Manager
Manager
avatar
Joined: 21 Feb 2010
Posts: 214
Followers: 1

Kudos [?]: 12 [0], given: 1

GMAT Tests User
Re: Financing vs. Cash -- how much cash to use? [#permalink] New post 11 Jun 2010, 19:09
why don't you do some calculations and decide which option is cheaper? what's the opportunity cost for the cash? if you finance most of the costs, what are you going to do with the cash? investing in equity, bonds, or any funds? if you don't invest and let the cash sits there, you better pay the costs with cash becasue i am sure the interests you pay out will be greater than the interests you get from the bank. hope this helps!!
Intern
Intern
avatar
Joined: 05 Jun 2010
Posts: 22
Schools: Kellogg 2013
Followers: 0

Kudos [?]: 1 [0], given: 8

Re: Financing vs. Cash -- how much cash to use? [#permalink] New post 12 Jun 2010, 04:51
I'd like to append another question to this one - can anyone share an estimated cost of "other expenses" at b-school? By that I mean outside tuition, housing and food. The gist I get from talking to friends is that it's an expensive two years, between nightly events, trips over winter and spring break, etc. Obviously many of these costs are optional, but if I choose to take advantage of them it would make me more inclined to borrow more for tuition and housing in order to have more cash for things like this, but I'm not really sure how high the cost might go.
Director
Director
User avatar
Joined: 26 Mar 2008
Posts: 652
Schools: Duke 2012
Followers: 14

Kudos [?]: 114 [0], given: 16

GMAT Tests User
Re: Financing vs. Cash -- how much cash to use? [#permalink] New post 12 Jun 2010, 07:41
I took my school's cost of a attendance breakdown and put it in a spreadsheet, then I estimated what I thought I would spend for that category each week and multiplied it out over a year (rather than 9 months) and added a percentage buffer to get my expected living costs. For the second year, I assumed a 5% tuition increase and a COL increase. Then on top of that, I added costs for school trips, computer, moving costs, etc. I'm going to pay as much cash as I can, so I'm basically leaving a small safety net, applying the rest of my cash, and then taking the remaining in loans. I erred on the side of caution (estimating too much), so that I wouldn't risk taking out too little in loans. Also, I'll be able to see how it went after the first year and take out more/less for the second as appropriate.

I compared the estimates I came up with from my Quicken cash flows and they actually matched up okay, so hopefully my estimates will be good.
_________________

"Egotism is the anesthetic that dulls the pain of stupidity." - Frank Leahy

Get the best GMAT Prep Resources with GMAT Club Premium Membership

Senior Manager
Senior Manager
User avatar
Joined: 19 Nov 2006
Posts: 256
Location: Washington, DC
Schools: Ross 2010
Followers: 3

Kudos [?]: 17 [0], given: 1

GMAT Tests User
Re: Financing vs. Cash -- how much cash to use? [#permalink] New post 12 Jun 2010, 18:55
I would finance some if not all COA. There are tons of opportunities to travel and participate in activities etc that all cost and you don't want to not take advantage of these just because you wanted to save a little money on the interest. Perhaps finance COA for the first year to be safe see how that goes and then make a decision about what you want to do the second year based on that.
Manager
Manager
User avatar
Joined: 09 Jul 2009
Posts: 53
Schools: HBS
Followers: 0

Kudos [?]: 13 [0], given: 2

Re: Financing vs. Cash -- how much cash to use? [#permalink] New post 13 Jun 2010, 19:21
I'd also recommend maxing out CoA. Frankly, "Cash is King", and you'll enjoy having the money to backup all the 'once in a lifetime' opportunities that school offers.
Intern
Intern
avatar
Joined: 05 Feb 2010
Posts: 14
Location: San Francisco
Schools: CBS 2012
Followers: 0

Kudos [?]: 1 [0], given: 1

Re: Financing vs. Cash -- how much cash to use? [#permalink] New post 21 Jun 2010, 12:32
Tons of excellent advice. Thank you all, truly.

Here's what I've decided to do:
-- Per skaballet and bwizzle's thoughts, will finance all COA for the first year.
-- Will finance most of it through gov't loans, but will try to finance a significant portion of it through private loans. Private loans are deferred interest, and will be the size of about 50% of my cash reserves. That way, if interest rates go up significantly after I graduate, I can pay them off immediately with cash, and the net balance of the transaction is that it will have saved me a few thousand in interest payments (assuming no significant prepayment penalties).
-- Will re-evaluate cash reserves when I finance my second year. At that point, I will know the accuracy of my previous cost estimates (a la highhopes), so if I have any degree of confidence in my new estimates I will consider using the other (non-allocated) half of my cash.

Re: tt11234's question about what I'm doing with my cash... Certainly, there are a lot of options. I just don't find them terribly compelling, especially since I don't have a strong finance background. Investing in equities with a one-year time horizon isn't exactly a slam dunk these days (double dip, anyone?). Given how conservatively I'd want to invest this cash, I don't think I'd go for corporate bonds, and the yield rate on a one-year T-bill isn't much better than money market and CD rates. I know this is more of a question for a financial adviser, but happy to hear any other suggestions ;)

Good luck everyone...
Intern
Intern
avatar
Joined: 23 Mar 2010
Posts: 34
Location: NYC
Schools: Booth 2012
WE 1: Fixed Income IB/Trading
Followers: 0

Kudos [?]: 3 [0], given: 0

Re: Financing vs. Cash -- how much cash to use? [#permalink] New post 22 Jun 2010, 10:44
You might want to consider the cash cushion/reserve on value beyond just 'you beeating the 7.9% fixed rate in your portfolio' but also think of it as, if you have the cash, you can buy a condo sooner, deal with life emergencies, etc.
Re: Financing vs. Cash -- how much cash to use?   [#permalink] 22 Jun 2010, 10:44
    Similar topics Author Replies Last post
Similar
Topics:
The United States government uses only a household's cash Orange08 11 02 Oct 2010, 10:05
1 Cash Flow malbec 3 27 Sep 2010, 08:27
Why Jobless Recovery? Too much corporate cash.. aveekguha 0 24 Jan 2010, 12:00
Cash flow forecasts hosam 1 14 Mar 2007, 13:08
SC: Formulas for cash flow vivek123 10 11 Jan 2006, 10:58
Display posts from previous: Sort by

Financing vs. Cash -- how much cash to use?

  Question banks Downloads My Bookmarks Reviews Important topics  

Moderator: threestripes



GMAT Club MBA Forum Home| About| Privacy Policy| Terms and Conditions| GMAT Club Rules| Contact| Sitemap

Powered by phpBB © phpBB Group and phpBB SEO

Kindly note that the GMAT® test is a registered trademark of the Graduate Management Admission Council®, and this site has neither been reviewed nor endorsed by GMAC®.