Financing advice

Question

I'm struggling a bit with a financial decision... what do you think about below? How did you decide on financing your studies?

I have ca. 100k savings. I can either invest them into MBA or keep them aside (3.5% savings account) and finance MBA with a loan (Prime of 3.25% as of today + 3.5% so 6.75% in total). I realize that I'm worse off in the latter scenario because of the difference in interest rates, but I gain a freedom of having money aside (if e.g. I come across some good housing deal and wanna invest in real estate or e.g. if I decide to start my own company after MBA and have an initial capital).

Does it make any sense? Or, rather, in the current scenario people take as little loan as possible?

refurb · Answer

I'm borrowing enough to cover tuition (and the other school expenses i.e. books). Everything else (housing, food, entertainment) will come from savings.

I have enough money to cover a big chunk of tuition as well, but most of that money is currently invested and I would take a big hit if I sold it right now.

Also, the interest rates are pretty dam reasonable right now. That coupled with an expected pay off in 5 years or less, makes the cost of financing pretty low.

And like you said, it's nice to have a chunk of cash available after you graduate.

RF

nink · Answer

I am in a similar situation. I have about $80k in savings account plus $70k in scholarship. I decided to use my savings instead of borrowing due to high interest rates (8.5% for GradPlus and 6.8% Stafford etc).

I am just not sure if I want to borrow money just so I can have some money left over in the savings account. If you think of a good reason, let me know. :-D

refurb · Answer

One thing to remember is that you don't have to decide right now. I'm pretty sure you can change how much you are borrowing each term (at least that's what I was told).

So, if you don't want to borrow anything the first year, you don't have to. If you think you need to borrow for your second year, then you can.

If you do it that way, you can actually save a year's worth of interest!

RF

garbus222 · Answer

Thanks guys.

Nink - few reasons I can think about.

Firstly, I'm seriously thinking about investing in a real estate. Now, with low prices, I think that it might be a good moment to buy. But to do this I need money (and without a job I'll not get a commercial credit).

Secondly, I found yesterday a post from last year where somebody (river?) mentioned that you might lucky and your new company will pay off your loan (or part of it). Not sure if that still happens and how rare it is though.

Thirdly, I don't think that I'll become an entrepreneur but what if I change my mind (apparently bschools are good at encouraging people to start their own business)? If that's the case I might need money.

In all these scenarios I'll be slightly worse off. I.e. if I take a loan for 150k (assuming 8% interest rate, 4% loan fees, 15 years repayment time) I'll pay 118k extra. If I put 100k on a bank account (assuming 4% interest rate) I'll earn 80k over 15 years. So, over 15 years, I'm "losing" 38k or 2.5k per year (over 15 years). But isn't the potential upside from a real estate investment (20% over 15 yeras?) or starting you own company or just being repaid by a new employer worth the risk?

3underscore · Answer

Companies won't be able to choose between people who paid with their own cash or loans to fund them - it is discrimination. And it is nowhere near loans - it is at best going to be a years fees, then post tax. Right now, that is happening less as people will bite hands off for jobs without incentives.

That said, I am uncertain why you are looking to pursue real estate investments at the same time as investing $100k in education (for which you are taking on debt). It's your money mind.

Jerz · Answer

I figure overall I'll need to borrow about $80-90k to cover tuition and expenses over the 2 years, with the remainder coming from savings and scholarships. However, I took on a lot more debt in the first year, thinking that a) hopefully the market will recover a bit before I sell some investments, and b) I want to keep some of my savings as a hedge against the possibility of unemployment or delayed start dates after graduation. Depending on how the job market looks and how internship recruiting goes this year, I will then borrow a lot less for year 2, and still end up at my target of $80-90k.

I realize that front loading debt like this will cost me some higher interest costs, but to me it's worth it to still have savings set aside for contingencies later.

I realize that front loading debt like this will cost me some higher interest costs, but to me it's worth it to still have savings set aside for contingencies later.

FN · Answer

good thread..this was also on my mind.

my game plan is to takeout loans to the max ($150K)

i have been debating about purchasing my apt in philly with the savings i have, and by purchasing, i mean put 25% down for the apt. i figured if i can use my boarding expenses to pay for mortgage for 2 yrs and the market recovers somewhat, then I should be in good shape.

the rest of the money in a CD account that pay 3.25% is an attractive offer.

garbus222 · Answer

3underscore - to answer your question... the idea was that now seems to be a good moment to purchase real estate (i.e. now = cheap). 2 yrs down the road market will most probably recover and real estate prices might be (depending on location) up by >=20%.

Overall I decided to take 70k loan in 1st year. In the next 1/2 year I can observe the situation (market, school, jobs, interest rates) and decide how to allocate my savings. To me it sounds like the most flexible option.

garbus222 · Answer

FN - I know it's off-topic, but I'm curious ;-)

. How did you get into W'11 and HBS'12? I mean did you get into HBS and deferred for a year? And did you decide finally on Wharton?

CalStep20 · Answer

I have a quick question about Grad PLUS loans that no one seems able to answer. With it being so busy in the year right now, trying to get ahold of financial aid advisors is nearly impossible. Does anyone know how many times per year you can take our Grad PLUS loans? For example, do I need to take out everything I am going to need for the entire academic year right now or should I do it one semester at a time to save some interest expenses? Kelley charges one semester at a time, but I didn't know if it would be possible to take out more than one Grad PLUS loan at a time. If anyone knows the answer or can provide a link to any info, that would be great. Thanks!

refurb · Answer

I can only tell you what Tuck does.

You specify how much you want to borrow at the beginning of the year. This is then divided into three equal payments for each of the three terms. You can change how much you want to borrow each term.

For example, if you borrow $30K in Grad Plus loans, $10K is disbursed each term. You only pay interest on the money that is disbursed. It's kinda of confusing because the loan is for $30K, but you don't get the whole $30K at once.

I think that's how most schools do it.

RF

Jerz · Answer

Kellogg does the same. When you accept your financial aid award, you say how much total GradPLUS you want to borrow for the full year. Then it's disbursed in three installments throughout the year (one for each academic quarter).

CalStep20 · Answer

I finally talked to the director or financial aid and he said that you can apply as many times as you like for Grad PLUS loans. There should be no problem doing 10k now and another 10k later (for spring), or whatever amounts you need. I'm assuming one would only need to apply a couple of times per year anyway. Hopefully, everyone can plan out most of their expenses so you aren't taking out loans every other month, because that would get kinda crazy. If anyone has taken this route (dividing loans by semester), can you post a little something about that?

refurb · Answer

So your school doesn't charge by term? They ask for the whole year's tuition up front?

RF

CalStep20 · Answer

They charge by semester, so we have tuition due in the fall and in the spring. So I am trying to avoid accruing interest with taking out a massive Grad PLUS loan now and instead, taking out two smaller loans. One now and one for the spring semester. That way I can avoid 5 months interest on one loan, and the interest accruing on the loan I take out will be less since the loan will be a lesser amount. True, when talking about thousands of dollars, 5 months of interest isn't a lot, but it's pretty easy to avoid it seems. I don't know if I take out a massive loan now that it will be disbursed by semester. Does that make any sense?

refurb · Answer

It makes perfect sense! I was just trying to clarify your situation.

My next question is, do you know if your school will request disbursements by semester?

The reason I ask is, it was all automatic for Tuck. I just put the request in for a GradPlus loan (the amount I need for the whole year) and the financial aid office sent back a request to the loan company to break the loan into three equal disbursements. In other words, they did exactly what you're asking about without any effort on my part.

I would suggest you contact the financial aid office and ask if they do the same. I'll bet they do.

RF

CalStep20 · Answer

Thanks for the info RF. I will definitely check into how they hand out the loans. That would be great if they broke them up for me. I am moving tomorrow so I'll drop by the office on Monday or Tuesday to check. I don't think our tuition is due until mid September so I have some time to investigate.

Financing advice

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