How much do u expect to be in DEBT after your MBA?

I haven't decided whether to max out the loans or plan off the bat how much of my savings I will use.

I've got enough accessible savings to pay for expenses for the two years.

So I'll be borrowing the two years tuition: $90,000

I don't know what will happen to the income from the summer internship. I'm planning on using that as a "slush fund".

RF

I should be in roughly the same spot.

Haha. Excellent plan

I will probably liquidate whatever I have, so I am hoping to not borrow more than 30-40K.

Is anyone planning to tap into their 401K. I heard that there is no penalty when you make a withdrawal for education expenses and it may make sense to withdraw in our second year when our marginal tax rate is very low. Any take on that?

I think you're right about the withdrawals. You'll still pay tax on what you withdrew since the contributions were tax-free, but you won't get hit with penalties.

I personally don't plan on touching my 401(k)..based on where the market is today, I think selling now would be selling at the nadir of the market. I'd rather borrow a bit more and let my 401(k) recover a bit.

Same here, probably including for non-401k equity/mutual fund holdings.

Very true, my assumption is that by mid 2010, we have a DOW that has recovered by 20/25%.

Yup, I'd rather borrow and pay off a loan in 3-5 years than pull money out of my investments right now.

RF

If you can borrow cheaply yes. From what I understand, Gradplus loan are around 8.5% and a 4% origination fee, so unless you can get better than that in the market, it is worth thinking about tapping stocks or 401K, especially if you went from a high marginal tax rate to a low one in your 2nd year.

This is not true. There is no allowance for penalty-free "early distributions" from 401(k) plans to fund education expenses. IRA accounts allow you to do that, 401(k) plans do not.



You need to consider the fact that based on historical data, a broad market stock fund over the long term could potentially offer a return significantly higher than the 8.5% fixed rate that GradPLUS loans are going at. If you intend to repay your loans over, say 10-15 years, rising inflation will further keep your fixed interest costs manageable and your 401(k) could return in excess of 8.5% each year. Also, as Jerz pointed out, selling your 401(k) balances now mean you're locking in your losses and essentially making yourself start all over from scratch as far as retirement investing is concerned. If you intend to repay your student loans much sooner, and can get a private education loan with no fees and one that is 250 to 300 bps cheaper than the GradPLUS, then by all means consider that option.

I have rolled over my 401K to an IRA and I guess that would be an option for all of use when we resign right?

Inflation assumptions and stock market returns are expectations. I expect (hope?) equity outperforms the 8.5% per year but I am not sure. Clearly if I had made that bet in 2000, I would have been wrong. It is all a probability game at that point, that's why I am asking the question.

Though there is a tax arbritage, from what I see. I probably saved 40% on my pre-tax contribution (fed + NY state taxes) and if we can withdraw penalty free at 10-15% in 2010 (when I don't have any income), that's a 25-30% return, which offsets some of the market loses. Do I have that right?

It seems to be one option; I am not saying that it is the way to go. If I can borrow at a lower rate than 8.5% I would probably go for that.

Thanks for all the good info Solaris.

Concerning these private loans, the rates float right?

Even if they do, if you were to take say a percentage of your total debt out using these loans, then pay them off first, you could save a little $$$?

RF

falibay, your tax arbitrage proposal will work fine.

refurb, yes - virtually all private student loans will be floating and indexed to LIBOR or Prime. You can pay off those loans anytime, there's usually no pre-payment penalty associated with them. To echo a point aaudetat made earlier on another thread, the private student loans can be substantially cheaper - as low as ~4.0% with the right credit (at least right now) however the federal GradPLUS loans carry some potentially very useful deferment and forbearance provisions that most private student loans won't offer. With the federal loans, you can defer payments in case of unemployment or financial emergency, for instance. So it's up to everyone to decide how much interest rate risk they are willing to carry on.

I personally am going to hold on to my savings and borrow the full cost of attendance using a combination of Stafford, GradPLUS and private student loans (ideally keep my average borrowing costs below 7%) and should LIBOR or Prime rates spike to higher than 8.5% I will pay those private loans down fairly quickly using my savings.

I heard the 4% origination fee at Booth's admit weekend financial aid session. What is an origination fee?

Just a fee you pay for having the right to get the loan... Basically helps the bank reduce their cost of issuing, packaging and selling the loan , I guess. I think it is a total ripe off for such a liquid market.