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

Question

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: https://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

Av · Answer

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.

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.

tt11234 · Answer

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!!

emr23 · Answer

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.

highhopes · Answer

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.

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.

skaballet · Answer

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.

bwizzle · Answer

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.

techwonk · Answer

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...

masscool · Answer

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.

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

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