Loans/personal savings split - advice needed

Question

Greetings to the Gmatclub community!

Advice needed: I plan to finance 40% of the MBA cost through loans and 60% out of personal savings.

Would you recommend that I use my own money during the 1st year and apply for a loan when Y2 starts? Or should I get a loan now to cover some of Y1 expenses? In this case I'll need a smaller loan for Y2 and will accrue interest on the Y1 loan, but I will need to borrow less when Y2 starts.

Many thanks!

Posted from my mobile device

bb · Answer

Hi! Good question. It's been a topic of debate for a bit. Here is my take: I would borrow in the first year unless you have easy access to a cheap emergency loan down the road.

Longer Version:

Interest rates are LOW right now so I would grab a fixed loan in the first year. (not all of them are fixed though) Yes, you will pay more in interest but you can deduct it on your taxes (since your income will dip) and get perhaps 10-20% write off and also lock in a low rate in case there is inflation coming our way. Moreover, your loan will paid out in 2 installments (one in Aug/Sept and one in Jan) so the interest bill wont' be huge but you are paying for flexibility. You can also keep your other money in a conservative stock/bond portfolio or i-Bonds to off-set that interest disparity, though that adds to your tax bill too but in the second year, you will likely only make your internship pay which will be $20-30K tops so investment/interest income is not going to add much.

My second thought would be that, everyone always runs low on cash during business school - there are recruiting trips, peer pressure to fly to Iceland to for a long weekend, and all kinds of opportunities you won't be able to resist and perhaps will never get a chance to experience again. Having a reserve of funds, you can choose to forego a loan in the second year or you may consider getting it.

Finally, do you know when you will get a job out of business school? Nobody does and it is nice to have a cushion of something in case things don't work out when you graduate and you need to spend 3 months looking for a job and not to have drive for Uber at the same time, focusing on recruiting instead.

Ultimately if you had an easy way to borrow money, then you don't need a loan in the first year but since most of us lack that ability, it gives extra flexibility and a safety play allowing to lock in a low interest rate too.

EugeneSal · Answer

Greetings,

Many thanks for such a detailed and thoughtful response, bb! I highly appreciate your insights.

In my case, I'm international student, and funding is quite scarce for international admits this year. Not many loan options for internationals at my school at the moment (M7), and firms such as MPower charge very high rates & fees.

In case I'll not be able to secure a loan in Y2, I've got an option to borrow from my family, although I'd prefer not to do so. Leaning towards no loans now.

Posted from my mobile device

bb · Answer

Got it. I see. I’m sorry, I assumed you were a domestic applicant. Yes, it seems there is a lack of abundant funding this year and interest rates are higher for international students. At the same time, I was under the impression that many M sevens had in-house funding or partnerships with local credit unions that could help with unsecured loans without cosigners. It may be a good topic of research but I have not checked it in a little while. I assume you have checked out all the resources available

In this case, I would agree with your call. At the same time, I would still apply for a loan with either prodigy or MPower as long as it doesn’t require spending money or substantial hassle. That would kind of get your foot in the door and give you the idea of what information will be required next year so you’re not surprised and are not locked out of a loan or something like that. You may have done it already of course

But when you apply, you don’t actually have to take a loan you can have your application approved but not funded. For US people that would require a credit check and so I would not recommend it bad for international, you can apply all day long. B Posted from my mobile device

douggieohare · Answer

I would fund the first year myself and then take some time to find the best offer for my second-year loan. It’s especially valid if you are an international student.

bb · Answer

This is a spammer post who just posted it to be able to stick a link into a topic.

However this is a pretty bad advice. There is a chance you may only get 80% of financing so funding the first year and then running out of cash can be pretty disastrous.

Posted from my mobile device

GyanDhan_Finance · Answer

Hey,

Although it seems a great idea to use your own savings to fund your abroad education but the wise decision would be to take an  abroad education loan . The reason why we are saying this is that in case you decide to use your own money then you will be liquidating a lot of money in one go and you have never seen the future. There can be some contingency situations in which you could need that money and therefore it is better to take an education loan.

Now coming to the second part of your question, we would recommend that you take the education loan for the first year and then you can use your own savings for the second year. The reason behind this strategy would be that you do not know how much you are going to spend in a foreign land. With an education loan, you can always get the loan approved for a higher amount and then can get disbursement of only the actual amount that you need. So in this way, it proves to be a great move. By the second year, you will have grabbed the knowledge of wisely spending money and where all you can save money and that is when using your own savings becomes a good decision as there will be less risk associated. Now usually with an education loan, you will get a moratorium in which your repayment will begin once the course is completed Therefore taking an education loan in the first year would not burden you during your course.

You can read more about the same in this blog here -  Education Loan vs Self Financing

In case you need help with getting an education loan or have any other query regarding education funding you can always reach out to us by clicking  here . We would be happy to assist you in the best way possible.

Loans/personal savings split - advice needed

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