At Your Smart Money Moves, we get questions that we get from clients, through the website, or others that I see on the internet. Here is a great one I recently came across around student loans.
Q: I have about $40,000 saved up with an additional $6,000 in liquid assets that I am using as my emergency fund. I'm attending graduate school, which will cost me about $50,000 by the time it's over. I will be working full time for the years of graduate school, so I believe that I will be able to save the extra $10,000 by the time I need to pay for it. Should I pay the tuition out of pocket, or take out a low interest student loan at 5%? I may be wanting to put a down payment on a house in the next five years, but I don't want to begin accruing interest on student loans that I don't necessarily have to incur.
A: You can always kid yourself that there will be some bigger and better investment for your money because the interest rates on the money you are borrowing will be cheap. People often ask this same type of question when they consider paying off their house. Your bank account is likely earning less than .5% right now and your student loan interest rate is going to be more than that when you borrow the money. I'm not a big fan of letting the tax tail wag the dog, so I would use your cash to pay for graduate school using the cash. The question about you buying a home or note probably won't be able to be settled until you graduate school and see where you land in the job market with your new degree. For all you know, it could be in another city with lower or higher cost of living and this could change your view on buying a home. I wouldn't be as quick today to get into home ownership until you view all of the costs of home ownership and your overall budget. Do yourself a favor and pay for the tuition and start your work life debt free.
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Written by:
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc
Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice and Smart Money Moves to the X and Y Generation.
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