Is this a solid plan for the next 4 years?

[DrZed]

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Incoming OMS-1, and I've been thinking, my parents had a small chunk of money saved for my undergrad which I never used. They can't afford to put me through all 4 years tuition and everything, but there is what I think a decent amount set aside that I haven't had a need to touch yet that should hopefully cover housing/food/expenses.

My plan is to use only the unsubsidized stafford for tuition and use up that extra fund first for first and second year, then start borrowing money from grad plus. The interest compounds as soon as you start borrowing right? So it would be better to put off the grad plus loans until 3rd and 4th year. Or would it be better to use grad plus 1st and 2nd and use the funds later 3rd and 4th year? What's more expensive, 1,2,3, or 4th year.

 

[eefen]

Incoming OMS-1, and I've been thinking, my parents had a small chunk of money saved for my undergrad which I never used. They can't afford to put me through all 4 years tuition and everything, but there is what I think a decent amount set aside that I haven't had a need to touch yet that should hopefully cover housing/food/expenses.

My plan is to use only the unsubsidized stafford for tuition and use up that extra fund first for first and second year, then start borrowing money from grad plus. The interest compounds as soon as you start borrowing right? So it would be better to put off the grad plus loans until 3rd and 4th year. Or would it be better to use grad plus 1st and 2nd and use the funds later 3rd and 4th year? What's more expensive, 1,2,3, or 4th year.

If you can, use the funds to avoid taking out any loans possible in the first year, starting with GradPLUS. For example, say you have 30k saved. Also say that, without the saved money, you would need to take out 40k in Stafford loans and another 20k in GradPLUS - in this case, you would only take out 30k in Stafford and use your savings to cover the rest.

You could run the numbers and see if it makes more sense to spread your money out over two years so that you could avoid taking out GradPLUS loans for those years, but it's probably best to just use it all in the first year.

Regarding the interest: it accumulates as soon as you take out the loan. It will not capitalize (be added to the principle) until about six months after you graduate, however.

And don't forget to thank your parents! 🙂

 

[DrZed]

If you can, use the funds to avoid taking out any loans possible in the first year, starting with GradPLUS. For example, say you have 30k saved. Also say that, without the saved money, you would need to take out 40k in Stafford loans and another 20k in GradPLUS - in this case, you would only take out 30k in Stafford and use your savings to cover the rest.

You could run the numbers and see if it makes more sense to spread your money out over two years so that you could avoid taking out GradPLUS loans for those years, but it's probably best to just use it all in the first year.

Regarding the interest: it accumulates as soon as you take out the loan. It will not capitalize (be added to the principle) until about six months after you graduate, however.

And don't forget to thank your parents! 🙂

Oooo that part I didn't know. So the interest isn't really compounded then. It just builds up if I'm reading that correctly right? So say I borrow $10k, interest of 1%, that's $100 every month until 6 months after I graduate? It doesn't become $100, 200, 300, 400 etc.

Yea, I looked at it and it's enough to live sparingly for 2 years or enough to pay 1 year's worth of tuition. Will just take out the regular unsubsidized loans for tuition only and save grad plus for year 3 and 4.

 

[eefen]

While your in school, it's simple interest - so if you take out $10k, and let's say that interest accumulates at a rate of 10% on a monthly basis (not necessarily true to life, but for our purposes), after the first month you'll have $11,000. The next month, interest will still only be calculated from the principal ($10k) instead of the total amount ($11,000).

After you graduate, future interest will be calculated in a compounding fashion - that is, if you had $10k to start, and accumulated $1000 in the first month after the grace period, the next month's interest will be calculated off of the $11,00 instead of just the original principal of $10,000. You can see how this quickly gets ugly.

In your case, I think you might be better served by avoiding taking out loans the first year entirely. Would this wipe out your funds? Or would you have any left to take a chunk out of your loan package the following year?

In any case, although the 7.9% GradPLUS rate is pretty bad, 6.8% isn't so hot either. If you can delay taking out any loans in the first year, you could save yourself a good bit in the future.

As I was thinking through this issues for myself I while back, I made an excel worksheet that allowed me to figure out some rough estimate for different scenarios. It's not perfect, and assumes no repayment during residency (which will hopefully not be the case!), but it's good for a ballpark estimate. Take a look at it and plug in your numbers for yourself. It's ugly, since I just intended to use it on my own, but it works well enough.

First, when you open it up, you'll notice the bolded numbers on the left. These represent your Stafford and GradPLUS loan amounts each year for all four years. Obviously, in reality, these numbers might change a little, but again, it works. Enter in your projected first year loan amount here (don't count your extra funds, just enter in what you would have to take out to live on loans, pay tuition on loans, etc.). Then, on row on the top represents your twice-a-year disbursement of the loans you just entered in. To see how using your funds to pay for the entire first year would work out, enter in "0" into the Stafford and GradPLUS rows under Fall 2013 and Spring 2013. Now look at your "Total Balance After School." Remember that number. Now, use the undo function to restore the worksheet back to how it was after you had just entered your projected yearly loan burden. Enter in "0" in ONLY the GradPLUS rows for Fall 2013, Spring 2014, Fall 2014, and Spring 2015 - this simulates using your funds to pay for GradPLUS loans over the first two years. Then you can decide which option will save you more money.

 

[DrZed]

Thanks for all the info. I have enough for either tuition for 1 year or living expenses for 2. I can't afford to pay for tuition and living expenses for a whole year though. Also, tuition is being deferred so we can have time to get ourselves situated. 😀

 

[PAYE1]

If you are considering PAYE or PSLF, you may want to keep your cash and use all loans.

 

[nBeeDee]

I'm in similar situation, as I have some savings built up from working after finishing undergrad. I considered both options like you, either use the money to pay tuition + living expenses the first year, or use it for living expenses for ~2 years and use stafford loans to pay tuition. But when I ran the numbers, the difference in my overall debt after 4 years (including interest + loan fees) was very minimal (<$1000). This obviously may work out different for your situation and your expected cost of attendance, and most likely you'll be better off in the long run if you use your money for first year tuition, but do the calculations for yourself and see what it looks like. Personally I'll be using my savings for living expenses as long as I can, and take loans out for tuition for the first couple of years, and I'll also enjoy the piece of mind that I'm spending my own money on living expenses rather than dollars with 6.8-7.9% interest attached.

I made an excel worksheet that allowed me to figure out some rough estimate for different scenarios.

Sorry to be neurotic and nitpick, but I noticed a small error in your spreadsheet. Under your residency interest scenario, the GradPLUS calculation is using 6.8% IR instead of 7.9%.

If you are considering PAYE or PSLF, you may want to keep your cash and use all loans.

This is not the best advice.. No one can predict the future as to whether these programs will be around by the time we are starting to pay off loan debt. I think it is much smarter to minimize your loans as much as possible, rather than banking on the government to forgive debt in the future.

 

[PAYE1]

This is not the best advice.. No one can predict the future as to whether these programs will be around by the time we are starting to pay off loan debt. I think it is much smarter to minimize your loans as much as possible, rather than banking on the government to forgive debt in the future.

Disagree. I don't expect the government to ax these programs, but if they do, you can always dump the cash into the loans at that point. Better to pay a little extra interest than to miss out on a windfall of forgiveness.

 

[nBeeDee]

Disagree. I don't expect the government to ax these programs, but if they do, you can always dump the cash into the loans at that point. Better to pay a little extra interest than to miss out on a windfall of forgiveness.

Assuming he hasn't already spent the cash by that time, and that it has grown equally to his loans through investments, than sure your backup plan might be feasible if the programs get axed.

But that scenario is very unlikely and its not just a little extra interest were talking about here. Its 6.8 - 7.9% interest for 4 years and then those rates with interest capitalization after. When you're borrowing the kind of money needed for medical school tuition plus living expenses, the interest will be thousands upon thousands on top of the original amount borrowed. If the OP uses his cash for school rather than loans, it’s a guaranteed 6.8-7.9% return. And if PSLF is still around in 14 years, he wont be missing out, he would simply have less debt forgiven than if he took out more loans. What you're suggesting is essentially a gamble.

 

[PAYE1]

Assuming he hasn't already spent the cash by that time, and that it has grown equally to his loans through investments, than sure your backup plan might be feasible if the programs get axed.

But that scenario is very unlikely and its not just a little extra interest were talking about here. Its 6.8 - 7.9% interest for 4 years and then those rates with interest capitalization after. When you're borrowing the kind of money needed for medical school tuition plus living expenses, the interest will be thousands upon thousands on top of the original amount borrowed. If the OP uses his cash for school rather than loans, it’s a guaranteed 6.8-7.9% return. And if PSLF is still around in 14 years, he wont be missing out, he would simply have less debt forgiven than if he took out more loans. What you're suggesting is essentially a gamble.

It's a gamble either way. If it were me, I'd keep the cash. Suppose you have $60K saved. I'd rather risk having to pay the difference in interest on the $60K if the government pulls the rug out in the next 4 years rather missing out on forgiveness of the entire $60K.

Given that the potential benefit of the forgiveness is much higher than the cost of the extra interest, you would have to be quite confident that PSLF is not sticking around to not save your cash. Personally, I'm quite confident it's going nowhere. For one, a lot graduates in other fields cannot possibly pay their debts without PSLF/PAYE. If the government torpedoes PAYE, legal academia, for one, will completely crumble. Very unlikely Congress lets that happen in my view.

 

[RangerBob]

Given that the potential benefit of the forgiveness is much higher than the cost of the extra interest, you would have to be quite confident that PSLF is not sticking around to not save your cash. Personally, I'm quite confident it's going nowhere. For one, a lot graduates in other fields cannot possibly pay their debts without PSLF/PAYE. If the government torpedoes PAYE, legal academia, for one, will completely crumble. Very unlikely Congress lets that happen in my view.

Most people (students, residents, financial aid officers) I know are highly suspicious about the program disappearing. Remember the media frenzy about a few doctors and lawyers declaring bankruptcy? Now none of us can get our student loans discharged through bankruptcy. The same thing will almost certainly happen with loan forgiveness--the public might be willing to forgive the (smaller) debt of (lower paid) teachers, policemen, etc., but not businessmen/women, lawyers, and physicians, all of whom are perceived to make a lot of money.

Regardless--it's a moot point. The OP is starting medical school, and will know full well whether loan forgiveness programs are here to stay ~2017/2018. At that time the OP can decide whether to make eligible payments during residency to qualify for PSLF, if still around.

But PSLF shouldn't factor in one dime as far as current financial planning. No one in their right mind should ever, ever borrow more than they need.

OP--I think you've gotten some good advice. Minimize high interest loans (GradPLUS) as much as possible. Max out on subsidized every year. Consider saving a little bit of money for residency interview/moving. If you don't need, but do take out the full cost of attendance in your fourth year, you can use those extra loan funds towards those costs. Otherwise you have to get a private, variable-interest loan. In ~4 years those variable rates are likely to be much higher than they are currently.

Congratulations on saving up that money--it's a great way to start and shows you already have good finance/spending habits.

 

[DrZed]

RangerBob, what do you mean don't max out the 4th year loans? Would it really be better to max out unsubsidize now and start accumulating interest for 4 years vs maxing out unsub and grad plus the 4th year?

 

[PAYE1]

But PSLF shouldn't factor in one dime as far as current financial planning. No one in their right mind should ever, ever borrow more than they need.

People used to borrow more than they needed all the time back when interest rates were locked in at 1.9%. Now, interest rates are painfully high, but loan forgiveness is quite generous. In fact, it has gotten much more generous in the last few years as PAYE has replaced IBR. And the Obama administration is pushing to make it even more generous by opening up PAYE to pre-2007 borrowers and removing the tax bomb. I think it would be rather foolish not to factor in this option at all in current planning.

 

[eefen]

Sorry to be neurotic and nitpick, but I noticed a small error in your spreadsheet. Under your residency interest scenario, the GradPLUS calculation is using 6.8% IR instead of 7.9%.

Whoops!

This is not the best advice.. No one can predict the future as to whether these programs will be around by the time we are starting to pay off loan debt. I think it is much smarter to minimize your loans as much as possible, rather than banking on the government to forgive debt in the future.

This. Very much this.

It's a much better bet to just minimize your loan burden from the get-go. Think worst-case scenarios: if you rely on a government program that might not be there, or that you might not be eligible for if they change the rules, you'll be left holding a big bill. That's a lot better than maybe having to spend your own interest-free money now!

 

[PAYE1]

It's a much better bet to just minimize your loan burden from the get-go. Think worst-case scenarios: if you rely on a government program that might not be there, or that you might not be eligible for if they change the rules, you'll be left holding a big bill. That's a lot better than maybe having to spend your own interest-free money now!

I think the "big bill" would just be the difference in interest between the loans and the amount of money over the four years. So, for instance, on $100K cash, you might be looking at about $15K extra interest at the end of the four years. Unless people are suggesting that the government will stop the program for people who already started making qualified payments. I think that's even more unlikely, and quite possibly would be a breach of contract.

 

[RangerBob]

RangerBob, what do you mean don't max out the 4th year loans? Would it really be better to max out unsubsidize now and start accumulating interest for 4 years vs maxing out unsub and grad plus the 4th year?

Sorry--what I meant to say was if the OP is planning on borrowing the full COA in 4th year, it may be worth considering saving some/all of the money they have saved up for residency interviewing and relocation expenses. Right now if you take out a residency and relocation loan, I believe the lowest variable rate you can get is ~6-7% (vs. only ~2.5-4% for a certified private loan). If the OP is able to budget so he/she doesn't have to borrow the full COA each year, it might make sense to borrow up to the full COA in their 4th year to have extra cash for interviewing.

Those private loan rates are likely to increase four years from now, so I just wanted the OP to be aware of those extra expenses in 4th year (I never thought about it until late in my 3rd year).

I don't know ultimately what would save more money--in general borrowing less high interest loans up front (ie., GradPlus in MS1, possibly MS2) will save the most, but if those private loans skyrocket then the lousy 7.9% GradPlus loans won't look so bad next to the residency loans.

Of course, if the OP decides to pursue an uncompetitive specialty and apply only within the metropolitan area their medical school is in, then residency interviews hardly cost a thing, assuming you can still fit in your medical school interview suit (and that it's nice enough!).

 

[RangerBob]

I think the "big bill" would just be the difference in interest between the loans and the amount of money over the four years. So, for instance, on $100K cash, you might be looking at about $15K extra interest at the end of the four years. Unless people are suggesting that the government will stop the program for people who already started making qualified payments. I think that's even more unlikely, and quite possibly would be a breach of contract.

It wouldn't be a breach of contract because there is no contract--we can update the government on how many qualifying payments we've made, but we don't sign a contract with them. Forgiveness isn't in the promissory note, which we do sign. We don't apply for loan forgiveness until the 10, 20, or 25 years is up, depending on the program.

Still, I'll grant that there is the possibility the government would "grandfather" in the people making payments. I don't think it would get in their way anymore than a stone in an elephant's way, but there's a tiny chance it could make some kind of impact. Like I said before, I think loan forgiveness is a program that we'd be foolish not to take advantage of if it is still around, but it'd be even more foolish to count on it and only make the minimum payments.

But the more important issues isn't the dollar difference between borrowing more and relying on loan forgiveness vs not borrowing the extra funds, but the behavior it encourages. Borrowing more money than one needs gets them walking down the wrong bath of fiscal responsibility. Budgeting smartly is how people with meager salaries get by and how people with good salaries live richly. Getting in the behavior of borrowing more now (and presumably spending more than needed) can turn one into someone with a great salary living paycheck to paycheck because of a series of unfortunate decisions. Think of how many people buy homes that are more expensive than they should be buying--just because the money was easy, it doesn't make it the smart, or right, thing to do.

It's always easier to live like you're poor when you're young and haven't known better (FYI, I'm only 29--I'm just sharing advice passed on to me from my father). That's why the really smart residents keep living like a resident for the first few years out of residency--they maintain the same quality of life, but pay off those loans fast, saving lots of money on interest and shacking off those chains of debt.

 

[PAYE1]

It wouldn't be a breach of contract because there is no contract--we can update the government on how many qualifying payments we've made, but we don't sign a contract with them. Forgiveness isn't in the promissory note, which we do sign. We don't apply for loan forgiveness until the 10, 20, or 25 years is up, depending on the program.

I'm not sure that's a fair description of the process. I thought you had to submit a request to the government to be approved for IBR or PAYE or PSLF. And the government then has to accept or reject that request. So, I would argue that the government is doing more than just being notified of qualifying payments.

 

[RangerBob]

I'm not sure that's a fair description of the process. I thought you had to submit a request to the government to be approved for IBR or PAYE or PSLF. And the government then has to accept or reject that request. So, I would argue that the government is doing more than just being notified of qualifying payments.

Yes, you submit a request to be in the IBR or PAYE repayment plan. I just submitted mine. But the government is just approving the repayment plan--there's nothing in the repayment plan request that says if you make payments your loans will be forgiven after x years.

The government technically doesn't keep track of your qualifying payments towards PSLF--you have to submit a separate form to notify them of that. And that just kind of lets the government know you're "in the program." But just like forgiveness through IBR or PAYE, with PSLF you don't apply until the end of the specified time period (10 years for PSLF). I don't think it's until you actually apply for the forgiveness that the government really looks at all your payments to make sure you actually qualify.

So it'd be a good idea to hold onto proof of all your payments, just in case. If the program sticks around, it'd sure be a bad day to miss out on a three-figure (or even two-figure) forgiveness because of some clerical or computer error.

 

[nBeeDee]

But PSLF shouldn't factor in one dime as far as current financial planning. No one in their right mind should ever, ever borrow more than they need.

+1000, this is pretty much what I was getting at. Borrowing more than you need with the justification of "don't worry, it will be forgiven in the future" could end up biting you in the a**.

Max out on subsidized every year.

Unfortunately, there are no more subsidized loans available for grad students 🙁

It wouldn't be a breach of contract because there is no contract--we can update the government on how many qualifying payments we've made, but we don't sign a contract with them. Forgiveness isn't in the promissory note, which we do sign. We don't apply for loan forgiveness until the 10, 20, or 25 years is up, depending on the program.

This was my understanding of the loan forgiveness programs, and is exactly why its risky to put so much faith in. They can be very generous if its still around by the time you can take advantage of it, but it could be changed at any time between that point and now.

 

[PAYE1]

This was my understanding of the loan forgiveness programs, and is exactly why its risky to put so much faith in. They can be very generous if its still around by the time you can take advantage of it, but it could be changed at any time between that point and now.

Well, if there is a significant risk of the government taking away forgiveness even for people already making IBR/PAYE/PSLF approved payments, that changes my calculus somewhat. The difference in interest over 4 years isn't very much, but could be more significant over 10 or 20 years, given the high Grad Plus interest rates.

 

[PAYE1]

Here's a good discussion of the same scenario over at a law school forum: http://www.top-law-schools.com/forums/viewtopic.php?f=15&t=208501

You'll notice there is little to no concern about the government axing the program over there. I suspect that is because it would be impossible for many lawyers to pay off debts without PAYE/IBR. So, the programs are seen more as a necessity. Whereas most any doctor can make six figures and pay off loans eventually. So, they are seen more as a luxury here.