Paying it all up front?

[Chibucks15]

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Hey so I have no clue where to put this and this area sees the most traffic so here we go. I was reading up on tuition of my school options and the financial aid section stated that a student could prepay for the full year (or two years, three, etc.) upfront at the current tuition rate to lock in that price. While it may be difficult to find a 200,000 loan (or more) to be paid right up front, would looking into that cause any savings? With tuition rising significantly every year would the interest difference work out? I know that there isn't a possibility of this through federal loans. Essentially would the 4-5% interest rate you can possibly find privately for the full amount be better than the 4-5% tuition bump every year? This is obviously taking a huge bet on yourself that you won't drop out/fail but we all do that. As you can tell I have no background in finance so just curious. Thanks!

 

[lpp06]

up front : ~55k in interest
Spread out with an annual tuition increase of 10% (very aggressive increases): ~36k

Unlike undergrad, interest begins accruing the day you borrow money

 

[TaroBubbleTea]

Bad idea.

Just borrow what you need when you need it to minimize the accumulated interest. Also, tuition may not rise 4-5% every year, it may increase less.

 

[Chibucks15]

Yeah I had just never seen that possibility before so I wasn't sure. Thanks everybody


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[darkjedi]

Never go with private loans, plain and simple, even if the interest rates are more favorable than the federal loans. They almost universally have terrible repayment terms and don't offer a lot of the critical benefits that federal loans have, like income based repayment and the potential for loan forgiveness.

 

[BeddingfieldMD]

Hey so I have no clue where to put this and this area sees the most traffic so here we go. I was reading up on tuition of my school options and the financial aid section stated that a student could prepay for the full year (or two years, three, etc.) upfront at the current tuition rate to lock in that price. While it may be difficult to find a 200,000 loan (or more) to be paid right up front, would looking into that cause any savings? With tuition rising significantly every year would the interest difference work out? I know that there isn't a possibility of this through federal loans. Essentially would the 4-5% interest rate you can possibly find privately for the full amount be better than the 4-5% tuition bump every year? This is obviously taking a huge bet on yourself that you won't drop out/fail but we all do that. As you can tell I have no background in finance so just curious. Thanks!

In short, taking out a loan this big will accumulate massive interest over the following 4-8 years (however long you are in med school and residency, possibly fellowship) while you are still earning too little to effectively pay back the loan. The key is minimizing your student debt. Take out only what you need, when you need it. Live modestly. Then start chipping away at your loans as early as you can, keeping your need to keep your sanity with a reasonable lifestyle in mind. And if you want to pay them off over the long haul, consider a private reconsolidation (at a lower interest rate than what the feds offer) once you're an attending.

 

[partypantss]

What if you have the cash on hand? I have a rather large savings that can pay for full estimated cost of attendance for at least my first couple years. Would it be wise in my situation to pre-pay for the first couple years of tuition?

 

[Doctor-S]

What if you have the cash on hand? I have a rather large savings that can pay for full estimated cost of attendance for at least my first couple years. Would it be wise in my situation to pre-pay for the first couple years of tuition?

You might be able to earn more income (or growth) by putting that money to work elsewhere. In so doing, you can pay your tuition and build a good credit record.

In your case, it is advisable to ask your CPA or a certified financial planner to run some numbers for you.

 

[darkjedi]

What if you have the cash on hand? I have a rather large savings that can pay for full estimated cost of attendance for at least my first couple years. Would it be wise in my situation to pre-pay for the first couple years of tuition?

Yes

No, it's generally better to save that money and invest it in some safe financial instruments then to just pay off all of your tuition directly. Honestly, it would still make financial sense to take out some of the lower interest Stafford loans even if you have the cash to pay it now due to how favorable the loan terms are compared to normal loans. Interest doesn't even capitalize while youre in school. Plus if you plan on working in a hospital, theres a decent chance you can qualify for at least some loan forgiveness. Your liquid assets could also go to something like buying a home, or kept liquid in the case of some emergency.

 

[partypantss]

No, it's generally better to save that money and invest it in some safe financial instruments then to just pay off all of your tuition directly. Honestly, it would still make financial sense to take out some of the lower interest Stafford loans even if you have the cash to pay it now due to how favorable the loan terms are compared to normal loans. Interest doesn't even capitalize while youre in school. Plus if you plan on working in a hospital, theres a decent chance you can qualify for at least some loan forgiveness. Your liquid assets could also go to something like buying a home, or kept liquid in the case of some emergency.

I'm not really sure I see how this makes much financial sense. It's not really possible to safely invest with the hope of beating the 5.8% interest on Stafford loans. So if I were to take out loans and throw my money into a mutual fund, I might be making a few points of interest a year while accumulating nearly 6 in debt. The risk involved in trying to get a greater than 6% per year return on my investment in such a short time frame would be substantial. And then even if I were to take pursue high risk investments and say I somehow manage to pull off say 6% interest a year, that's still only just barely beating the 5.8% interest my loans will have accumulated. That would just not be at all worth the risk.

I just don't see a scenario where this makes sense, besides going all-in on a loan forgiveness program which is less than ideal of a plan since I don't think I would want to spend 10 years living in one of those places. What am I missing? (Also, yes I plan on saving at least 10k of it for emergencies/ unexpected circumstances.)

 

[partypantss]

You might be able to earn more income (or growth) by putting that money to work elsewhere. In so doing, you can pay your tuition and build a good credit record.

In your case, it is advisable to ask your CPA or a certified financial planner to run some numbers for you.

Yes, I've been thinking it's probably a good idea to talk to a CFP sometime before school starts. I'm just not seeing how taking on 6% interest on loans can be worth any safe outside investment. But maybe I'm just not seeing something.

 

[watermelon master]

I'm not really sure I see how this makes much financial sense. It's not really possible to safely invest with the hope of beating the 5.8% interest on Stafford loans. So if I were to take out loans and throw my money into a mutual fund, I might be making a few points of interest a year while accumulating nearly 6 in debt. The risk involved in trying to get a greater than 6% per year return on my investment in such a short time frame would be substantial. And then even if I were to take pursue high risk investments and say I somehow manage to pull off say 6% interest a year, that's still only just barely beating the 5.8% interest my loans will have accumulated. That would just not be at all worth the risk.

I just don't see a scenario where this makes sense, besides going all-in on a loan forgiveness program which is less than ideal of a plan since I don't think I would want to spend 10 years living in one of those places. What am I missing? (Also, yes I plan on saving at least 10k of it for emergencies/ unexpected circumstances.)

I think @darkjedi is under the impression that the Stafford Loans do not accrue interest during medical school, in which case his plan would make sense. However they do accrue interest, so yes partypants, your logic sounds correct to me.

 

[BeddingfieldMD]

What if you have the cash on hand? I have a rather large savings that can pay for full estimated cost of attendance for at least my first couple years. Would it be wise in my situation to pre-pay for the first couple years of tuition?

Yes, could be a very good idea. The interest you will accumulate with loans will typically compete with whatever returns you may get on that money elsewhere--at least until you make enough money to reconsolidate for a lower rate. And once you're an attending, you'll make too much money to get any tax benefit from paying your student loan interest.

So in general, if you have substantial money lying around and are about to start med school, I would say pay off any credit cards, car payments, and other consumer debt--then use the rest to pay for med school and living expenses to minimize your student debt.

You'll love not having that $1-3k/month debt repayment coming out of your checking account each month once you're done with training!


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[BeddingfieldMD]

I'm not really sure I see how this makes much financial sense. It's not really possible to safely invest with the hope of beating the 5.8% interest on Stafford loans. So if I were to take out loans and throw my money into a mutual fund, I might be making a few points of interest a year while accumulating nearly 6 in debt. The risk involved in trying to get a greater than 6% per year return on my investment in such a short time frame would be substantial. And then even if I were to take pursue high risk investments and say I somehow manage to pull off say 6% interest a year, that's still only just barely beating the 5.8% interest my loans will have accumulated. That would just not be at all worth the risk.

I just don't see a scenario where this makes sense, besides going all-in on a loan forgiveness program which is less than ideal of a plan since I don't think I would want to spend 10 years living in one of those places. What am I missing? (Also, yes I plan on saving at least 10k of it for emergencies/ unexpected circumstances.)

Agreed. Sure, safe investments over the last year have had huge returns, but that will doubtfully continue over the next decade.


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[darkjedi]

I think @darkjedi is under the impression that the Stafford Loans do not accrue interest during medical school, in which case his plan would make sense. However they do accrue interest, so yes partypants, your logic sounds correct to me.

I never said interest doesn't accrue, they just don't capitalize, so if you you wanted to you could pay down that interest soon after graduation without having paid compounded interest on capitalized interest.

The point is not to beat the market, but to have a reserve of liquid assets. Its much easier to take the Stafford since Stafford loans are effectively guaranteed, than taking out private loans in the future with worse rates and terms.

The REPAYE scheme also subsidizes up to half of any unpaid interest once you are in repayment.

If student loans were commercial loans, I would absolutely agree to not take out extra loans when you could just pay it up front. But federal student loans are not like normal loans and you can reap a lot of benefits from them if you understand their terms.

 

[chm9332]

I have around $30,000 in cash, do you think it's wise to use this money to pay for my first year tuition or should I just take out loans and keep the money as 'emergency cash'?
(also you guys keep talking about talking to a financial advisor. where can I find one? I am asking because I have absolutely no connections to that field and I am sorta of 'naive' about money)

 

[Doctor-S]

I have around $30,000 in cash, do you think it's wise to use this money to pay for my first year tuition or should I just take out loans and keep the money as 'emergency cash'?
(also you guys keep talking about talking to a financial advisor. where can I find one? I am asking because I have absolutely no connections to that field and I am sorta of 'naive' about money)

As a start, you can ask your family or trusted friends for some names and contact numbers. If your family already has a good CPA, ask the CPA for information. Many well-qualified CPAs and CFPs will meet with you, and crunch some numbers, for free. If the CFP is an investment advisor, you can also check their general background, using FINRA.