Should I use my saving or take out 100% loan?

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tai9588

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Hello there,

This may be a stupid question...but I just want to see you guys' thoughts and plans on paying for medical school. So I am lucky enough to have some savings...and now I am wondering if I should use it to pay for a part of medical school cost or save it for emergency and take out as much loan as I need. My estimated loan for medical school is 300+. I was looking at student forgiveness program and it does not seem like I have to pay back the full amount (around 150). Anyone in the same boat and what do you guys plan to do?

Thanks in advance🙂
 
cj_cregg said:
I was/am in the same boat, though I'll have less loans taken out than you will if all goes as planned. Personally, I am taking out loans for tuition and using my savings for cost of living as long as they last (if I play my cards right, I should make it through the end of med school). Your loans start accruing interest while you're in school and that'll capitalize. I'm not investing or doing anything crazy with my savings, so for me I will end up saving money in the long run if I minimize the loans I take out. A close relative of mine is a financial planner and agreed that this was my best option looking forward, as did the financial aid people at my school.

That said, what works for me might not work for you. I would get in touch with your school's financial aid office and see what they recommend based on your specific situation. This is exactly the kind of thing they're there for.
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I contacted my financial aid office and they did not really give me a definitive response..."You should be able to pay it back within few years with your salary as a doctor..." Well I am like you. I am not really investing my savings with anything so it will just sit there. However, I am trying to considering between using my savings versus the benefits of loan forgiveness program.
 
I'm also weighing the options right now. I'll have 29k liquid investments, then like maybe 50k combined between a rollover and roth IRA, which I could call on should I need to but taxes and fines could be heavy. If i withdraw from the rollover, it would count as 2016 income and could put me in another tax bracket when I do my 2016 taxes. Should I wait until 2nd semester to touch it? My school is 37k/yr tuition. I'm thinking of keeping the 29k liquid as an emergency fund and for any ancillary expenses not related to my education, then using loans for everything else like room and board, groceries etc. Is there a balance to be had that would make sense? @IlDestriero I thought you brought up a good point about early loans accruing more interest. Opinions?
 
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I would use my savings to cover what's not covered by unsubsidized stafford loans. Grad Plus Loans have high interests, unsubsidized have a slightly lower interest. What are the returns on a roth ira? Is it greater than 7%, otherwise it's not worth it.

I'll only have $12K and I'm going to use that to cover my COL for the 1st year because the interest gained in the 4yrs capitalizes at graduation, so the more you delay taking out loans the less capitalizes.

Plus, you should look more into what the forgiveness program entails (ie. The 10 yr forgiveness wont likely last long and the forgiven loans after 20 yrs are taxable)
 
tai9588 said:
I contacted my financial aid office and they did not really give me a definitive response..."You should be able to pay it back within few years with your salary as a doctor..." Well I am like you. I am not really investing my savings with anything so it will just sit there. However, I am trying to considering between using my savings versus the benefits of loan forgiveness program.
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Financial aid offices know nothing. They are salespeople essentially. You should always do your own research (like you are doing now)
 
DKMA said:
What are the returns on a roth ira? Is it greater than 7%, otherwise it's not worth it.
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The returns are going to be dependent on what you have the $ invested in. There's no such thing as guaranteed returns except on stuff like CDs. The way I have to look at it is. 4 years of unknown % growth/loss in the IRA vs a year or 2 less of debt with less accrued interest.


Sent from my iPhone using SDN mobile
 
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cj_cregg said:
More simply, the extra money you owe in interest will become part of the original loan when calculating interest for the next year...so if you start with a $1000 loan at 10% interest, you gain another $100 you owe in interest after the first year, and then your second year's interest will be calculated on a loan of $1100. For most people, using your savings for as long as you can without dipping into the higher interest loans will save you money that comes from the interest/capitalization. I know it doesn't sound like much but it can add up pretty fast.
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Wait, can I get a clarifiication on this? @Mad Jack , I believe you are a poster who is in school right now.

The interest doesn't capitalize yearly- it capitalizes 6 months after graduating.
So $1000 at 10% taken out in the first year will capitalize to $1,400 after graduating right?


Then on AAMC FIRST it says that with PAYE the amount capitalized cannot exceed 10% of what you orginally took out (can't find this on the federal loan website yet). So $300,000 can't capitalize to more than $330,000, can anyone confirm this?
 
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This is an important question, so I sent this email to the federal aid office:
On AAMC FIRST, a website about financing medical school tuition, it says that the interest capitalizing on our loan cannot exceed 10% of our original loan if we use the PAYE plan (https://students-residents.aamc.org/financial-aid/article/loan-repayment-options/ Under Pay As You Earn, the 2nd bullet).

I cannot find where that is mentioned on the federal aid website, so is that true?

I would also like to clarify what that means: If I take out $300,000 in $75,000 per year installments, those loans will start gaining interest immediately. The interest will capitalize when I graduate, but it will capitalize to no more than $330,000 if I enter the PAYE plan, correct? So even though the $75,000 I take out first year would gain (75,000* 0.07)= 5,250* 4years= 21,000 interest over the course of medical school. Then the second will gain 15,750, etc. No more than $30,000 will capitalize?
 
gonnif said:
Cant roll it all into a traditional IRA as way over IRS limits. and rules. A Roth IRA may be better



I believe that 1) each year is consider agreed as a separate loan ; 2) interests accrues for that year; 3) only when you start paying back the interest is delayed not the accruing itself; 4) Each year a new loan is technically issued that includes the previous year's original loan amount and interest. This becomes the new loan amount issued to you. So each year, the previous year's loan with interest is "paid off" with the issuing of new loan for that previous amount plus new money for the current year (someone correct if I am wrong on this, it is not my area of expertise)

Year 1 loan) $60,000
Year 2 loan) $60,000 + $6,000 (10% interest) = $66,000 for year 1 + $60,000 = $126,000 loan amount beginning year 2.
Year 3 loan) $126,000 + $12,600 (10% interest) = $138,600 for year 2 + $60,000 = $198,600 loan amount beginning year 3
Year 4 loan) $198,600 + $19,860 (10% interest) = $218,460 for year 3 + $60,000 = $278,460 loan amount beginning year 3
Graduation ) $278,460 is the final amount. While interest is accruing on this during your final year, I am not sure if this would be capitalized in as you will not be having a new loan and therefore, your interest will be calculated on the final amount only and not the accumulating interest as well

Again, this is not my area so this needs to be confirmed
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I just ran a scenario through AAMC's loan calculator with $70K/yr and an interest rate of 7% (so $4.9K interest a year). Then I selected no residency and no income. They gave me a balance of $320K after graduation.

My way would give a $329K ($280K + (4.9*(4+3+2+1)) balance, and your way would give an even higher balance. So who the hell knows what is going on at this point, haha
 
I'll be using my savings to avoid loan interest, but leaving enough buffer so that I won't have to stress out about the bills every month.
 
cj_cregg said:
Sorry, that was unclear - I was just giving a highly simplified example of how it works when your interest capitalizes. The capitalization frequency varies from loan to loan and lender to lender - for the unsubsidized Stafford, I think all accrued interest capitalizes at the end of the grace/deferment/forbearance period, after which it capitalizes quarterly. I may be remembering this incorrectly, so I'll yield to anyone who knows better than I.

I'm only an M1 and haven't even started to think about repayment programs at this point, so I can't comment on PAYE.
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When you say varies from lender to lender, are you talking about grad plus loans being disbursed by different lenders having different policies? Do you have any control over who your grad plus lender is or will it be the lender who distributed your undergrad loans?
 
DKMA said:
Wait, can I get a clarifiication on this? @Mad Jack , I believe you are a poster who is in school right now.

The interest doesn't capitalize yearly- it capitalizes 6 months after graduating.
So $1000 at 10% taken out in the first year will capitalize to $1,400 after graduating right?


Then on AAMC FIRST it says that with PAYE the amount capitalized cannot exceed 10% of what you orginally took out (can't find this on the federal loan website yet). So $300,000 can't capitalize to more than $330,000, can anyone confirm this?
Click to expand...
It capitalizes six months after graduating if you have not previously used your grace period for another loan. I already used mine, so my loans capitalize on day 1. Since you are not under PAYE at the time of interest accrual, the interest capitalization will not fall under PAYE rules and will thus have no cap.
 
gonnif said:
Year 1 loan) $60,000
Year 2 loan) $60,000 + $6,000 (10% interest) = $66,000 for year 1 + $60,000 = $126,000 loan amount beginning year 2.
Year 3 loan) $126,000 + $12,600 (10% interest) = $138,600 for year 2 + $60,000 = $198,600 loan amount beginning year 3
Year 4 loan) $198,600 + $19,860 (10% interest) = $218,460 for year 3 + $60,000 = $278,460 loan amount beginning year 3
Graduation ) $278,460 is the final amount. While interest is accruing on this during your final year, I am not sure if this would be capitalized in as you will not be having a new loan and therefore, your interest will be calculated on the final amount only and not the accumulating interest as well
Click to expand...

Well that is depressing to look at
 
Mad Jack said:
It capitalizes six months after graduating if you have not previously used your grace period for another loan. I already used mine, so my loans capitalize on day 1. Since you are not under PAYE at the time of interest accrual, the interest capitalization will not fall under PAYE rules and will thus have no cap.
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Day 1 of graduation or day 1 of med school? Sorry for all the questions, I just don't want to end up with a lot more debt than I expected
 
gonnif said:
Things arent the bad, they are actually worse as I didnt include year 4 interest. At the end of year 4, your loan with capitalization could be $306,306 and might have another half year (6 months after graduation) interest added
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You're actually better off just choosing to enter repayment rather than take the grace period, as PAYE (supposedly) would cap any new accrual of interest if your total interest is >10% of your initial borrowed amount. Even REPAYE would be a more favorable arrangement, as it would halve your interest accrual during that six months, potentially saving many thousands of dollars. I'm still looking up the 10% rule on PAYE to verify its accuracy, but, if it is correct, one would basically stop accruing interest after school if they kept paying 10% of their income then threw additional payments entirely at principle without touching the interest balance.
 
I don't know if you have gotten good advice or not, but I highly recommend posting your situation in the personal finance subreddit.

Very qualified people in finance who are willing to help. https://www.reddit.com/r/personalfinance/
 
Mad Jack said:
You're actually better off just choosing to enter repayment rather than take the grace period, as PAYE (supposedly) would cap any new accrual of interest if your total interest is >10% of your initial borrowed amount. Even REPAYE would be a more favorable arrangement, as it would halve your interest accrual during that six months, potentially saving many thousands of dollars. I'm still looking up the 10% rule on PAYE to verify its accuracy, but, if it is correct, one would basically stop accruing interest after school if they kept paying 10% of their income then threw additional payments entirely at principle without touching the interest balance.
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I'll let you know when I get a response from that email I sent to the DoE federal aid help contact
 
Turambar said:
Put your savings in an IRA and take out 100% loans
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gonnif said:
Cant roll it all into a traditional IRA as way over IRS limits. and rules. A Roth IRA may be better
the IRS limits are the same for both Roth and traditional IRA contributions. If the OP made at least $5,000 in 2015 and 2016, he/she can put $10,000 in an IRA using prior and current year contributions before 4/18/2016 for the prior contribution.

Personally, I like the idea of using it for living expenses after keeping a 6-months safety net for emergencies. You will need money in 3rd and 4th year for testing, test prep, residency interviews and moving expenses so that can kept aside as well.
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Thanks for your all responses. Though I have not get much thought on Loan forgiveness program. According to my understanding, you only have to pay 10% out of your check for 10 years as long as you work at a non-profit hospital. These 10 years including your residency years. Lot of hospitals nowadays are non-profit I think
 
tai9588 said:
Thanks for your all responses. Though I have not get much thought on Loan forgiveness program. According to my understanding, you only have to pay 10% out of your check for 10 years as long as you work at a non-profit hospital. These 10 years including your residency years. Lot of hospitals nowadays are non-profit I think
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Not all physicians are hired directly through the hospital, but are employed by private physician groups that contract with hospitals. This will make a difference after residency when you are hiring, and it may be better for you to join a private practice than directly through a hospital in terms of overall compensation and benefits.
Anyone know the percentage of private practice to direct hospital employees? I know it is changing drastically, so maybe by the time we are through that will be the norm.
 
Astra118 said:
I don't know if you have gotten good advice or not, but I highly recommend posting your situation in the personal finance subreddit.

Very qualified people in finance who are willing to help. https://www.reddit.com/r/personalfinance/
Click to expand...
Turning to Reddit for finance advice...
Anyway, I wouldn't liquidate your retirement accounts to decrease loans, just your liquid assets, and maybe trade in your luxury car for a less expensive reliable one (civic, crv, etc) if that applies.


--
Il Destriero
 
IlDestriero said:
Turning to Reddit for finance advice...
Anyway, I wouldn't liquidate your retirement accounts to decrease loans, just your liquid assets, and maybe trade in your luxury car for a less expensive reliable one (civic, crv, etc) if that applies.


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Il Destriero
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I am talking about about my liquid assets, not retirement. And I posted on reddit but no response so far. First time using reddit.
 
Make sure and keep ~10k in emergency funds especially if you have limited familial help in the event of a true emergency.

Loan budgets drastically underestimate the costs of residency apps and travel.
 
DrBowtie said:
Make sure and keep ~10k in emergency funds especially if you have limited familial help in the event of a true emergency.

Loan budgets drastically underestimate the costs of residency apps and travel.
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How much do you think we should save for residency stuff?
 
IlDestriero said:
You might lose even more money going that route. I surely did.
However I didn't join for the money, so I don't give it much thought.


--
Il Destriero
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How do you lose more money if you have 0 debt after you graduate from medical school?
 
You lose money in lost attending income if you have to do any GMO time and you lose money during your payback when you're working for below market income. If you're in a well compensated field, you can lose a lot more than that scholarship. Though if you do a .mil residency, you'll make more than your civilian colleagues.


--
Il Destriero
 
And then at the end of your obligated service, they give you another little poke in the eye when your specialty bonus is paid in September and not July, so you have to give it up for your last year, or work an extra 3 months in the .mil.
You'd have to crunch the numbers on on which is worth more based on your projected civilian income and your bonus. If you want to do a civilian fellowship after your obligated service, you might not have a choice.


--
Il Destriero
 
IlDestriero said:
You lose money in lost attending income if you have to do any GMO time and you lose money during your payback when you're working for below market income. If you're in a well compensated field, you can lose a lot more than that scholarship. Though if you do a .mil residency, you'll make more than your civilian colleagues.


--
Il Destriero
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Thanks for the advice. I see how you would lose much more money than the scholarship based on the salaries of physicians in the military compared to private practice.
 
tai9588 said:
This may be a stupid question
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Don't start with that... that discounts whatever you will say next. Get rid of that habit before you start med school.

tai9588 said:
pay for a part of medical school cost or save it for emergency
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Rule of thumb, put aside enough money so you can go without any payment/income for 3 month - should be enough for emergency. Pay the rest for tuition, then take out loans.
 
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