Unsubsidized vs. subsidized ?

[swiminh2o]

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I just got accepted to dental school and am trying to figure the financial end of it out. I have been working for the last seven years earning approx. 55k each year. I have property valued at about 50k and savings (mutual funds, money market, and IRAs) valued at around 40k. I have no debt (we rent, cars are payed for and no consumer debt). I am wondering how best to utilize what I have to avoid as much debt as possible. Also, will I be able to qualify for subsidized loans given my current financial status? I have a family with four kids and would like to possibly buy a home wherever we end up going to school. Is that crazy or reasonable to consider? Any advice is welcome.

 

[mpp]

The student loan system in this country is backwards...those that work and save get the least benefit. So unfortunately, the best way to qualify for the best federal aid is to first use up your own money.

The FAFSA will determine your expected contribution from your income and savings (minus any money in an IRA or other retirement account and a primary residence). See what financial aid the dental school will offer and see what benefits you most. The interest rate on student loans is quite low right now so if you are into a little bit of a gamble, it might be wise to borrow as much as you can and invest your savings to try and beat the loan inerest rate. Or you can use up all your savings in your first couple years and probably qualify for better federal aid for your last couple of years. As far as buying a house, that's totally up to you, the cost of living where you live, and what you want to spend.

 

[swiminh2o]

How does FAFSA consider property? I own an acre of land outright valued at about 50k.

Also, do student loans just cover school costs (tuition, books, fees etc.) or is there a measure included for living expenses such as rent and health insurance?

 

[mpp]

Unless your primary residence is on that land, the FAFSA would consider it an investment property and the value will be used when determining your expected contribution. Each school will determine an annual budget that includes tuition and living expenses.

 

[DrScott]

I have recently been accepted to medical school and have started doing research on the financial aid aspects of all this. The situation mentioned below is very similiar to my own. I make about 100k/yr and have approximately 130k in investments. The FAFSA process WILL calculate your EFC and it will be high. However, the EFC is really not important when it comes to those applicants who have large incomes/investments. Here is why:

The government allows you to borrow a certain amount($38,500 for the first two years and $45,157 for the next two years) of combined subsidized and unsubsidized Stafford loans. I can tell you for certain that high income/high asset applicants will not qualify for the SUBSIDIZED Stafford Loan. However, they will qualify for the UNSUBSIDIZED Stafford Loan which is NOT based on NEED and is not limited by your EFC. The only limitation is the calculated budget of the school you will be attending. I have seen a number of websites mention to stay away from Unsubsidized Stafford loans because the interest starts accruing right away. THIS IS CRAZY!! Do the math! I would rather pay 2.82% interest than take money out of my retirement account which has earned 34% this year! In a market of low interest rates and a healthy stock market, UNSUBSIDIZED Stafford Loans are a gold mine. My plan is to simply withdraw money from my IRA to pay the interest which with current rates will be less than $500/yr.

This situation is only relevant for the first year. After that, your EFC should drop dramatically and then you can qualify for SUBSIDIZED Stafford loans too which are even better since you don't pay any interest while in school. Any funding gap would then be taken up by the UNSUBSIDIZED Stafford loans.

Bottom line: Keep your investments in the market as long as you can unless loan interest rates start to exceed your rate of return on your investments.

Check out MEDLOANS for your Stafford Loan. They seem to have the best deal going....you need to shop around.

 

[mpp]

You seem to be saying two different things. I agree that you might as well borrow as much as you can (which is as you say is limited by your EFC and your annual school budget) since the rates are low and you can make more than that in the market . However, then you say you will take money out of your IRA to pay the interest. This is a very bad idea and is a triple whammy against you: 1) you will defeat the idea that the rates are lower than you can make in the market. By pulling the money out of the market to pay the low interest you are not making money in the market. 2) IRA money (if it is a traditional IRA or from a SEP-IRA, 401(k), or 403(b)) is pre-tax money, therefore you will have to pay tax on that $500 (which if you made >$100k last year will be at the highest tax rate. 3) Unless you are older than 59-1/2 you will pay a penalty to withdraw money from your IRA.

Like you said, the interest rates right now are low (that could change...the interest rates on Stafford loans are variable) so it is better to borrow all that you can and let your money work for you in the market. If there comes a time when it seems the interest rate is higher than you can get in the market, then pay money into the loan.

Medloans is a good program but definitely compare with other lenders because some (T.H.E., and Access) tend to have better repayment options. Theoretically, it may be better to borrow with different lenders...you might have to deal with getting a few different things in the mail, but it makes for more options when consolidating later on. If all your money is with one lender, you have fewer options when consolidating.

 

[swiminh2o]

How are IRAs calculated into the FAFSA equation?

Can I convert my simple IRA so I can use that money during school if I need to?

I am wondering if I should up my simple IRA contribution some more before I enter dental school or if should hold onto that money and have more cash on hand for the first year.

 

[mpp]

IRAs are not used on the FAFSA. Any money in there (and any equity in a primary residence) is protected. I would not suggest removing money from your IRA since you will be taxed and penalized to do that. There are programs in which you can borrow against your IRA, but even this is not so smart as it really isn't a true loan since the money you borrow against is no longer being invested and therefore is static. The Stafford loans right now are far better than using any of your own money to pay for any necessities such as tuition and rent.

As far as the money now or money later thing in regards to puttin money in an IRA, that is up to you. If you feel you want money on hand later, then don't put it in. If you are like me, I will always get by with the money I have no matter how little it is so I always put the maximum into my IRA's the first minute I can knowing it might be there when I need it most. But if you are the type that feels better spending money than saving it, keep your money out of the IRA and buy yourself something nice when you need to.

 

[DrScott]

mpp, thank you for your input. Yes, I probably shouldn't pay the interest with my IRA for the same reason I am not going to use my IRA money to pay my tuition. I just figured that it is such a small amount that the impact is not substantial. One thing though....my money is in a ROTH with is post-tax. Also, you can make withdrawals penalty-free when using for 'qualified educational expenses". Thanks for the info on T.H.E. and Access. Where can I look to get more information on these programs?

 

[mpp]

T.H.E. can be found at www.northstar.org and Access can be found at www.accessgroup.org . www.nowloans.org also seems to have decent terms. The main problem with MedLoans is the 3% origination fee. That's $3,000 on a the typical $100k of medical student loans. That's a big fee to pay for no added benefit...just more money in the AAMC's pocket. And definitely stay away from any company that charges a guarantee fee.

As for taking money out of a Roth for 'qualified education expenses' that does not include student loans. However, since they don't require you to file payment statement for school (i.e., they don't know where the money you are paying for school is coming from) techinically you can take out as much money out of your IRA as is the sum total of your tuition and room & board. However, that is a bit like lying to either the Stafford loan people or to the Roth IRA people since you shouldn't be getting both to pay your tuition and room & board.

 

[juddson]

I have not found ANYTHING on the web which tells me HOW the school (or is it government) translates your EFC (Expected Family Contribution) into a proportion of sub versus unsub loans.

In my case, I expect that I will NOT qualify for institutional aid because my parents make too much $$$ (I'm married and 30 for god's sake). BUT, that leaves stafford loan aid. Two types are available - sub and unsub. But HOW will my eligibility for the Subsidized portion be evaluated give my EFC.

Suppose my EFC is $10,000 (just a guess). Will that preclude me from all subsidized aid (the max is only $8,500, afterall)? Or will I STILL qualify for some subsidized stafford loan? Where do I find the formula for this?

Judd

 

[mpp]

There is no formula. It is up to the financial aidadvisors at the school to distribute the subsidized aid they have been provided. With a $10,000 EFC you will not be eligible for subsidized aid.

 

[juddson]

Originally posted by mpp
There is no formula. It is up to the financial aidadvisors at the school to distribute the subsidized aid they have been provided. With a $10,000 EFC you will not be eligible for subsidized aid.

This does not seem to comport with what i have seen on this forum after I posted my original question.

several threads down I saw a couple of people with 10k and 12k EFC's who said they qualified for the whole 8,500 in subsidized stafford (which is obviously good news). What makes you think that having an EFC of 10k will preclude one from qualifying for subsidized stafford loans.

Judd

 

[LaurieB]

Originally posted by DrScott
This situation is only relevant for the first year. After that, your EFC should drop dramatically and then you can qualify for SUBSIDIZED Stafford loans too which are even better since you don't pay any interest while in school. Any funding gap would then be taken up by the UNSUBSIDIZED Stafford loans.

How does your EFC drop after your first year if you still have savings? I'm trying to figure out how best to pay for med school next year and I'm leaning towards your approach.

 

[LaurieB]

bump - Anyone know how your EFC drops after your first year if you still have savings?

 

[mpp]

Do a search for 'EFC calculator' and you can get an estimate of your EFC.

 

[DrScott]

LauriB,

What I am referring to is for us non-traditional applicants who are making a decent income. My household income will drop from around 110k to 40k after the first year. Then it will drop to around 22k for the third year(primarily my wifes income). Therefore, my EFC will be much lower the second and third years of medical school. My EFC for this year is around 27k...so I doubt I will get any subsidized loans.

As far as savings are concerned...I have rental property with equity but I am selling my primary home and moving back into my rental property. The equity in my primary home will be placed into my rental property. Therefore, my only 'savings' will include all my retirement accounts and equity in my primary residence. All of these are excluded when considering financial aid.

Hope this helps!!!

Scott

 

[Fermi]

Originally posted by mpp
There is no formula. It is up to the financial aidadvisors at the school to distribute the subsidized aid they have been provided. With a $10,000 EFC you will not be eligible for subsidized aid.

Not true. I don't know how they calculate eligibility for federal sub/unsub loans, but I know from personal experience that a >$10,000 EFC still qualifies for the full $8,500/9mo. subsidized loan at my school. It may be fairly simple--take the school's predetermined budget (tuition + living expenses), subtract the EFC and any scholarships/grants, and the difference will first be made up with subsidized loans up to $8500, then unsubsidized.

 

[Amy B]

Originally posted by DrScott
LauriB,

What I am referring to is for us non-traditional applicants who are making a decent income. My household income will drop from around 110k to 40k after the first year. Then it will drop to around 22k for the third year(primarily my wifes income). Therefore, my EFC will be much lower the second and third years of medical school. My EFC for this year is around 27k...so I doubt I will get any subsidized loans.

I am also in the same kind of boat as you are. My husband is going to have to change jobs to move to the town where I will be going to school in August. It is a small town compared to the D.C. area where we live now and he is going to end up taking a $60,000 pay cut. There is nooooo way I can pay our EFC of $20,500 and his lesser income is going to be difficult as well.

So they are figuring the EFC on last year's tax return (2003) and this year won't even be close.

Do they redo the EFC this year or would I have to wait until next year to adjust for the new income?

 

[DrScott]

Amy B,

As far as readjusting your income is concerned, I think I have always read that if you are in a sitution where your income is going to change substantially, speak to your Financial Aid office and see if they can make special considerations.

You would probably benefit from reading the documentation about how the EFC is calculated. There are situations(which I will not go into here) where your assets are not considered. This doesn't help you with your income sitution but it is still good information that you should understand so that you can "work the system" to your advantage.

One last thing...keep in mind that you are NOT on the hook to pay your EFC. It is completely in your right to borrow all the way up to your schools budget by using unsubsidized stafford loans. The amount of unsubsidized stafford loans you receive is ONLY LIMITED BY YOUR SCHOOL BUDGET, not your EFC. For example, say your EFC is 25k and the school budget is 34k. You can hope that you get some subsidized loans. However, if you do not then you are allowed to borrow 34k of unsubsidized loans to help pay for schooling. As you can see, in this situation the EFC has no bearing.

If you send me an email at [email protected], I can see if I can send you the PDF about EFC calculations. It is too big to attach to this forum.

Good luck!

Scott