Use my 60k saved up for tuition?

[darktooth]

It basically costs me 80k for tuition and living. I have 60k saved after 10yrs. Should I knock out one year with my savings? Or use maybe 30k towards my savings? Or should I just hang onto it until I land a residency, then use it to start paying back?

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[Perrotfish]

It basically costs me 60k for tuition and living. I have 60k saved after 10yrs. Should I knock out one year with my savings? Or use maybe 30k towards my savings? Or should I just hang onto it until I land a residency, then use it to start paying back?

In my opinion, what you are asking is if you should bank on one of the loan forgiveness programs.

If you are planning to do public service loan forgiveness or Pay as you Earn to pay down your debt, then the answer is no. Those programs will allow you to pay back a very small amount of your salary each year and then cancel your entire debt after 10 and 20 years respectively. In that case actually paying down your debt early is a bad idea. You should try and milk the stock market for a 5-7% rate of return and pay off as little as the programs allow.

On the other hand if you don't believe those programs will come through, you consider them too restricting, or you (like me) just think that six figure debt hanging over your head is a source of background stress that you would be fine paying to get rid of, then the right decision is definitely to start paying off this year's debt. Your debt is, for all intents and purposes, an investment that yields 6.8% a year no matter what. That's hard to match.

Whatever you do, I believe you should always maintain an emergency fund with 3-5K in it, and you should always carry 5K/month of disability insurance (costs about $100-$150 if its indexed to inflation). So it probably makes sense save 5 for emergencies, and save the other 5K for your $120/month disability payments, regardless of what you do with the other 50K

BTW I'm assuming you're going to a US non-profit medical school when you ask these questions. If you are going to a for-profit or foreign/Caribbean school the correct answer is not to go. They are trying to scam you out of your money. Also I'm assuming that you're single, not coming up on retirement, and know enough to carry good health insurance.

 

[Scorcher31]

Your going to find a mixed crowd weighing in on loan forgiveness. I can only tell you that like Perrot I decided to pay off my loans as quickly as possible to try avoid the anxiety of the debt. If loan forgiveness falls through and you were counting on it by taking out larger than normal loans and paying less than interest back, you will end up in a world of hurt.

If i was in your situation, I would have a ~5k emergency fund, live as cheapely as I can (60k sounds like way to much to me for some reason), including going to the most affordable medical school, and use the rest for tuition and living expenses. Even if you just get a year out of that money its 60k less in total, plus ~16320 less in interest over 4 years of medical school assuming 6.8% interest rate. Just finishing medical school thats 76320 less and don't forget it would take years to pay that off in residency where it would continue to gain more interest and probably capitalize.

 

[RangerBob]

I tend to agree with the others--use your savings, but save some of it for a rainy day. I thought 2-3k was enough for a rainy day, but it'll depend on whether you have family to support (or support you if say, your car dies and you need a little help and can't get a loan). I personally hope loan forgiveness (PSLF) will still be around after 10 years of payments, but my opinion is it's rather unlikely. And I'd much prefer to not have all this debt right now and have prevented it in the first place, so if I were in your shoes that's exactly what I would have done--used the savings up front to prevent my debt going so high.

One thing to think about is that if you're borrowing 60k a year (I agree with the others--live on as little as possible and borrow less than you need if you can) is the difference between the interest rates on loans. If I'm not mistaken, subsidized loans are a thing of the past and now the interest rates are variable and quite low (compared to prior years--they rates themselves are still quite high) right now, but likely to go up in future years. So it may be to your benefit to max out on at least the Stafford loans for your first year, and use just part of your savings to pay for the remainder of your first year of tuition. If the GradPlus loan rate is also low right now you might just want to max out on all your loans your first year and save that $60,000 for when interest rates go up, which they're likely to do.

If you're really determined, I'd recommend running the numbers as far as the difference between using that money up front (and possibly having loans in your later years at higher rates) vs using it later (and accruing interest from an earlier date). It's possible it could be a wash, but if you plan to take 20 years to repay your loans then you're probably best off using that savings in place of the higher interest loans that you'll encounter in your later years. If on the other hand, you plan to repay your debt within a few years, then the interest accrual during medical school might be more significant.

 

[krl7044]

If you only have 1 year until the residency, you can pay more towards your tuition (say $50k). If you have more time, say 3 years left, you might want to pay only $30k or so. You always want to keep some money around in case of emergencies. Exactly how much might depend on your budget and projected expenses. In any case, getting rid of high interest loans should be your first priority upon graduation.