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| e_pang |
 Posted: Fri Aug 04, 2006 5:25 am Post subject: I have a friend who is in this kind of situation |
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Investing Sr. Associate
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Here's my friend's situation;
He is currently attending college and will be a sophomore this fall. Currently, he is paying for his college tuition from a side business. He is paying it on a montly payment plan so I always have enough money to cover an emergency. And he is not currently using any loans right now.
What he is trying to figure out is why not take out a federal stafford or perkins loan (no payments while in school) and then just keep the money he is currently making and put it in a high interest CD or fund while in school and then just pay off his college loans as soon as he is out of college so he will not get hit with any college loan interest fees?
This would also allow him to reinvest in his side business to help it grow because currently he really does not have much flexibility within his business budget because tuition, room and board, and self employment taxes take a huge chunk out of my earnings.
Any thoughts, comments, or feedback would be greatly appreciated! |
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| Gilgamesh |
| Posted: Sat Aug 05, 2006 5:54 am Post subject: |
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Investing Associate
Joined: 03 Aug 2006
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I came from a similiar situation, where I could go through school without loans, and did. I consider it one of my larger mistakes financialy. Heres why:
1. College loans are incredibly low intrest, especially if you manage them correctly and start paying them off promptly. Investing it in a balanced way between fixed income and mutual funds (I don't reccomend stocks unless you have money, knowledge and time, even though you pay fees for the fund, good high quility mutuals will often beat even experianced investors and are much easier to diversify then stocks) can offset the loan over the long run.
2. You gain increased options, college is EXPENSIVE, The money I spent out of my portfolio to pay for school would have been much better spent staying there in hindsight and appreciating with the rest of my portfolio of funds and fixed income. This though comes down to a serious evaluation of the risks you are willing and can afford to take. honestly, for inexperianced investors, a full service brokerage like merrill lynch is not bad, but be sure to examine the fees and options before getting in.
3. you might not be thinking of it now, but you will down the road and thats credit rating. Student loans are EXCELLENT for establishing credit rating, especially if you pay off all your bills, don't have other loans, don't carry debt etc.
4. avoid junk like intrest paying life insurance polices. These might look good on paper and from a salesman, but they are a bad road to get on as a savings vessel.
Last edited by Gilgamesh on Sat Aug 05, 2006 6:25 am; edited 1 time in total |
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| nelaina |
| Posted: Sat Aug 05, 2006 6:14 am Post subject: |
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CFO
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totally off topic but i just finished reading the Epic of Gilgamesh a few weeks ago and whoa you appear!  |
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| e_pang |
| Posted: Mon Aug 14, 2006 4:46 am Post subject: |
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Investing Sr. Associate
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| Any more input? Just wondering! |
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| MrT |
| Posted: Tue Aug 15, 2006 8:50 am Post subject: |
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Investing Sr. Associate
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I'm not 100% sure, but I think that those loans start accruing interest even during school.
Also, interest on students loans are tax deductible. This won't help you much now since likely you don't meet the $4500 standard limit, but it will in the future.
In general, my opinion is that you really have to step back and take a look at the long-term financial risk that you take when you make certain decisions during college. Unfortunately, getting a degree in college does not mean you will have a job in that field when you graduate. You need to have done very well in that major (3.0+) and have the appropriate connections in the industry you want to work in. Anything that gets in the way of doing that is severly hampering your the value of your education.
Take, for example, a fictional study of two students of about the same ability level in the same 4-year program at the same school. The cost of college (tuition, cost of living, etc) is about $15K/year after various scholarships and grants for each of the students.
Now, student #1 wants to graduate from school without any debt, so he figures he has to earn about $20K/year before taxes to meet his cost. He can work full time during the 3 months he is not in school at a (generous) $15/hour selling let's say... "Alien Invasion Insurance" to conspiracy theorists. working 40 hours a week, he'll make $7800. During the school year, he works 20 hours a week because he only has nights and weekends, so he'll have to make about $15/hour oh...let's say...serving drinks to CLEARLY underage freshmen girls. The money's better than a lot of college jobs, but it'll be difficult to take time off his job when he has extra work to do, and student #1 will likely not have any free time to unwind. Like many college majors, there is a lot of reading work, and a lot of group assignments. Classes alone take up 20 hours a week, and depending on the time of the semester, student #1 could have anywhere from 5-40 hours worth of reading/studying/group projects (Trying to get together 4 college students to work on even a simple class project can easily consume an entire day). Because of working though, student #1 is always busy and doesn't always get in the extra study time, and doesn't always get to meet with other students at night to get extra help on the homework. He is hard working though, and graduates with a C+/B average (2.8 for example). Unfortunately, the only club he ever has time for is the UBSCUFG (Underage Bartenders Serving Clearly Underage Freshman Girls), and the only award he ever gets is the Alien Insurance Salesman of the Month. On top of that, he barely knows any of his classmates because has to work all the time and his professors think he's an average student, at best.
But hey, he graduated AND doesn't have any debt right? Well, in a particularly competitive field, it's not unreasonable to say that someone with a sub-3.0 GPA and no connections would take 6 months after graduation to find a starting job in the field, making the minimum starting salary of, oh lets say $30K a year for the field.
OK, onto student #2! Student #2 says, "Hey, I don't care about being $60K down the hole, I am going to work hard at this so I can be the top student. I'll try to save money when I can, but getting the most out of my education is my top priority." Student #2 works a little bit harder than student #1 because he has 20 extra hours during the week, and can be a lot more flexible during the day to see professors and TA's, and at night for when working with other students. During the weekends, he gets to know the other students in his major and can easily spare an entire day to studying extra when he feels he needs to. Because he is flexible, he does well, as a B+/A- (3.5 GPA) student. He is able to obtain $5K extra in scholarships each year after his first because he is one of the top students in his class and has the time to search for them. Additionally, he joins the "Young (Insert industry name here) Club" and makes connections with working professionals. All it cost him is his time. He also gets an excellent unpaid internship after his junior year that gains him valuable experience and connections.
But he still has $45000 in debt right? Well, he has done well enough that he has the option of pursuing his goals at a prestigious grad school, or going directly into industry. He chooses to get a job because of his internship/connections/other students help, and starts immediately after graduation, starting at $40K/year. 33% more is not an unreasonable difference in starting pay between an an excellent student and an average student.
OK, so how does this really pan out? In the first year after graduation, student #1 only makes $15K the first year out of school on account of having to search 6 months for a job, while student #2 makes $40K. After that, student #2 makes $10K/year more as they move up the corporate ladder, so after 4 years out of school, student #2 is up by $55K. (Let's call this $36K after taxes)
Now here comes the tricky part, student loans are usually some of the lowest interest loans around, the Stafford loans are at 6.8%, right in the ballpark of 30-year mortgage interest rates (They were a nice 3%, but Bush bush put an end to that Gravy Train). This would cost student #2 about $3800/year in interest only, so 4 years out of school, the loans would have cost about $16K total if he could only pay interest, which is possible considering the long repayment times, 20 years I think. So, on paper, student #2 is still down by $45K in low-interest loans, but he has $20K extra in cash.
At this point though, he has more flexibility than student #1 though, because let's say that they have both gotten married (Not to each other, unless they live in Massachusetts!), and decide they want to buy a home. Student #1 would have needed to live pretty frugally for the first few years out of school to be able to afford the 20% needed to avoid PMI or taking out a higher interest rate loan, even if he was splitting it with his wife/man-wife, which would be about $40K, assuming a starting home price of $200K. Student #2 on the other hand, has $20K extra to put towards the down payment, thus saving him the second home mortgage rate of 9-10%. Taking the tax deductible into account, this saves him about 5-6%/year on interest, or ~$1000. At this point though, all of his student loan interest would be tax deductible, so it would be more like a 4-5% loan ($2500/year). Combined with his tax savings from the loan, he is really only in the hole $1500/year compared with student #1, and his networth is $35K less.
The point is, on paper, student #2 didn't make out that much better than #1, but he had a lot more options after school, and probably got the job he wanted right out of school. Later on, he'll have an easy time going to graduate school if he chooses also. Although student loan rates have gone up recently, there are still lots of small discounts you can get by paying on time, using electronic withdraw, etc, that may make the actual costs of the loan cheaper than a mortgage. At that point, it really doesn't make a lot of sense to pay them off any faster than you have to if you have a mortgage.
Anyhow, as I think I stated near the top, colleges exist in their own world, and the key to remember is that if you want to get the most value out of it, you need to be a top student and somehow get those connections. If you have to bust your butt trying to pay for school at the same time, I just don't see how that is possible without losing your mind. It's not uncommon to see recent college grads still doing the same restaurant service job they did while in school because they are having a hard time finding a job. Sure, this is often because they chose a poor major in school or companies just aren't hiring, but often times its also because they probably look mediocre on paper.
It's good to save where you can, but hey, if you're at school for computer engineering, and the son of a VP at Microsoft wants some extra help with his homework, and then wants to take you on an expensive skiing trip when you are scheduled to work at Denny's for Kid's Night because you are broke, then go ahead an do some gold digging! It's all about the good old boys network, and if you want that awesome job after college, you had better be the top student, or know the right people, and preferably both!
That was my 105,500 e cents.  |
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| crazyK |
| Posted: Mon Aug 28, 2006 6:35 am Post subject: |
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Investing Associate
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| There are two types of federal Stafford loans: subsidized and unsubsidized. It's harder to qualify for the subsidized, but if you do, this means the feds pay your interest until you graduate. Most people will at least qualify for the unsubsidized. For both loans, you have to start repaying within 6 months of graduation, but you can usually consolidate for a good deal. crazyT and I consolidated last year and are paying 1.625% so it would be ridiculous for us to pay it off. Plus, if we make 3 more years of on-time payments, the interest rate drops to 0.625%. |
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| crazyT |
| Posted: Mon Aug 28, 2006 8:34 am Post subject: |
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Investing Associate
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| That would have been really good, but I spent some of it on a stupid purchase instead of investing all of it like the plan was. Doh! |
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