Student loans- how much is too much, running the numbers

[weymiller]

I qualify for in-state tuition for my Master's program and I get a small stipend with a TA position.  However, I will have to take out loans to pay for tuition.  I am curious how much extra money people take out in loans.  My tuition for a semester is about 4000, but I can take out 10,000 in loans.  I can probably afford to live on the stipend, but it would be very tight and maybe too tight if unexpected expenses come up.  I am currently trying to sell my house and my budget will differ depending on whether or not I am paying a mortgage every month.  I was thinking possibly taking an extra month of expenses out in loans, in case of emergency.  My other thought is that the current rates of students loans is 6.3%.  I have some undergraduate loans that range from 4.5 to 6.8%.  So I thought about maxing out the new loans to pay of the higher interest undergraduate loans.  

 

What have others done?  Taking out loans for regular expenses or taking out loans to pay off other loans?  

 

 

[Academicat]

I would factor in how likely you are to find a job immediately upon graduation and how much that job is likely to pay. How's the placement rate in your program? The faster you pay off the loans, the less you pay on interest.

[geographyrocks]

I'm taking out the full amount of loans for my first year and here's why:

I'm paying off my credit cards since the student loan interest rate is much lower.

I'm also paying off my car for the same reason.

I also want that extra cash cushion. Graduate school is stressful enough so I want to know that I won't have financial trouble.

I plan on paying on my graduate loans starting in the spring since I won't be making a $230 monthly car payment.

I also know that the job outlooks for my field are good so I'm not as worried about finding a job when I graduate.

[WriteAndKnit]

I know that most of my tuition and fees will be covered by the GI Bill (80%), but I'll still need loans to cover the rest and replace my laptop (it's literally starting to fall apart). I'm still waiting for my financial aid to finish going through, I'll probably borrow a bit more than I "need", and most will go into my savings account as backup for school supplies and related stuff (and just in case I need an extra month's rent).

[bhr]

I'm taking out the max year 1, though I likely won't need it. I just feel like I would be a better student without any financial worries, so I'm putting that money in the bank and hoping I don't have a need for it. If I had more savings, I wouldn't worry, but the move is cleaning me out completely.

 

I'm thinking about putting part of it in an index fund. Fidelity is returning 25% right now on the Spartan 500, with over a 15% five year return rate. If I can return a conservative 10%, I'm breaking even on interest for the year while still having 1/2 available to spend. I already have a USAA account, and their SP500 fund is returning 20%.

[weymiller]

I finally accepted the loans and decided to not take out the max but to take out about 3000 extra per semester for the first year.  I am hoping to also not need all of this and maybe decline some for the spring semester.  My school schedule and TA schedule is only have me in school Tuesdays and Thursdays, so I'm hoping to work a weekend and/or night job for extra cash, but debt really freaks me out.  The job market for what I want to do is good, but I won't ever be making a ton of money.  My goal is to not ever take out more than my first year starting salary, which could vary from 35,000 to 45,000 or more if lucky.  I have about 13,000 from undergrad and I took out 15,000 for my first year of my MS program.  So, I have hoping to pay cash for my second year (if I sell my house this shouldn't be an issue).  I am fairly lucky in that I have a house payment in Wisconsin, but will be going to school in Idaho where I will live with relatives.  So, I only have housing expenses for one location.  

[FlyingDutchman]

I'm taking out the max year 1, though I likely won't need it. I just feel like I would be a better student without any financial worries, so I'm putting that money in the bank and hoping I don't have a need for it. If I had more savings, I wouldn't worry, but the move is cleaning me out completely.

 

I'm thinking about putting part of it in an index fund. Fidelity is returning 25% right now on the Spartan 500, with over a 15% five year return rate. If I can return a conservative 10%, I'm breaking even on interest for the year while still having 1/2 available to spend. I already have a USAA account, and their SP500 fund is returning 20%.

 

Awesome that you are interested in investing some of your savings, however, I seriously question the logic you are utilizing here.

 

A word of caution: the returns of the stock market over the past five years have been great but historically abnormal. The market is rebounding from its latest correction and recession in '08, making the returns seem unusually high. You can typically count on an average return of 6-7% per year over a very long time frame (10+ years). In other words, it is unlikely the market will continue to return 20% per year. Even your "conservative 10%" would be considered by many to be a very lucrative year. Conservative is more like 2-3%. You also should be ready to assume the risk that the returns could go in the exact opposite direction, such as in 2008, when the S&P 500 lost roughly 40% of its value. 

 

All this to say: I would highly recommend you do not invest money that has been loaned to you! What would happen if the market underwent a major correction? You'd lose the money loaned to you and be in a major hole trying to pay that money back at interest. A correction is not unlikely with the way the market has been growing over the past few years.

 

Don't forget stocks are highly volatile and risky ways to invest money. You should really only be investing in a stock index fund if you can keep that money in the market for at least 10 years. That allows you to ride the ups and downs of the market. But for short-term use, it's a bad idea! Especially with money coming from a loan!!

 

I think the smartest move would be to put that loan in an online savings account. Some of the best ones (Ally, Barclays) can give you a yield of .75-.9% per year. 

Edited July 18, 2014 by OneFrugalScholar