Grad Plus loans to pay car payments...pay car off?

[DaniCM]

So, weird question, but I didn't know where to put it...

 

I was offered $19K/year and some federal work study money from Fletcher, in addition to the standard $20,500 unsubsidized direct loan. Taken together, my scholarship, unsubsidized direct loan and federal work study money will cover my first year tutition, but I'll still need to work part time as well as take out a Grad Plus loan to cover living expenses while in school.

 

I also have a $200/month payment on a car I bought last year for $8K. As a full time grad student, I'll have to use a combination of my Grad Plus loan money and my part time wages (assuming I get a job) to pay my car payment while in school.

 

So, my question is, since I'll likely be using (at least some) loan money to make my car payment each month anyway, does it make sense to just take out a larger Grad Plus loan than I otherwise would in order to pay off my car? The interest rate on the Grad Plus loan (7.9%) is cheaper than my car loan (almost 12%), plus payments would be deferred until after I graduate, should I need that cushion.

 

I do realize interest on Grad Plus loans still accumulates while you're in school and I risk "paying interest on interest," but I'm hoping to make payments on the Grad Plus loan when/if I have the extra money during both the academic year and the summer (when I can work full time and make more money).

Thoughts?

[vincehoward]

As Drake would say, "Don't do it, please don't do it."

[flyingjellyfish]

DaniCM- There's no specific reason why you can't do that, particularly as you can use PLUS loans for education-related expenses which I would argue covers a car as much as it covers a laptop/computer since you'll use your car to get to/from school.  As you are already doing, I would weigh the cost/benefits carefully, but also $8k for a car is relatively low so in the big scheme of things, it seems reasonable to just pay it off now as you are considering to avoid the 12% interest rate. Plus, as you said, you'd already be making payments using the PLUS loan money. 

 

Of course, remember that student loan debt functions differently from "regular" debt in that it is very difficult to unwind if you ever have to file for bankruptcy or get into financial difficulties.  So only take out what you absolutely have to.  I think considering how carefully you're thinking about this, my last comment goes without saying.

 

Congrats on Fletcher and best of luck!

[flyingjellyfish]

And anyone else- please do correct me if I'm wrong on this!  My advice above is using my reasonableness and common-sense tests, but I'm not a financial expert.

[DaniCM]

And anyone else- please do correct me if I'm wrong on this!  My advice above is using my reasonableness and common-sense tests, but I'm not a financial expert.

 

haha, my feelings exactly. Intuitively, it seems to make sense to me. When you consider I'll likely have to take out close to $60K altogether for grad school, another $6/7K doesn't seem like much, particularly since it means I'll be paying back that $6/7K with a lower interest rate. And if I'm going to be using some of my student loans to make my car payment anyway over the 2 years I'm in school, why not just do it up front?

[DaniCM]

As Drake would say, "Don't do it, please don't do it."

 

I make many a life decision based on Drake's advice. haha...why the strong aversion, Vince?

[flyingjellyfish]

Yeah, I think your intuition is right on this one

[vincehoward]

I make many a life decision based on Drake's advice. haha...why the strong aversion, Vince?

 

Student loans are nondischargeable so if you hit hard times there is no way to escape the debt. You want to minimize your student loan debt as much as possible, not pile it on with more and more just so you can pay your car note. If I were you I'd sell the car and take the T. You'll be near Boston and a quick bus or train ride away from most places you'd need to go. Get a friend to drive you or rent a zipcar if you absolutely need to drive somewhere which should be rare since you'll be a student.

[cunninlynguist]

Student loans are nondischargeable so if you hit hard times there is no way to escape the debt. You want to minimize your student loan debt as much as possible, not pile it on with more and more just so you can pay your car note. If I were you I'd sell the car and take the T. You'll be near Boston and a quick bus or train ride away from most places you'd need to go. Get a friend to drive you or rent a zipcar if you absolutely need to drive somewhere which should be rare since you'll be a student.

 

Agreed, especially about Boston. (I downvoted your first post due to Drake... sorry). In general, even if the rationale seems strong (e.g. interest rates more favorable), using loans to pay off loans is a backwards proposition. Student loans create a more harrowing situation.

[JSW1]

If you are going to Boston, I WOULD NOT recommend a car. Take the T. The amount you will have to pay for car insurance, parking, and driving. Lol, not worth the money or trouble. Only worth the money if you are wealthy and have expendable income. If you are taking out a loan to cause yourself a pain in your ass...Well, that would just be silly in my opinion.

 

Warning you now. Listen to vince.

Edited March 28, 2013 by JSW1

[JSW1]

Sell the car (or keep it at your parents house for the time being) and buy a bike would be my suggestion.

[ZacharyObama]

I'd say make the payments for it while you're in grad school if you must with PLUS loan money and pay the rest off once you're pau with school. To those above saying get a friend to drive you, I say you are that friend to drive people. If you can afford it, as a Californian, I understand your love of your motor vehicle. To those saying well you can't discharge student loan debt in bankruptcy, I say you're not planning on going bankrupt.

[leon32]

Not really related, but where did you see the work study info from fletcher? I'm going there but didn't see any info about that, or any other fafsa stuff.

[student12345]

I'd say make the payments for it while you're in grad school if you must with PLUS loan money and pay the rest off once you're pau with school. To those above saying get a friend to drive you, I say you are that friend to drive people. If you can afford it, as a Californian, I understand your love of your motor vehicle. To those saying well you can't discharge student loan debt in bankruptcy, I say you're not planning on going bankrupt.

 

No one plans on going bankrupt, and as hard it is to think about it's a very real possibility for any of us. 

 

Having lived in Florida/Los Angeles/Boston I can say right now with absolute certainty that OP should not have a car in Boston. It would be absolutely justifiable in Florida or California (where public transportation is virtually nonexistent) but since I have not met a single student with a car in all of my time in Boston (a city small enough that commute times will be under 30 minutes if you decide to go with public transportation), please go with the advice above and sell the car. Semester T passes are available for students if you cannot find a place within walking distance from the school (you should be able to). 

[DaniCM]

Not really related, but where did you see the work study info from fletcher? I'm going there but didn't see any info about that, or any other fafsa stuff.

 

I got an email from fin aid about a week ago. It just listed the standard 10,250/semester and 1800 for federal work study. Maybe check your spam folder or give fin aid a quick call.

[DaniCM]

Reading the thread, there are essentially 2 arguments against paying my car off with a lower interest, deferable, grad plus loan:

1. school loans are non-discharable, and

2. I wont need a car in Boston.

 

Normally, I would find the first argument pretty convincing on its own, but I'm talking about a pretty small amount of money: $5-6K. I'm not considering putting a down payment on a house or buying a brand new car, both of which I've known grad students to do. If I really end up in such a dire economic state that I am forced to file bankrupty and go into default on my school loans, the $5-6K from my car will not be the final nail in my coffin. I already have $45K from undergrad and expect at least another $30 from grad school.

 

And I certainly do want to minimize my total debt, student loans or otherwise, but I will need to take loans for grad school, and I have already done so for my car. I feel like self-consolidating these two loans, for which I'll receive an overall lower interest rate, is making the best of my debt reality.

 

On the second point, selling my car is certainly something I've considered, and will continue to do so over the next few months. I worry about the argument I wont need a car in Boston simply bc I currently live in the DC metro area, where public transportation (certainly the metro) is arguably better than in Boston, and I still find having a car extremely useful. Going to the grocery store, homes of friends who live in surrounding suburbs, or taking my dog to the vet is made much easier with a vehicle. Additionally, I plan to come back down to DC from Boston during breaks and will need to bring my dog. How would I do that without a car?

 

Plus, even if I sell my car, there's gonna be a gap between what I get for it and what I owe on it. That gap will still have to be paid with Grad Plus money, as I'm using all my savings for the move to Boston.