Using student loans to build up savings

[Snowdrift]

What do you all think about the idea of using student loan funds for living expenses in order to save up a larger proportion of salary? DH and I get considerably more student loan money that we need to live and our plan so far has been to save surplus. When I graduate we will either use it to buy land (and move trailer and put in utilities) then start in on student loan repayment schedule, or use it for large down payment on a house and start on loan repayment schedule plus lower mortgage than otehrwise, or continue renting at a higher price but pay it all back at the beginning to reduce student loan debt/payments.

At our current rate we will borrow about $85,000 and save about $35,000. We hope to spend less and get our saving trend up (as discussed in the budget thread I started earlier in the week). They're Stafford loans, with varying precentages of subsidized/unsub'd by year. This year they are mostly unsubbed because we both worked full time last year, but last year and in future they will be moslty sub'd. The difference is that no interest accumulates on subsidized loans while in school. Interest rates vary--the current maximun is 8.5%. Consolidation and lower interest rates are always available, although of course that depends on where interest rates are overall at any given time.

The advantages, as I see it, are:
-having a fairly large emergency fund that will not have to be repaid immediately if we need to use it
-being able to earn interest on it (although we will only invest conservatively since it's not realy our money)
-having more flexible repayment options (prepayment is always allowed, repayment plans contingent on income are possible, extended (30 yr) repayment plans are available, 90 day hardship periods with no payments required (but accumulating interest) are easy to obtain.

The disadvantages are:
-it's way too easy to spend it, leaving us potentially borrowing more than we can afford to borrow with not way to pay it back
-We will be paying interest on it equal or greater than what we will be earning on it (so it ain't free money). Interest is only on the unsub'd portion, which will steadily decrease as out family grows, but still there will be some interest accumulation. We do have the option of paying the interest as we go so that it will not start to capitalize until I leave school.

So, what do you think? Is it a good idea to continue borrowing the max we can get and save 5k+ per year, or should we only borrow what we need, leaving us with no safety net, but with a less overwhelming student debt and less risk of spending moeny that were supposed to be saving?

[wednesday]

I think what you have described is risky. I had a big long post of pros and cons but it really doesn't matter. It boils down to one thought for me. The idea that has really been driven into me, by making my own mistakes and by reading lots and lots about how to be frugal and how to maintain financial stability, is the concept of "living within your means." This plan you have outlined doesn't seem to fit with that. You are essentially planning to finance a mortgage or rental situation far in advance of your earning an income to pay for it. You really don't even know what your income will be. DH has a law degree and an MBA. You'd think we'd be rolling in cash. Well, we aren't. Some of the financial choices we made while he was still in grad-school, thinking a six-figure income was right around the corner, really hurt us later when things didn't pan out the way we'd anticipated. And I don't mean we blew money left and right, it was nothing like that. But, we didn't live within our means.

Maybe it will take a while after finishing school before you have things in place to purchase a home or land, and I know that's hard, but maybe you'll also sleep better at night.

One last thought I want to add is that student loans are a riskier debt for borrowers than other kinds of debt. No one wants to think they will ever file for bankruptcy but say for whatever reason your family ends up at a point where you are choosing between paying off debt, or putting food on the table. You mentioned repayment is flexible, which it is up to a point, but OTOH unlike just about any other debt you can not discharge student loans under bankruptcy. The very rare exceptions are for people who become so completely disabled they can not work at all. Otherwise if you borrow $85K...you WILL pay back the $85K. There is no other scenario under which a person without a good solid income would borrow that kind of money for anything, but especially not without a tangible, resalable asset to show for it. It's essentially indentured servitude...but now I'm ranting, so I'll stop.

[sweetfeet]

Have you guys figured out how much the repayment is on a $85k loan per month? Is that something that can be paid back and allow you to live comfortably once out of college?

[jentilla]

I have to agree with Wednesday--out of experience. My dh and I owe a gross amount of student loans for a BA, MA, MFA and now a Ph.D. We will work forever b/c of chosen careers, but to be able to just run off and live off-grid is not an option. We are working at being more and more frugal everyday. We DID NOT need all the loans we took out (my dh didn't work for about 6 yrs outside the university which only paid his BASIC living expenses) and I took over a year of extra coursework that I paid for, etc. Our intereste rate is locked in at 3%, but we still have years of managing the expense of a $400-500 monthly payment. I will likely work PT to pay for it in the next few yrs.

Take out only what you need and you'll be glad when your repayment period starts.

[pumpkin]

Some student loans are also based upon your available funds. So if you have a large savings account you might not qualify for future loans.

[TiredX2]

I would consider doing that *only* with subsidized loans. There is just no way you can, IMO, have that money in short term savings (so it would be a safety cushion) and still expect to be making more than 8.5% on it.

If it were subsidized, at the very least you could put it into savings (at 3.8-4% online) and then use that exact same money to pay off the loans as soon as you graduated and your grace period was over.

What area do you plan on living in? How will an 85K debt effect that? How will 35K of savings effect that? Also, if you are planning on using the 35K as a downpayment for a home/land--- would it be cheaper to just get a 2nd mortgage (I really don't know--- how is your credit, how much will you be earning: taking those into account could you get a better rate than 8.5% on the 2nd mortgage portion?)

Additionally, people don't like to think about this, but if the worst happened, I think you cannot discharge student loans in a bankruptcy.

[CarrieMF]

Why borrow and extra $35,000 if it is just going into savings? you are not going to make that 8.5% interest back in the interest on the savings and that $35,000 is going to end up costing you more money than what you'll get out of it. Consolidation loans hurt your credit rating. Taking the $35,000 and saving it to pay off some student loans doesn't make a whole lot of sense. You are making debt to pay off that same debt. You will have less student loan debt by not borrowing that extra money to begin with.

[TiredX2]

Originally Posted by CarrieMF

Why borrow and extra $35,000 if it is just going into savings? you are not going to make that 8.5% interest back in the interest on the savings and that $35,000 is going to end up costing you more money than what you'll get out of it. Consolidation loans hurt your credit rating. Taking the $35,000 and saving it to pay off some student loans doesn't make a whole lot of sense. You are making debt to pay off that same debt. You will have less student loan debt by not borrowing that extra money to begin with.

The advantage would come with a subsidized loan (meaning interest does not accumulate until six months after you have graduated or left your degree granting program).

So, lets say you are going to school for four years starting in 2001

Sept 2001: given $1K loan, you immediate invest it at 4%
Sept 2002: You now have $1040
Sept 2003: You now have $1081.60
Sept 2004: You now have $1124.86
June: 2005: Graduate
Sept 2005: You now have $1169.86

By December of that year you need to pay off the balance (still $1K) or start making payments. You pay off $1K and have $181 for your trouble.

Not a lot. BUT, if you were doing this with, say $10K thats close to $2K.

BUT, this is not risk free. First, if you need to apply for food stamps, you would be denied because of savings. Possibly other situations as well. And, of course, savings are counted against you while applying for financial aid so you the amounts you could get would get smaller w/higher interest rates. Additionally, once you have committed to a student loan it is yours for life (unless you join the military or find another commmittment that will pay off your student loans for you).

[TiredX2]

Originally Posted by CarrieMF

Why borrow and extra $35,000 if it is just going into savings? you are not going to make that 8.5% interest back in the interest on the savings and that $35,000 is going to end up costing you more money than what you'll get out of it. Consolidation loans hurt your credit rating. Taking the $35,000 and saving it to pay off some student loans doesn't make a whole lot of sense. You are making debt to pay off that same debt. You will have less student loan debt by not borrowing that extra money to begin with.

Oh, I think another thought of the OP is that if they had $35K of savings they could immediately purchase a home/land while if they did not have the savings they would not qualify to do so (perhaps for years?).

[Snowdrift]

Originally Posted by TiredX2

Oh, I think another thought of the OP is that if they had $35K of savings they could immediately purchase a home/land while if they did not have the savings they would not qualify to do so (perhaps for years?).

Exactly. The idea is that we would have a big student loan payment $1000/month +/- a couple hundred depending on what repayment plan we are on, but that we would have a much smaller housing bill if we bought. We wouldn't do a down payment on land, we would buy it outright and use the trailer we will mostly own by then. Our only outstanding large debt would be the student loan, kwim? Even if the whole semi-rural thing didn't work out we could do a 35% down payment and have a very low mortgage payment, or if we managed to get a good price for the trailer even put 50% down. The idea isn't increasing debt so much as shifting obligations from housing to student loan--the way I see it we will need housing no matter what--continuing to make a large monthly rental payment while making payments on 45-50k in student loans (the amount we will actually use while in school) is less manageable than making the larger student loan payment but owning our housing free and clear--not to mention the bonus of being able to save money by homesteading, whereas renting in the trailer park now we can't even grow our own tomatoes or hang laundry out to dry.

If things got really bad we could also go on income contingent repayment, which has much lower payments (but is not a good way to live...)

As for how much I will make that is anyone's guess. I don't usually count my chickens this early. I'll have a law degree and I'll probably have some contacts in the state gov't. What that'll do for us is anyone's guess.

edited to add: as for the whole interest/sub'd/unsub'd issue, because the majority is sub'd, we'd probably break even or make a negligable amount.

[Selesai]

I have to second what wednesday and jentilla have said, also out of experience.
I am attorney and I borrowed everything I could to make it through school, including living expenses. Even with consolidation, I will have to pay about $700 per month for the next thirty years, and including my husbands school loans, we'll have a monthly $1000 payment.
When I was a law student I thought none of this mattered since I would be making a lot of money anyway. Right now, instead of that six figure income, I make $42000. All of our loans are in deferment/forbearance. I have to pull in a six figure income starting this fall, in my new job, to make a comfortable living and pay off our other debts. If I can find such a job, that is.
Making that much money as an attorney means, for many people, selling yourself to the firm.
You talk about state gov't. I don't know what state you live in, but don't expect to make more than $30,000-$40,000 to start.
And I think of what Dave Ramsey says-- debt is just the selling of your future for now. If you want to have kids and stay home with them later, will your debt allow for that? You can't project what choices you might want to make later.
If I had it to do over again I would have borrowed as little as possible.
Part of going to school is being patient. You're going to take longer to buy a place to live, etc. etc. That's just the way it is.

[Eman'smom]

There are lots of mortgage companies that will do "piggy back" loans if you don't have the 20% down, so you can avoid PMI.

I think some savings is good, but 85,000 is huge to pay back. Dh just finished his PHD, and owes nearly that, he wants to teach, guess what he can't, and won't be able to anytime soon. When faced with that much student loan debt it's very daunting. We thought "oh when he make's his big time salary all will be fine" well guess what it's not (ok we are doing fine, but not like we were hoping), he makes a VERY good living and we aren't living any better than we were in college, ok a touch better but not like what we thought.

I'd borrow enough for a safety cushion and call it a day.

Oh and that much student loan debt affected how much house we could buy even though we put the full 20% down on our house. It totally throws your debt/income ratio out of wack.

[annekevdbroek]

I think this would only be worth doing with subsidized loans that you immediately pay back on graduation. I do know some people that did this during graduate school (with subsidized loans only!) so that they pocketed the interest that the money earned while they were in school.

You mention borrowing 85K, with a large percentage of that being unsubsitized. Lets say 50K unsubsidized - all of which will earn interest until completely paid off. So you'll owe much more than 50K before you even start to pay off the loan.

A large student loan payment pay prevent you from being able to borrow enough to buy a house. I think a much better approach would be to save what you can, or at least avoid excessive debt while in school. After you graduate you can look for programs to help you buy a house with little or nothing down (e.g FHA loans?) or other funding options. I think it is an exceedingly bad idea to "save" money that you are paying interest on that far exceeds the interest that the money could earn. You aren't "saving" anything then - you are simply paying to have that money sit in an account.

I had HUGE student loan debts from my PhD program and was shocked at the first bill - like $1000 a month! I ended up refinancing my house to get a better interest rate and to pay off the loans. Really, if you can avoid that huge loan I'd say do it.

[rootzdawta]

Personally, I couldn't do it. I have a huge problem with owing in that it doesn't allow me to relax. I cannot WAIT to pay off my $20,000 in student loans and I wish I never had to take them in the first place. We will still be living quite frugally when I start to work so that I can hit that principal balance with $500-$600 monthly and get that bear off my shoulders. Man, if I could have squeezed in more hours at my part-time job when I was in college, I would have just to avoid having to owe someone, much less the U.S. government. I will only be completely easy when I know that I no longer have any obligation to the U.S. gov't or any one else so using student loans as a way to build savings is not a viable option. But that's me.

[afishwithabike]

I wouldn't do it. A trailer is depreciable. You are borrowing with interest you won't make back and there is no guarantee you will get a job in your profession right away. To me it is just too risky.

[Snowdrift]

wow. I know the whole idea is problematic but a lot of the gloom and doom scenarios don't have anything to do with the 35k or so estra and have everyhting to do witht eh 50k we need for schooling. I know I asked for opinions but I wish I could take it back and not have posted this. It's totally my own fault and I did ask for opinions, but I'm totally scared and anxious and nauseated now just thinking about anything. I'm totally feeling guilty and horrible and scared for even being in school.

We already have the trailer. I know it depreciates. It was not entirely my choice, but we have it nonetheless. This is why we were hoping to buy land. Land is mostly cheap, and the trailer can last for twenty years or more.

I was never counting on making six figures at graduation. That is just not realistic. I know of know one who hires attorneys in at six figures, unless the degree is from a top ten school and teh firm is on wall street and involves 100 hours a week.

A lot of people are in the position of taking out large student loans and now regret it--would you give back your JD, your PhD? I could not face being a lousy salesperson my whole life.

I'm sorry, it's just been a really bad day (dropped a knife on my foot, deep puncture wound, trip to ER, stitches+antibiotics...muchas pain and nauseated from anitbiotics).

I just can't see going out and getting a crap job for ten bucks an hour when I'm pg and will soon have to pay nearly that much for childcare per hour. Had I stayed in sales I would've still had to work my whole life, just at a job I hated with a passion, or rather a succession of remarkably similar jobs all of which are equally horrible.

I know I should appreciate all the advice, seeing as how I asked for it, but I just can't handle any more of it. I have no idea why I'm even posting, other than I feel this scary fascination with watching the gloom and doom scenarios unfold one at a time. I'm sorry, chalk it up to being sick and feeling really, really dumb, but I just can't even handle this thread anymore even though I started it.

[Unreal]

Sounds like a winner of a day

okay...my $.02 is that you ought to explore other options as well.
This is clearly an option.
It may or may not be the best one.
What else is out there?
What other ways could you purchase land?

Would it still be worth it if the school gets more strict about financial aid and with only 15K in savings, you find youself not being able to add more?
The schools around here are vicious about loans. we've had to go in and PLEAD for more money to cover living expenses--and they've still denied it

I don't see that this is at all a decision that needs to be made in stone right now. You can obviously start saving what you can, and then if you find there is a better option, you can reduce your loan amounts for future semesters.

so....explore...explore...explore.
If you know about when you want to buy land, go talk to a few bank/mortgage people now and get some ideas from them



I hope tomorrow is a MUCH better day

[Daphnes_mama]

I have not read all the replies, but I would not do this. You are just saddling yourselves with debt at every angle. Also, what is the interest rate you will obtain from the savings? Probably not as much as the interest on the loan, even though student loan interest is not that high (and interest hasn't accumulated while you are still in school). It is not a good idea to rack up more money than you will get by saving.

There is a big difference between the loan payment for 85K and 50K. Both are enormous amounts of money, and believe me, it will take years to see the end of it.

[wednesday]

I'm sorry you're not feeling more supported. What I read above as far as "gloom and doom scenarios" was actually people sharing their real life experiences. Not so much "this could happen to you" as "this did happen to us."

No one is saying you should quit law school and go back to being a salesperson. But what I am kind of hearing from you is something along the lines of "we will be in debt for 50K anyway so what's another 35K?" Followed up by "we will need to live somewhere no matter what so why not borrow the money now instead of later?" It's triggering some alarm bells for me because I have been there. From personal experience, the difference between owing 50K vs 85K over 20 years is about $200/month. (I know because that's roughly the difference between DH's loans vs both our loans combined.) $200/month is a car payment! $200/month can be the difference between having a little bit extra to tuck away each month, versus being right on the edge and having to put any unexpected expenses on a credit card. $200/month invested over 20 years at a modest 6% adds up to over $92K! That could go towards your retirement, or help pay for your children's college expenses. Or, $200/month could mean paying off the $50K loan in 12 years instead of 20. Any way you slice it, it is not an insignificant amount.

I hear you saying you will need to pay for housing one way or another. But I think you can make the best, most truly informed decision about how to arrange that once you are out of school, employed, and know where you will be working and what your income actually will be. If you have a good job, and a credit score that is not totally in the toilet, financing a house or even undeveloped land with reasonable terms is not a problem.

[EmsMom]

Hey, I am sorry you are having such a crap day. I don't think anyone meant to attack you. Your idea seems logical because having money in the bank makes everyone feel safer and less stressed. However, my first response when reading your post was NO WAY! Don't do it! But then everyone else chimed in with the same thought. The truth is a lot of us "more experienced" folk have done the same kind of things and can tell you that life is not always what it seems. I don't think anyone would suggest that your student loans are not a reasonable way to pay for your school. Or that a mortgage is not a reasonable way to pay for a house in this economy. However, they all do have to be paid back and there is no guarantee about a job waiting for you when you graduate, especially not a decent paying one. There is no guarantee that you won't end up with huge medical disabilities, or aging parents that need care, or a houseful of wonderful children that you couldn't even dream about sending into daycare even if it meant making $8 an hour working part-time to put food on the table. I am sure that what the other posters meant was, hey life happens and one thing is for sure: come hell or high water that money you borrow now will have to be repaid with interest of up to 8% (and possibly even higher in a few years, who knows?) I graduated with a BA, summa cum laude. I intended to pursue a masters and even a doctorate. Instead I had late life pregnancies and became a committed stay home homeschooling mom. I love this life and cannot imagine any other, even though the pull to go back to school is there. However, some debt is in my way for both going back to school and being home full-time. It is also standing in the way of my blue-grass fiddle lessons that I really, really want. I don't regret taking out the debt because at the time it was necessary (mortgage). But I am sure glad we kept it as small as possible. Good luck with whatever you do.