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I'm going back to school in about a month. I will be going after my bachelors degree in Information Technology with an emphasis in Software Development. I am in a position right now where I could afford to pay for my entire degree in cash, but that would put me at only $35 / month ahead, and that is baring any accidents or surprise expenses. However, I could take out $2700 in subsidized loans which would put me ahead by about $335 / month. I also qualify for unsubsidized loans but I'm determined to not touch those.

Which one of the two would be smarter? With a lot of work, I could make the $35 / month work, and maybe even cut back on some existing expenses so it would be a little more, but the $335 / month would put me in a fairly comfortable spot, and allow me to carry on with my current lifestyle without really worrying about anything and I would have 6 months after I finished my degree before the interest (current rate is 3.4%) even kicked in. During that period of time, I am fairly certain that I could pay off my loans, so I shouldn't have any interest at all.

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The degree will take 4 years, I am guaranteed the same tuition rates, but nothing about my other expenses. I have no emergency fund, I recently moved and so that went towards getting my apartment set up. My current life obligations are myself and my ferret.

For the sudden expenses, the only thing I would have for an emergency would be a $300 credit card. The only emergency expense that is likely is my ferret could need a trip to the vet. I don't have a car and won't get one till after I finish school, everything is within bike riding distance from my apartment.

I also have the option to work up to 10 hours / week overtime at my job, which after taxes is about $250 / week extra that I didn't include in my calculations. I didn't want to include them because I can't guarantee that I will always be able to work the extra time, especially while going to school.

I'm not very good with saving money, unless I know I need to. If I know I have enough money to pay all my bills and still have $100 + x left over that month, I will go spend $x on non-essential things, and the $100 will go towards anything extra that I actually need.

Any suggestions are welcome

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I will suggest that you not be so sanguine about paying off your student loan in the six months after finishing your degree. Many people have found this is not quite as easy to do as it seemed to be when they were taking out the loan, and of course, the longer the loan lasts, the more interest you pay, and the existence of the loan also affects other aspects of your existence, e.g. how much house you can afford or interest rate you get on a mortgage etc. –  Dilip Sarwate Jun 7 '12 at 11:07
    
More details needed. How long will the degree take? Are you guaranteed the yearly tuition/other costs will not increase? Do you have an emergency fund? What are your life obligations? What happens if you go the pay-cash route and then get hit one month with a $700 car repair cost? How disciplined of a saver are you? Etc. –  Chelonian Jun 7 '12 at 15:29
    
More questions: Do you have family support if you got into any need for a big payment? E.g., vet bills could be > $500 (one site I saw mentioned, "[ferret] vet visits ended up a total of $3K in just one year. Another had dental surgery that cost me about $600."). Do you have health insurance? How do you know your tuition is locked at that rate? (Colleges routinely increases tuition). How old are you? –  Chelonian Jun 7 '12 at 17:36
    
@Chelonian I have family I could ask for help if I really needed it. At this moment, they wouldn't be able to help, but at other times they can. I have health, dental, vision, and renters insurance. The financial aid department at the school I will be attending said tuition would be locked in for the duration of my degree. I'm 19 –  nick Jun 7 '12 at 18:04
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4 Answers

up vote 6 down vote accepted

First, excellent choice to say no to non-subsidized loans!

But I'd say you are cutting things very close either way, and you need to face up to that now. $35/mo extra at the end of the month is "within the noise" of financial life, meaning you should think of it as essentially $0 each month or even negative money, since one vet bill/school books/unforeseen problem could remove it for the entire year, easily. You are leaving yourself no buffer.

But by taking the loan, unless you are (as Joe said) socking away savings to pay for it upon graduation, you are guaranteeing you'll leave college with debt, which I think should be avoided if you can.

Could you do a hybrid plan in which you worked hard to do the following?:

  • Find an extra $50/mo you could cut from your expenses? (food, cable, etc.)
  • Try hard to work at least 5 of those 10 overtime hours a week (= $500/mo!) most weeks.
  • Commit--really commit now--to putting a "Do Not Touch Under Pain of Death" fund for nothing else than paying off the loan in your 3rd year of college (psychologically it will be better to have most of it paid off prior to graduating, and you will have the payments automated and well under way at a time of big transition. If you put $29/week in this fund every week from now you will have the entire amount of your loan available to pay back by the first day of your junior year!

If you do these things or something along these lines, the loan is probably OK; if not, I'd be concerned about taking it. [Probably unnecessary, but: Keep in mind that student loans are not excusable by bankruptcy, so one is on the hook for them no matter what].

Also consider whether you can take a semester off now and then to catch up financially. The key is to really stay far from the edge of any financial cliffs.

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Sounds like a good plan. Books are included in the rates already (thankfully) as are all lab fees. I might look into cutting my course load a little bit as well. I really appreciate the suggestion for putting away $29 / week. I can stick to that without an issue. I'll just treat it as an additional expense and have it auto transferred every payday to another account so I don't even see it under available funds. –  nick Jun 7 '12 at 19:09
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I'd change my attitude a bit. "I'm not very good with saving money, unless I know I need to." If you could act as if you absolutely needed to save, but took the subsidized loan and set it aside, you'd have a good start. As a student, it would be difficult to raise money the way an established working person might. A low interest credit card, a 401(k) loan, Home Equity Loan, etc.

If you feel it would be too tempting to set it aside, don't take it. Your question is fine, but the answer isn't financial, it's behavioral.

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First, are you sure that no interest accrues on the student loans until six months after you finish your studies? My understanding is that you have to start paying back the student loans six months after leaving the university, but that doesn't mean no interest accrues in the meantime.

My concern about student loans is that life happens and when it happens in an unexpected way, the powers of the student loan companies exceed pretty much everybody else's with the possible exception of the IRS. If you are in a position to be able to pay cash for the tuition then I would cut back the "lifestyle", scrimp as much as I can and pay cash. You'll be in a much better position afterwards - for starters, you won't have a student loan payment which means you're in a much better position financially than most of your peers and have a lot more options open. Plus, you're not carrying around a mortgage before you even bought a house.

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Stay away from college debt. You can't default on it. Your wages will be garnished if you're unable to pay it back. Even when your and old man, they will garnish your social security money. In effect college debt makes you an indentured servant. Maybe even worse than the 7 years of servitude people served in early America.

Lots of grads are working in restaurants and retail stores.... even some computer science grads. There is great risk in the college investment compared to 40 years ago when it was a sure thing.

Do not take debt for college. If that means you can't go to college then so be it. You're future self will than you.

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-1 for "Do not take debt for college". College is an investment and it can pay big rewards. Most decent paying jobs require a college degree. The job market is not going to be in the tank forever. As long as the debt payment vs realistically expected income is reasonable, there's nothing inherently wrong with taking on an appropriate amount of debt to fund an education. –  Jeremy Aug 5 '12 at 16:03
    
Not all debt is so terrible. Like any investment consider the return on that investment. There are plenty of times when it is smart to borrow money for school. I think this answer is over cautious. (IMO) –  MrChrister Oct 13 '12 at 4:46
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