Should I save for a down payment or pay off school in cash?

Question

I am able to save about $1000/month after all bills. I can either save this money for a down payment on a house, or pay for my (rather expensive) grad school program in cash and incur no additional school debt. I'm trying to figure out which option will leave me most ahead after 4 years of school.

I have been saving the money in an ING Direct "High Yield" savings account, earning a whopping .75% APR. I take the savings out about every 4 months to pay for the next semester of school. If I were to leave the money in this account, and save for a down payment, I'd have to use unsubsidized Stafford loans to pay for school, which are (I think), 6.8% interest right now.

Answer 1

You should pay for grad school without taking loans if your circumstances permit. There is the possibility of a tax write off for interest paid on student loans, but it's slightly complicated and it's very much a "give me $10, and I'll give you $5 back" kind of deal. You're better off not borrowing the money to begin with, even though I tend to think that borrowing for things which appreciate-- e.g., a house-- or which can significantly increase your earning capability-- e.g., the right kind of graduate school-- is generally better/wiser/more permissible than borrowing for something which depreciates, like a car.

Having no student loan debt after graduation means you have greater freedom than someone who is laboring to pay student loan debt in addition to all of their other bills.

My $0.02

Answer 2

I am going to respond to a very thin sliver of what's going on.

Skip ahead 4 years. When buying that house, is it better to have $48K in the bank but a $48K student loan, or to have neither?

That $48K may very well be what it would take to put you over the 20% down payment threshhold thus avoiding PMI. Banks let you have a certain amount of non-mortgage debt before impacting your ability to borrow. It's the difference between the 28% for the mortgage, insurance and property tax, and the total 38% debt service.

What I offer above is a bit counter-intuitive, and I only mention it as you said the house is a priority. I'm answering as if you asked "how do I maximize my purchasing power if I wish to buy a house in the next few years?"

Answer 3

Just to make the deal sweeter, see if you can negotiate a cash discount for paying for grad school with cash. If not, at least look into paying with a rewards credit card so you can get a rebate through your own means. Pay the school loan. People can default on mortgages, school loans are forever. Nothing wrong with sacrificing your dreams for a house several more years while you save. My wife and I are debt free, but it will take a few more years to save for a down payment on a house. It sure feels good knowing we don't owe anyone anything while we make our money have the purpose we want to give it. When you have to pay the bank interest, you do not have control on some of your money.

Answer 4

You should pay for school with cash.

If you take out a loan, you are not really saving money; you are borrowing money. I do not think you will come out ahead borrowing a down payment at student loan rates.