Author Topic: Numbers vs Behavior: College Tuition Help  (Read 1850 times)

FIREFTW

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Numbers vs Behavior: College Tuition Help
« on: September 04, 2017, 05:46:45 AM »
I'm 30 years old and I'm going back to RN school while currently working at an acute care hospital.  I have about $90,000 invested.  I had originally planned to use about $34,000 to go to RN school and graduate debt free while working summers.  Student loan interest rates are currently 4.45%.  The 'popular' average return projected for the S&P 500 is 7% (ideally).  The math tells me to take out a student loan for at least a portion of it and pay it back later (I live in California where starting acute care RN salaries are +$80,000) so I can leave the money invested to continue earning returns. But as any mustachian would probably say, "Don't take out a loan if you don't have to".  What are your thoughts on this?

Thank you,

-Darren

Dave1442397

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Re: Numbers vs Behavior: College Tuition Help
« Reply #1 on: September 04, 2017, 10:59:46 AM »
Have you checked with the hospital to see if they have any grants or education benefits you can tap into?

If not, I would take the loan. My 401(k) has more than a 13% return for the year so far. As long as you're disciplined enough to pay it back, you'll come out ahead, barring a market catastrophe :)

My friend is an RN and has an arrangement with his hospital where he works a 50-hour week to make more money. He used to have a second job on the weekend, but he said switching to 50 hours is less stressful and he hardly notices the extra two hours a day.

Laura33

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Re: Numbers vs Behavior: College Tuition Help
« Reply #2 on: September 04, 2017, 11:52:48 AM »
You are fundamentally talking about investing on margin - borrowing money to invest.  This is the same as taking out a HELOC on your house to invest, or taking a cash advance off of a 0% credit card to invest.  Except, of course, student loans can't be discharged in bankruptcy.

This is an aggressive investment strategy - while "they" are currently projecting around 7% market returns, no one is promising that that will happen next year, or the year after.  Yes, the market goes up over time, frequently significantly -- but that is measured over decades.  Look at any chart of year-by-year returns and see just how often the market is below your 7% projection.  So how aggressive of an investor are you?  How comfortable are you with losses?  If you take out a $20K loan and the market drops 30%, how are you going to react?

You have enough savings in reserve that even a major crash wouldn't wipe you out -- as long as you don't bail and sell, and as long as you get a job that allows you to pay off those loans out of cashflow.  So, sure, you can.  But that doesn't mean you should.

Livingthedream55

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Re: Numbers vs Behavior: College Tuition Help
« Reply #3 on: September 06, 2017, 10:18:14 AM »

Finances_With_Purpose

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Re: Numbers vs Behavior: College Tuition Help
« Reply #4 on: September 06, 2017, 12:51:09 PM »
You are fundamentally talking about investing on margin - borrowing money to invest.  This is the same as taking out a HELOC on your house to invest, or taking a cash advance off of a 0% credit card to invest.  Except, of course, student loans can't be discharged in bankruptcy.

This is an aggressive investment strategy - while "they" are currently projecting around 7% market returns, no one is promising that that will happen next year, or the year after.  Yes, the market goes up over time, frequently significantly -- but that is measured over decades.  Look at any chart of year-by-year returns and see just how often the market is below your 7% projection.  So how aggressive of an investor are you?  How comfortable are you with losses?  If you take out a $20K loan and the market drops 30%, how are you going to react?

You have enough savings in reserve that even a major crash wouldn't wipe you out -- as long as you don't bail and sell, and as long as you get a job that allows you to pay off those loans out of cashflow.  So, sure, you can.  But that doesn't mean you should.

Once again, Laura for the win.  You could go either way; it's a matter of what you're comfortable with, especially since you have far more invested than you're thinking of borrowing.  Personally, I wouldn't take the loan; I can't stand debt, and especially student loans.

What if you graduate into a job market where you're struggling, and your portfolio has lost 50% of its value?  Now you have debts = most of your savings, no job, and it looks like a far worse decision than graduating with no debt at all and some cash in the bank.  Will that happen?: who knows.  A recession sure seems historically very likely soon, but it could be another decade away for all any of us knows. 

You could also end up in a position where you then have to liquidate your portfolio when you least want to, and end up losing far more of it. 

You didn't tell us how great your finances are otherwise, and whether, for instance, you have a big emergency fund.  (We have one that'll buy us a year, basically, of not having to work, which means we can be riskier in general.) 

At any rate, student loan is aggressively risky debt: you can't discharge in bankruptcy (what if you get injured and can't work?) and it'll be there whether or not your portfolio is worth anything.  You are basically deciding whether you want a guaranteed return of 4.45% (and less risk of personal bankruptcy, etc. - even if the odds were already low) versus a chance to make 2.5%-3% more return on that same amount of money - or to end up indebted by that amount. 

Neither of these options is dramatically horrible, so it's really about how risk-taking you want to be. 

Novik

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Re: Numbers vs Behavior: College Tuition Help
« Reply #5 on: September 06, 2017, 01:51:52 PM »
If you can get the "good" kind of student loans (I'm not in the US but I understand there are subsidized that don't accrue interest until you graduate and have other perks), I would consider taking out 5-10k per year in student loans, and matching any loan you get with a sale from investments. So the total would depend on how long the RN program was, but you wouldn't take it all up front so you could re-evaluate, and you wouldn't have much loans overall (<17k).

This may not be optimal, but if you can get the "good" loans I think it's a nicely balanced path.

charis

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Re: Numbers vs Behavior: College Tuition Help
« Reply #6 on: September 06, 2017, 04:13:40 PM »
At any rate, student loan is aggressively risky debt: you can't discharge in bankruptcy (what if you get injured and can't work?) and it'll be there whether or not your portfolio is worth anything.  You are basically deciding whether you want a guaranteed return of 4.45% (and less risk of personal bankruptcy, etc. - even if the odds were already low) versus a chance to make 2.5%-3% more return on that same amount of money - or to end up indebted by that amount. 

Neither of these options is dramatically horrible, so it's really about how risk-taking you want to be.

Legal bankruptcy is not the same as becoming disabled, which is implied here.  I believe federal loans can be discharged in the case of permanent disability.

Goldielocks

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Re: Numbers vs Behavior: College Tuition Help
« Reply #7 on: September 06, 2017, 05:04:34 PM »
If you can get the subsidized federal loans, or loans that qualify for Pell Grants, I would of course do that.  Even if you just pull the equivalent amount and put it into a fixed investment.

There is a good chance that you may be able to pay some of it back without withdrawing, and the federal susidized loans have all sorts of advantages and no penalties for repaying as soon as you graduate.

Finances_With_Purpose

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Re: Numbers vs Behavior: College Tuition Help
« Reply #8 on: September 06, 2017, 05:22:03 PM »
At any rate, student loan is aggressively risky debt: you can't discharge in bankruptcy (what if you get injured and can't work?) and it'll be there whether or not your portfolio is worth anything.  You are basically deciding whether you want a guaranteed return of 4.45% (and less risk of personal bankruptcy, etc. - even if the odds were already low) versus a chance to make 2.5%-3% more return on that same amount of money - or to end up indebted by that amount. 

Neither of these options is dramatically horrible, so it's really about how risk-taking you want to be.

Legal bankruptcy is not the same as becoming disabled, which is implied here.  I believe federal loans can be discharged in the case of permanent disability.

We agree - I apologize for any confusion.  I wasn't implying that at all, but instead, I was pointing out that if Op becomes disabled/unable to earn income, that's a scenario where the debt may matter a lot more.  Your point is well-taken, although my understanding is that it's (1) still expensive to do so and (2) not as easy/can sometimes fail.  Thankfully, Op will very likely never have to worry about that. 

I was pointing out that the biggest issue here is that Op would be increasing risks a lot in the event of worst-case scenarios: disability, huge market drop, recession + no job, and so on.  Other than those, Op may be relatively fine - and fine either way if Op has a solid emergency fund.  Op has more assets than debt, and would absent a 50% market correction, so it's really about how much risk Op wants to take on. 

If Op wants to use some/any of the 90k in the next ten years, then it's far riskier, but if Op is relatively guaranteed a better job and loves working anyway, it appears a lot less risky. 

Finally, I remembered another point to add: student loans come with other risks/annoyances.  E.g., I read a thread on here very recently where someone was "prepaying" loan payments rather than paying them down.  The lender had tricked the person into essentially making huge interest payments ahead of time - a free donation to the lender.  Lenders tried that trick on me too - it makes them a ton more money.  The student loan sphere contains a lot of gimmicks like that which can cost more than what you plan for. 

Also, someone else made a good point that the subsidized loans may be interest-free while in school, so they're a little cheaper than they seem. 

Rubic

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Re: Numbers vs Behavior: College Tuition Help
« Reply #9 on: September 07, 2017, 11:08:00 AM »
OP: In your situation it probably makes sense to take out the student loans.  You've
essentially got an option to sell stock to cover the loan amount in the future if things
don't work out, but more importantly you're using the loan for a high ROI purpose,
an expectation of a future $80K RN salary.

I respectfully disagree with an earlier reply that compared this to margin investing,
as the student loan (like most US mortgages) is un-callable.  You have some slight
risk that the market will under perform relative to your loan interest, but assuming
you'll have to pay capital gains on selling your stock(*), you'd probably still come out
ahead.


* Assuming your stock is currently in a taxable account.  If the stocks are in a tax
deferred account, there's probably even more of a reason not to withdraw them at
age 30.