Author Topic: Reader Case Study - Grad School Financing  (Read 1214 times)

switty

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Reader Case Study - Grad School Financing
« on: August 01, 2016, 08:32:04 AM »
Hi all,

I'm heading to grad school for a Master's in Computer Science (AI focus) this September and wanted to get some advice on the best way to fund it given my particular situation. To give some background, I graduated with my BS in Mechanical Engineering in 2013 and have been working at a small engineering consulting firm since then. I didn't discover MMM and FI in general until just over a year ago, but being naturally frugal and debt averse led me to pay off all of my undergraduate student loans and save a fair amount regardless. In the past year I've dramatically increased my savings rate and 401k/IRA contributions. That being said, I have also been anticipating a transition to graduate school and have avoided contributing to taxable investment accounts because of the higher short-term risk. I figured that because I may need to access that money in a 1-2 year time horizon this seemed like a better choice.

As it stands now, my portfolio will look like this before I start in September.

30k Cash
6k Roth IRA (5.5k principle) - VTSMX
34k 401k and Traditional IRA - VTSMX, VFIAX, VIMAX, VSIAX

As I'll be attending a public university with in-state tuition the total cost of the degree is relatively inexpensive at just over 20k for the MS. My COL is also going to be  around 15-20k per year over the 2 years I'm expecting the degree to take. I was not offered, and do not expect to get a RA or TA position to fund my education as these are generally reserved for PhD students.

The dilemma I'm facing is that there are quite a few distinct financial options in front of me, each with their own pros and cons.

1. Take out private or public student loans (private seem to have lower interest rates)
2. Withdraw money first from my Roth to avoid the penalty and then from my 401k and traditional IRA as necessary
3. Work from home part-time at my current job while in school (45k gross salary at 24hrs/wk).

#1 makes me a little uncomfortable just because I don't like debt.

The benefit of #2 is that while I'll be taking a 10% penalty for early withdrawal, my income will be so low that I can probably avoid income taxes for the "income". The obvious disadvantage is the penalty as well as losing out on the long-term benefit of tax advantaged gains.

The interesting thing about #3 is that my employer has also offered to pay 50% of the cost of tuition if I keep working part-time (24 hrs/wk) through school as well as 1 year of full time afterwards. This offer involves partial reimbursement periodically throughout the degree, meaning that it's not an all-or-nothing sort of arrangement. While this is definitely the most lucrative choice, I'm concerned about being able to balance an intensive course load with working even part-time. I'm also considering getting involved with research once I'm there, which would make it almost impossible to work. My work would also adjust slightly to match the new skills I'll be developing, which adds a bit of appeal.

Does anyone have thoughts on which option seems to make the most sense? I really like the idea of focusing entirely on school-work, but working would put me in a much better position financially. The other side of me is thinking that my income is going to increase significantly once I finish the degree, and that dedicating more time on developing skills now will pay off significantly once I want to fully reenter the work-force.

Thanks in advance.
« Last Edit: August 01, 2016, 09:36:22 AM by switty »

Tig_

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Re: Reader Case Study - Grad School Financing
« Reply #1 on: August 01, 2016, 09:28:46 AM »
Seems like option 3 is the best choice... When I did my MA, the GRA I had was 20 hours a week, and many of my cohort-mates worked more than that in addition to taking on additional research/internships.  Granted, I imagine that there's more of a commute for you (job does not have the luxurious location of being on campus the way a TA/RA-ship does).  You'll have to speak up and at work and let them know your exam/project schedule ahead of time that might require some additional flexibility around finals if you are worried about balance.  To me, this is a clear winner.  It'll be a sacrifice on your social life (and, I've found, your grocery budget), but if the MA is needed, it will probably be worth it.

switty

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Re: Reader Case Study - Grad School Financing
« Reply #2 on: August 01, 2016, 09:37:48 AM »
Forgot to mention that the part-time work would be telecommuting except for the occasional meeting (once every few weeks) at the office. Edited in original post.

Caymanite

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Re: Reader Case Study - Grad School Financing
« Reply #3 on: August 01, 2016, 11:53:26 AM »
Obviously, #3 is the best course of action.  However, I would suggest a counteroffer to your employer changing the parameters of the offer to make it more friendly to you but not taking away too much from the employer.  The employer was the one who suggested this arrangement, presumably because of your great work. 

I would suggest something along the lines of: the employer pays you for 40% of tuition under the same conditions (or some other amount slightly less than 50% [really this is only to give them a small benefit for accepting the counter]) and you work 2 days a week or whatever you think you can comfortably handle.  First, the worst thing that the employer can do is say no or stick to his original offer.  Second, this would allow you to not touch your retirement savings and just live off of the cash and earnings.  Third, working only 2 days a week would probably not result in significant taxable income especially if you structure it correctly.  Madfientist would be a good source for those calculations.


ysette9

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Re: Reader Case Study - Grad School Financing
« Reply #4 on: August 01, 2016, 05:15:15 PM »
Given the info you have presented, it does appear that #3 is the best choice. That said though, I have some further questions.

Will you be changing employers for a higher-paying job after you graduate?
Will you be switching jobs at the same employer after you graduate?
Does your employer have a clause that stipulates you work there for x years after graduation in exchange for tuition assistance?
If you will be switching jobs after graduation, do you know how much extra you might make?

Sharing some personal tidbits:
I worked full-time while doing my master's part-time. It was 4 long years before I was done which was rough, but the upside was that my employer paid for my $50k+ degree. My husband did a similar degree at the same school but did it full-time (no work) and paid for it himself. He finished in 9 brutal months and had a job offer on the other side earning significantly more money at a different company. For him the student loans were well worth it because the payback period was so short and he was out of the workforce for a short amount of time. That said, him cramming a master's into 9 months was brutal. For me, working and going to school at the same time was brutal. There is no correct answer, but definitely run the numbers, including how much more you can realistically earn and the opportunity cost of both stretching out getting the new degree and the lost income.

seattlecyclone

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Re: Reader Case Study - Grad School Financing
« Reply #5 on: August 01, 2016, 05:25:11 PM »
Option 3 is clearly the best from a purely financial perspective, but as you note it will mean you have essentially no free time for two years.

As to the other options, there's no 10% early withdrawal penalty from IRAs if the money is used for educational expenses. See this link for more information.

However I think that if you have to choose between raiding the IRAs or taking out some loans, the loans may be the better option. You're presumably taking this CS MS to enable you to qualify for highly-paid software jobs, right? Once you get one of these jobs you should have plenty of cash available to max out retirement accounts and pay off loans. If you keep your existing money invested in your retirement accounts, this money will be able to grow in a tax-advantaged manner for the rest of your career. There's no going back later to replenish the contribution space from previous years, so raiding these accounts now will mean that a good fraction of your stash at retirement will be transformed from tax-advantaged to taxable.

switty

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Re: Reader Case Study - Grad School Financing
« Reply #6 on: August 02, 2016, 10:04:45 AM »
Thanks everyone for the advice so far. Hearing other people's experiences is definitely helping me wrap my head around the available options. It's interesting that everyone so far has leaned heavily towards option #3, which definitely makes sense. I think at this point I'm leaning in that direction as well, at least for the time being. I agree Seattlecyclone, that if I do decide to stop working that taking out loans seems to make more sense as I'll likely hold them for a very short period of time. That's also some new information about educational expenses and penalties, so thanks for that as well.

I'm definitely expecting to dramatically increase my salary once I finish the degree, although not necessarily at a different employer. In fact, it seems unlikely that I'll continue working for my current employer, but it is a possibility. It's hard to tell what the exact salary will be, but I think it will be around 100-150k depending on where I'm located. My full time salary now is just over 70k for comparison. The formal agreement for tuition reimbursement (which I have already signed) splits the 50% total contribution across the next 3 years. If I finish the degree and then immediately leave then I will receive 37.5% of my tuition.

I guess the final conclusion (unless someone posts a horror story about balancing work and school) is that I'll start out by working part-time while constantly reassessing my workload and stress. If I decide to stop, then I'll fund the remainder with private loans and accelerate my degree program.