Law School Discussion

Nine Years of Discussion
;

Author Topic: Financial wizards, your advice is needed!  (Read 1144 times)

angmill08

  • Sr. Citizen
  • ****
  • Posts: 401
    • View Profile
Financial wizards, your advice is needed!
« on: May 17, 2006, 04:13:28 PM »
... OK, at the risk of sounding crazy...

If a person has significant cash reserves before starting law school, is there any reason to hold that cash and still take the max Stafford loan ($18,500) each year?

I guess I was thinking, what if I want to buy a house right out of law school and mortgage interest rates are higher than the Stafford interest rates?

Or will the interest I'm paying on my Stafford loans during law school cancel any possible savings from decreasing a (possible) higher interest mortgage loan after graduation?

I'd appreciate opinions on this from anyone with financial know-how.
164/3.46 Undergrad GPA, graduated college in 1996.
Applied: UT Austin (ED), Univ. of Houston, George Washington U & American U.
Accepted: Univ. of Houston, GW, American
Attending: GW, Fall 2006

upNdown

  • Sr. Citizen
  • ****
  • Posts: 636
  • My favorite bike - cheap, ugly, heavy, and fun.
    • View Profile
Re: Financial wizards, your advice is needed!
« Reply #1 on: May 18, 2006, 03:39:16 PM »
... OK, at the risk of sounding crazy...

If a person has significant cash reserves before starting law school, is there any reason to hold that cash and still take the max Stafford loan ($18,500) each year?

I guess I was thinking, what if I want to buy a house right out of law school and mortgage interest rates are higher than the Stafford interest rates?

Or will the interest I'm paying on my Stafford loans during law school cancel any possible savings from decreasing a (possible) higher interest mortgage loan after graduation?

I'd appreciate opinions on this from anyone with financial know-how.

Why not buy a small house or condo right now? 
GPA - 2.095 (It was a long time ago and I wasn't trying.)
LSAT - 161

In - Suffolk, New England School of Law
Out - BC, Northeastern
Pending - Nothing pending . . . now what?

slp

  • Full Member
  • ***
  • Posts: 83
    • View Profile
Re: Financial wizards, your advice is needed!
« Reply #2 on: May 19, 2006, 01:12:01 PM »
If you use up all your reserves for school and do not have at least enough to get a donwpayment, it will be harder to get a home and u will have to start saving again.  I think it would not be a bad idea to use some for school expense but have enough set aside so taht when u do go up for a home loan, u arent coming in with no money for downpayment or closing costs.  I know there are special programs and such that will take zero down, but why risk having only one avenue to secure that home loan. 
I had a slightly different experience to draw from.  When I got out of school, I could have spent all of my money I  saved to pay down my student loans.  Instead I used the few bucks I had to secure my first mortgage.  My student loans area at a decent rate,  and now I have a hosue that I would not have had if I did not buy when I did with the money I saved. You dont need any collateral or credit history to get that Stafford loan, but u need to prove yourself for the home loan and so that is where I would set aside my savings toward.  The previous poster's idea of having a small house/condo now is also a good one. 

UGAfootballfanatic

  • Sr. Citizen
  • ****
  • Posts: 742
    • View Profile
Re: Financial wizards, your advice is needed!
« Reply #3 on: May 20, 2006, 01:10:58 PM »
From a long-term standpoint, there is a huge advantage to having OPM (other people's money). The rates are low to borrow on a Stafford. BTW, we're in a similar situation: I don't have to borrow, but I'm going to anyway. Take the stafford, put it into a CD or other shorter-term horizon investment vehicle and continue to roll that money over until you're done with school. When you're done, buy your house, pay off your loans (probably not the best idea, but you might want to), or just make the payments and use that money to get ahead of most of us financially. There is no credit check for the Stafford and you can (within reason) do virtually whatever you want with it. Bottom line: I'd take the max.

gillesthegreat

  • Sr. Citizen
  • ****
  • Posts: 609
    • View Profile
    • Email
Re: Financial wizards, your advice is needed!
« Reply #4 on: May 20, 2006, 01:20:32 PM »
It's probably a bit more complicated than other posters would have it. The first question should be: what's the interest rate of Stafford Loans, and what's the interest you can get from investing? Second, what is the mystical lure of buying real estate? The only people in the finance world who are actively recommending buying residential real estate right now are realtors and people with a property. The market in the US is most likely significantly overvalued (The Economist cites 30-40%, with NY and CA at 50%). If you do all the math, including interest, taxes, amortissements (i.e. repairs and maintenance), it's probably a better deal to not purchase now and pay rent. Save the difference, and in 10 years, you will be able to buy the same house you would have purchased now, but end up with more money.

But again, you need numbers to make that decision.
Penn (2007)

lope

  • Full Member
  • ***
  • Posts: 50
    • View Profile
Re: Financial wizards, your advice is needed!
« Reply #5 on: May 20, 2006, 10:43:50 PM »
angmill08, it sounds like you're talking about using the Stafford loan money to pay the mortgage on a house, but that you wouldn't need it to use as a down payment.  If that's the case, here's what I'd say:

The interest rate on Stafford loans that begin in July of this year is fixed at 6.8%.  I'd be very surprised if you're able to find a CD with a rate that high.  You might be able to find some other short-term investment with a higher rate, but you'll have to take on more risk, which probably wouldn't be a great idea.  So, during law school you'd actually lose money by taking out the Stafford loans and putting the money into CDs.  If mortgage rates at the end of law school are higher than 6.8%, then it might make good financial sense to take out the Stafford loans and lose a little bit during school, in order to save even more on your mortgage later, but there's no way of knowing what mortgage rates will be in three years. 

As of last week, 30yr mortgage rates were about 6.61%, which is lower than the 6.8% you'd have to pay on the Stafford loans.  If mortgage rates are at this same level in three years, then you'll end up losing money by taking out the Stafford loans. 

If you want to bet that mortgage rates will be higher in 3yrs, then it might make sense to take out stafford loans and use the money later to pay your mortgage.  In this case, it all depends on what interest rate you can earn on that money during the 3yrs of law school, and also how much higher the mortgage rates are than the 6.8% of the Stafford loans when you buy the house.  If the mortgage rates are siginificantly higher in 3yrs, then taking out the Stafford loans might pay off, but if they're similar to what they are now, then you'll end up losing money.

If you don't want to make the bet that mortgage rates will be enough higher than 6.8% in three years to make taking out the Stafford loans worthwhile, then definitely don't take out the Stafford loans.  If it was me, I'd skip the Stafford loans for the first year, or probably two, and then see how the mortgage rates are looking.  If they're way up at that point and not likely to come down much before graduation, then I'd take out the Stafford loans. 

Sorry for the extended length of that.  I hope it all makes sense.

gwenkern

  • Sr. Citizen
  • ****
  • Posts: 200
    • View Profile
Re: Financial wizards, your advice is needed!
« Reply #6 on: May 21, 2006, 11:45:42 AM »
Not that I'm necessarily advocating this, but a friend of mine was eligible for the subsidized Stafford loans and took out the full amount each year to invest.  As long as he pays them back before entering repayment, he doesn't have to pay the interest, since that part is paid by the government while he's in school (that's why they're subsidized).  If the OP is eligible for subsidized Stafford loans and accepts only those, his plan could be viable.
LSN

Virginia Law '09

lope

  • Full Member
  • ***
  • Posts: 50
    • View Profile
Re: Financial wizards, your advice is needed!
« Reply #7 on: May 21, 2006, 11:55:04 AM »
Since the subsidized Stafford loans are need-based, and the OP already has enough cash to pay for law school without loans, he/she won't qualify for the subsidized loans. 

If the parents were actually the ones with the cash and the OP is poor, then he/she might be able to get the subsidized Stafford loans, in which case it would be financially beneficial.  It doesn't sound like this is what's going on though.

angmill08

  • Sr. Citizen
  • ****
  • Posts: 401
    • View Profile
Re: Financial wizards, your advice is needed!
« Reply #8 on: May 22, 2006, 04:41:44 PM »
....
Sorry for the extended length of that.  I hope it all makes sense.

This was the kind of advice I was looking for, thank you! 

I don't want to buy a condo or something now because prices are so inflated on the east coast that I can rent for much less than I can buy for. I am thinking that in 3-5 years real estate prices will be lower and interest rates higher, and I'll probably want to buy a house at that time. But I think that I'm not going to try any kind of investment gamble with the interest rates while I'm in school, because even though I *think* it would work out, the pay off probably won't be that great and the mounting interest will just be one more thing to worry about. I wanted to see if others concurred with this, so thanks to all who replied!

Also, btw, when you apply for Stafford loans you do have to agree to use them for educational expenses. (Tuition, fees, living expenses, etc.) So someone who takes out Stafford loans and puts them directly into short term investments is, I believe, being a bit dishonest and I wouldn't advise doing that.
164/3.46 Undergrad GPA, graduated college in 1996.
Applied: UT Austin (ED), Univ. of Houston, George Washington U & American U.
Accepted: Univ. of Houston, GW, American
Attending: GW, Fall 2006

bspitz

  • Full Member
  • ***
  • Posts: 29
    • View Profile
Re: Financial wizards, your advice is needed!
« Reply #9 on: May 23, 2006, 01:10:45 AM »
On a somewhat similar note...

I am in a 4 year joint degree program, and I plan to take out the Stafford max all 4 years.

Thanks to a scholarship which makes my total budget lower, I have enough in assets to cover the remainder of my first year expenses and most of year 2 as well.

Is there any conceivable reason not to spend all of my assets/savings in the first 2 years, and take out the private/grad PLUS loans I need for years 3 and 4? 

My year 3 and 4 loans will be higher (but no difference in the total), but I will avoid accumulating 2 extra years of the higher interest.  Moreover, there's the off chance I'll stumble onto some other source of funding or, not as though I like to think about this, have a grandparent die  :-[

Oh, and the reason I plan to do Stafford for all four years is because I am certain I'll have to take out at least $18,500 x 4 in loans, and I might as well do as much as possible at the lower rate.

I think I know the answer, just want to make sure I'm not overlooking anything...