Coming in with money

[bretticus]

Hey guys, I was wondering if anybody had any advice on how I should use the money I'll be coming into school with. I've been working as an engineer since graduation, and I should have about $35K-40K saved up by the time I matriculate. I've put everything in decent interest bearing accounts (~5%), and I think that's the best I can do boosting any earnings with little risk. What should I do when I get in though? Should I pay as much of first year as possible and then take out loans for M2-4? Should I hold onto a good amount to help with living expenses? I'm fairly sure I'll at least pay off the interest on the unsubsidized loans, but mathematically it seems like I should pay as much as possible up front to keep the interest from building up. Any thoughts? (I know this is a nice problem to have!) I'm already accepted to my state school, so I may be weighing the public vs. private option down the road -- if I end up going to Memphis I'll also probably need a new (i.e. nice used) car, as mine really sucks and is questionable wrt reliability. Thanks for your input

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[Lesley]

Hey guys, I was wondering if anybody had any advice on how I should use the money I'll be coming into school with. I've been working as an engineer since graduation, and I should have about $35K-40K saved up by the time I matriculate. I've put everything in decent interest bearing accounts (~5%), and I think that's the best I can do boosting any earnings with little risk. What should I do when I get in though? Should I pay as much of first year as possible and then take out loans for M2-4? Should I hold onto a good amount to help with living expenses? I'm fairly sure I'll at least pay off the interest on the unsubsidized loans, but mathematically it seems like I should pay as much as possible up front to keep the interest from building up. Any thoughts? (I know this is a nice problem to have!) I'm already accepted to my state school, so I may be weighing the public vs. private option down the road -- if I end up going to Memphis I'll also probably need a new (i.e. nice used) car, as mine really sucks and is questionable wrt reliability. Thanks for your input

This is a tough decision. If you need to buy a nice used car to get you through medical school and residency, I guess you're looking to spend in the $12-14,000 range. A certified used car may save you some headaches. That leaves you with about $20,000+ or about $5,000 year while in medical school, or less if you stretch that extra money over a residency period too.

Taking out loans and having interest accrue is usually not preferential to paying cash up front, but with medical school and a residency ahead of you, there may be a lot of possible unexpected expenses for an extended period of time. Having a safety net is a very nice thing.

Once you make your decision on the school you will attend, it may make more sense for you to buy a condo instead of rent, maybe you will get more for your money, be able to live in a nicer area and possibly build or maintain some equity. Some of your savings could go towards a down payment.

Even when you borrow money for medical school, the school determines the budget for it's students, not the student. Often the cost of attendance is a little short sighted and students use credit cards, best avoided, or other private loans to help fund their living expenses. You will be allowed to borrow up to $8,500 in subsidized loans and $30,000 in unsubsidized loans both at 6.8% and the remainder at 8.5%, unsubsidized, from the plus loan up to the cost of attendance.

So my advice would be, don't make any decisions until you buy a car, see how much that's going to cost you. Pay cash for the car. Buy a good, dependable car. Once you do that, see what's left. Think about how many years you have ahead of you and really think about if you were to stretch the remainder over that period, how much extra cash that allows you per year.

I'd be inclined to borrow what the school will allow, up to their cost of living and hang onto your money, less the car, for the first year or possibly longer to allow you to get a better feeling for your situation and to determine how well you can manage your expenses within the school's cost of living budget. During that time, leave any remaining savings in a high yield money market earning ~5%. It's nice you have the option to attend your state school. Usually, that option costs a lot less than private school. Good luck with your decisions and in school.

 

[mshheaddoc]

I actually talked with someone about this same issue. His stockbrocker and supposed financial advisor told him to try to pay everything without loans. I advised him otherwise only because educational debt is one of the few good debts out there.

My advice, never use your saving for med school. I'd get them in some good investments and let them grow as the previous poster said, you might need them sometime.

I never get why people with limited funds (meaning like only one year's worth of tuition) won't take free money from the government to pay for school or even in some cases, won't take private loans - of course you should minimize your loans but to finance your education on savings is almost impossible (unless your loaded) so use the resources given to you in your best advantage.

I have money I'm not touching for school b/c I'm also thinking of the future and retirement. Having a nest egg isn't a bad thing!

 

[crowman]

Put the cash you are going to pull out for school into a 529 plan. Then pull it right back out to pay your tuition. You will get a state tax exemption at your state rate (IL is 3% etc), and hence are getting an exemption on your state tax return...

 

[bretticus]

Put the cash you are going to pull out for school into a 529 plan. Then pull it right back out to pay your tuition. You will get a state tax exemption at your state rate (IL is 3% etc), and hence are getting an exemption on your state tax return...

Tennessee doesn't have a state income tax. Does that still help?

 

[lazyjayn]

Maybe I'm confused, But when I fill in the fafsa, It asks me, every single time, about savings accounts and all that jazz. And then anything I have there takes a chunk out of what's ok'd for my loans.

So, OP, say your school has a COA of 36k (what, you don't live at disney like me?) and you have 40k in savings. They'll tell you to spend your money first. Ok, they'll phrase it a bit nicer than that.

But they do expect you to use up *all* your rescources before they'll start handing out the good(?) money. Might wanna check tho- they may not expect you to cash out 401k or IRA. Tho I get the feeling this isn't that kinda money.

And you should be able to get a decent used car for waaay less than 10k. Try a saturn, not one with bells and whistles, and you should be looking south of 7k. and upwards of 30mpg.

j.

 

[dpmd]

They ask you about your savings and assets, but the EFC does not assume you will cash out everything and put every cent into tuition. They take a percentage of that, so yes this guy will have a bigger EFC than someone with no savings, but it will not equal the amount of his savings (it didn't in my experience).

As for what to do with the money, it is a difficult decision. If you crunch the numbers you probably end up at an advantage over time if you use the money now, but my husband made a good point the other day. The value of that money now (in terms of being able to use it instead of sinking it into tuition or debt) is a lot more considering that the amount of money you save in the long term will be compared to the drastically improved financial situation you will be in once you are through. That might have just been his way of getting me to buy him that nice camera instead of paying down my student loans . It made some sense to me though.

 

[dpmd]

Oops, double post

 

[bretticus]

Maybe I'm confused, But when I fill in the fafsa, It asks me, every single time, about savings accounts and all that jazz. And then anything I have there takes a chunk out of what's ok'd for my loans.

So, OP, say your school has a COA of 36k (what, you don't live at disney like me?) and you have 40k in savings. They'll tell you to spend your money first. Ok, they'll phrase it a bit nicer than that.

But they do expect you to use up *all* your rescources before they'll start handing out the good(?) money. Might wanna check tho- they may not expect you to cash out 401k or IRA. Tho I get the feeling this isn't that kinda money.

And you should be able to get a decent used car for waaay less than 10k. Try a saturn, not one with bells and whistles, and you should be looking south of 7k. and upwards of 30mpg.

j.

Well, when I run the EFC calculator at finaid.org, it says my EFC will be around $8000. Keep in mind that I won't have all that money or my full income listed when I file, because I only started working in May. It still might be enough to nullify any grants I may have received though, especially if they take my parents' money into account.

As far as the car goes, I'm buying foreign -- Nissan, Toyota, or Honda most likely. My current car really isn't that bad, but it would be a little questionable in Memphis or Atlanta when I'm far away from my family. If I buy something though, I'm going to make sure it's something that's going to last me a good long while. My parents have had Toyotas that lasted forever and problems with every domestic. It might seem cheaper to get something else, but not if has a ton of problems down the road.

 

[bretticus]

They ask you about your savings and assets, but the EFC does not assume you will cash out everything and put every cent into tuition. They take a percentage of that, so yes this guy will have a bigger EFC than someone with no savings, but it will not equal the amount of his savings (it didn't in my experience).

As for what to do with the money, it is a difficult decision. If you crunch the numbers you probably end up at an advantage over time if you use the money now, but my husband made a good point the other day. The value of that money now (in terms of being able to use it instead of sinking it into tuition or debt) is a lot more considering that the amount of money you save in the long term will be compared to the drastically improved financial situation you will be in once you are through. That might have just been his way of getting me to buy him that nice camera instead of paying down my student loans . It made some sense to me though.

You have a point with that. I think what I might try to do is just take out as little MedPLUS as possible. If I can keep my loans to Stafford + Perkins + institutional, I will feel like I'm doing alright. I would also be a lot more comfortable doing that if the Dems lower interest rates to 3.4%. Honestly there's no reason to not just take the money then, no matter whether you need it or not! Even 5% is really not that much. 6.8-8.5% is getting pretty sucky though. I guess I'll just have to wait and see what kind of financial aid packages I get...

 

[Lesley]

if the Dems lower interest rates to 3.4%. Honestly there's no reason to not just take the money then, no matter whether you need it or not! Even 5% is really not that much. 6.8-8.5% is getting pretty sucky though. I guess I'll just have to wait and see what kind of financial aid packages I get...

From what I understand, if the Dems do lower the interest rate on student loans, it may only be for one year.

I have a Toyota with 120,000 miles on it. They are very dependable cars as are Hondas. They are often not inexpensive new or used cars, but we have had a lot of success with them. Good luck.

 

[QuantumMechanic]

Tennessee doesn't have a state income tax. Does that still help?

omg...WE DO HAVE A STATE INCOME TAX! (just not on earned income!)

it is called the "Hall Tax" and it is a tax on capital gains and dividends on invested money!!!!!!! 529's are excellent ways to exempt from state taxes!

 

[bretticus]

omg...WE DO HAVE A STATE INCOME TAX! (just not on earned income!)

it is called the "Hall Tax" and it is a tax on capital gains and dividends on invested money!!!!!!! 529's are excellent ways to exempt from state taxes!

Sorry, let me rephrase. There are no state taxes that apply to me. I only have a CD and a MMA. While TN does technically have an income tax, I'd wager that it doesn't apply to most people. Whenever people talk about income tax around here, they usually mean earned income.

 

[ncalcate]

Maybe I'm confused, But when I fill in the fafsa, It asks me, every single time, about savings accounts and all that jazz. And then anything I have there takes a chunk out of what's ok'd for my loans.

So, OP, say your school has a COA of 36k (what, you don't live at disney like me?) and you have 40k in savings. They'll tell you to spend your money first. Ok, they'll phrase it a bit nicer than that.

But they do expect you to use up *all* your rescources before they'll start handing out the good(?) money. Might wanna check tho- they may not expect you to cash out 401k or IRA. Tho I get the feeling this isn't that kinda money.


j.

To confirm what lazyjan says, any money in a 401(k) or IRA is NOT included in your EFC calculation. Stated another way, when you fill out the FAFSA, they won't ask you how much you have in your 401(k) or IRA. So it won't count against you in your EFC; those assets won't be included when it does the EFC calculation. So your EFC will be lower.

The same thing applies to money you have in your primary residence. So if all of your money was invested in a home or condo in which you live, those funds wouldn't be considered in your EFC.

So one approach might be to max out your 401(k) and/or IRA before you start school. That way, your money can earn a high return in a stock-based mutual fund, and you are more likely to qualify for a subsidized loan, since your EFC will be lower.

I hope that made sense. This is exactly what I did, as I was in a similar situation to you before I started dental school. Good luck.

 

[bretticus]

To confirm what lazyjan says, any money in a 401(k) or IRA is NOT included in your EFC calculation. Stated another way, when you fill out the FAFSA, they won't ask you how much you have in your 401(k) or IRA. So it won't count against you in your EFC; those assets won't be included when it does the EFC calculation. So your EFC will be lower.

The same thing applies to money you have in your primary residence. So if all of your money was invested in a home or condo in which you live, those funds wouldn't be considered in your EFC.

So one approach might be to max out your 401(k) and/or IRA before you start school. That way, your money can earn a high return in a stock-based mutual fund, and you are more likely to qualify for a subsidized loan, since your EFC will be lower.

I hope that made sense. This is exactly what I did, as I was in a similar situation to you before I started dental school. Good luck.

Assuming I could do this (open enrollment at my employer is over), aren't you restricted to when you can withdraw funds from these types of accounts?

 

[QuantumMechanic]

Sorry, let me rephrase. There are no state taxes that apply to me. I only have a CD and a MMA. While TN does technically have an income tax, I'd wager that it doesn't apply to most people. Whenever people talk about income tax around here, they usually mean earned income.

ahh I didnt know that it was in a cd as opposed to a bond fund...

the "income tax" the poster you replied to was referring to a capital gains and dividends type tax that most states have had forever.

 

[QuantumMechanic]

Assuming I could do this (open enrollment at my employer is over), aren't you restricted to when you can withdraw funds from these types of accounts?

there are tax penalties (the normal tax plus 10% for withdrawn IRA monies, it might be similar for 401(k) money) when you take your money out of a 401(k) or IRA before a certain age (59 and 1/2 I believe for both). the point is that this money will be sheltered in a "lockbox" from government taxation while invested and will be hidden from financial aid offices. its a good idea to start investing for retirement (1k now at 10% annual interest, normal for most u.s. equity funds will be 45k in 40 yrs!!!!!!!), and the payoff in the distant future may exceed the cost of having to take the money you put in for a loan, especially considering that you might be able to deduct student loan payments from future income taxes (I'm not sure about that one though).

since you can't enroll in a 401(k) now you might want to consider maxing out an IRA (and for the love of god, put IRA money into stocks or stock funds instead of bonds or money market funds!!!!!!)

 

[Lesley]

The money you have in retirement accounts and invested in your home will not be taken into consideration for your EFC. However, if you have a second home, that will be considered a touchable asset. Some university forms may ask you what your home is worth, but it is doubtful that even they would consider it a useable asset. FASFA does not to the best of my knowledge. This is why Roth IRA's are great. You can use them for education if you wish, but it's an IRA. The income you contribute to a Roth during a calender year is considered income that you could use for any purpose, including school, and can effect your EFC for that year. This is true of any IRA or retirement contribution. But once it is sitting in that account, the following year it is not a touchable asset. The only drawback is that you can only contribute a max of $4,000 per year to a Roth IRA if you are under 50, $5,000 over 50, but there are no penalties should you withdraw it for educational purposes.

 

[bretticus]

So say I put $4000 into an IRA right now. This would subtract $4000 from my income from 2006 that goes into calculating my EFC? I can then use that money with no penalty in July to pay some of my tuition?

 

[QuantumMechanic]

So say I put $4000 into an IRA right now. This would subtract $4000 from my income from 2006 that goes into calculating my EFC? I can then use that money with no penalty in July to pay some of my tuition?

You might want to research it a bit, so don't take my word as the law...

If you put it in an IRA, then that money is still regarded as money from your income (you can't just say you made 20k instead of 24k because you put 4k in an IRA). So your EFC probably won't be affected, and therefore this might not be as smart.

However you (and I'm in a somewhat similar situation) have money saved up, I think that reallocating such money to an IRA might be a good idea since the IRA is sheltered from finaid and taxes so its as if its not there. Less non-retirement account savings should theoretically mean a lower EFC.

I'm pretty sure that a while back the US gov started to allow IRA monies to be used for an individual's or his/her family's higher education expenses (for people like you and me who were 'unaware' of future education needs who were thinking about retirement) so that the 10% withdrawal penalty is exempted for such needs.

Like I said again, don't take my word as truth, but I have done a bit of research on this myself, and I plan to reallocate the max amount of money I can (i.e. the amount I earned from my summer job) from my taxable savings to my IRA so that my EFC will be minimized. However, I do not plan on touching my IRA until I retire as the opportunity cost for spending this money on medical education outweighs the amount of money I would spend on loan interest in the future. In the end, I'm going to bet that the stock market in the long-term will continue to perform well (i.e. about 10%, a very reasonable long-term assumption), so that my money is better spent in owning stock than spent on medical education that can be financed through different sources of funds.

 

[Lesley]

So say I put $4000 into an IRA right now. This would subtract $4000 from my income from 2006 that goes into calculating my EFC? I can then use that money with no penalty in July to pay some of my tuition?

Any money you put into a Roth IRA has to be earned income from the same year it is declared.

So, if for example you make $20,000 income in 2006 and you put $4,000 into an IRA. Your EFC in 2006 would still be based on $20,000, your income that year, and any savings you have. Any money sitting in any IRA's, unlike money that is sitting in savings where you are expected to use 30% of it towards your education, is not considered. Roth's are not deductible IRA's. Investing in a Roth would not help your EFC for 06 but would have future value.

As you have limited time to invest in a Roth and medical school is right around the corner, this stategy can be useful, but is limited. But even for you, buying that car, and putting some money into an IRA would reduce the amount you have in savings, and, therefore, reduce the amount FASFA would deem available for your education over the next couple of years.

You could put some money into a Roth in 06, 07, 08 and then tap the Roth in 2010 for your last year of medical school without penalty. You can stipulate that you want your Roth holdings to be placed in a money market so the money is very safe and earning 5%. This reduces the savings you would have to declare on your FASFA in 07, 08 and 09. Most of the large brokerages offer Roths. Buying that car in 06 or 07, before you fill out your FASFA, would also be a way of reducing your savings sooner.

A part time job in the summer should provide you with the income necessary to declare a Roth. Even if you don't earn $4,000, you can invest any amount up to $4,000. You would just need income in the same dollar amount, before taxes. It would give you some money to help support you and allow you to protect a little bit of your savings. A Roth sitting in a money market would involve very limited fees, unlike some 529 plans.

Bottom line, FASFA does not consider IRA's when determing EFC's. Good luck.

 

[Gabujabu]

Hello. I am in a similar situation as the OP in that I will have about $40k before medical school. However, I am coming straight out of college, if that makes a difference. Anyway, at the current moment, I am earning very modest returns of 4.5% in a MMA account. Also, I come from a state (PA) in which public school tuition is only $4k/year cheaper than private school tuition. I also do not own a car, though am not sure if I would want to buy one (i.e. living in a city w/ good public transport). Is it wise to spend this money on tuition, or is best to save it (I want to completely avoid credit card debt, for instance)? More specifically, are there any important expenses that medical school budgets do not cover, i.e. residency interviews? I am hesitant to spend away all this money on tuition immediately, but also don't want to have excessive debt. Thanks a lot!

 

[Lesley]

Hello. I am in a similar situation as the OP in that I will have about $40k before medical school. However, I am coming straight out of college, if that makes a difference. Anyway, at the current moment, I am earning very modest returns of 4.5% in a MMA account. Also, I come from a state (PA) in which public school tuition is only $4k/year cheaper than private school tuition. I also do not own a car, though am not sure if I would want to buy one (i.e. living in a city w/ good public transport). Is it wise to spend this money on tuition, or is best to save it (I want to completely avoid credit card debt, for instance)? More specifically, are there any important expenses that medical school budgets do not cover, i.e. residency interviews? I am hesitant to spend away all this money on tuition immediately, but also don't want to have excessive debt. Thanks a lot!

I went to dental school in PA too, and your right public education is not much cheaper, or significantly cheaper, than private schools. I'm not sure if you are referring to Philadelphia or Pittsburg, but I was not too keen on public transporation, for many reasons. If you are a medical student the last two years you will be doing rotations. You may not be able to get or want all of your rotations in the city, and at that point you will need a car. A car requires gas and insurance. I understand that you do not want a lot of debt, but being cash poor is a very stressful situation. I have been there. I remember trying not to work during school and then finding I had no cash, and quickly getting a part time job doing almost anything. Very stressful. Asking the school for extra money, at that point, proved useless.

My advice would be to borrow what you need up to the cost of attendance or close to it. If you feel parting with $5,000 of your cash to help defray some of the 8.5% debt, each year, that would still leave you enough cash to buy and support a car. But remember even public transporation takes money, and if you are going to buy a car, sooner may make more sense that later, provided you buy a dependable car. But between the purchase of a car, parking and auto insurance, assuming the vehicle you buy is around $15,000, you may be left with only $25,000 of your original $40,000. Using even only $5,000/yr to help pay for tuition will only leave you a $5,000 cushion at the end of medical school provided you don't touch anything more during any year. At that point you may need some cash to make the move to a new city, buy some furniture, etc.

Is that enough for you? Things happen, a safety net is a very nice thing.

If you are unsure, borrow what you can your first year, think about it and keep your cash, possibly less a car, in a money market earning a nice rate of interest. You can put $4,000 into a Roth IRA, as I mentioned above, as you have income this year, and will be able to touch it without penalty for your education, any year down the road. In my opinion, you should use no more than $5,000 cash, towards tution your first year, if you feel comfortable and so inclined. Many medical and professional students graduate with credit card debt. This is something your safety net can help you avoid.

Good luck. Happy Holidays!

 

[The White Coat Investor]

Hey guys, I was wondering if anybody had any advice on how I should use the money I'll be coming into school with. I've been working as an engineer since graduation, and I should have about $35K-40K saved up by the time I matriculate. I've put everything in decent interest bearing accounts (~5%), and I think that's the best I can do boosting any earnings with little risk. What should I do when I get in though? Should I pay as much of first year as possible and then take out loans for M2-4? Should I hold onto a good amount to help with living expenses? I'm fairly sure I'll at least pay off the interest on the unsubsidized loans, but mathematically it seems like I should pay as much as possible up front to keep the interest from building up. Any thoughts? (I know this is a nice problem to have!) I'm already accepted to my state school, so I may be weighing the public vs. private option down the road -- if I end up going to Memphis I'll also probably need a new (i.e. nice used) car, as mine really sucks and is questionable wrt reliability. Thanks for your input

Borrow up to the fully subsidized limit ($8500 I believe) and then use your money after that until its gone. Then start taking additional loans. With luck, a tight budget, and maybe a little part time work, your money may last well into your 3rd or 4th year.

You may consider using a Roth IRA for some of your savings. If you earned at least $4k, you can put 4K per year into it (meaning $4K for $2006 and $4K for $2007.) Your CONTRIBUTIONS (not earnings) can be withdrawn at any time. Your earnings can be withdrawn for educational purposes. A regular IRA is an inappropriate investment vehicle for you at this time in your life.

Keep your non-IRA money in a high-yield savings account (ING etc) or a low cost money market fund (such as Vanguard Prime) so you'll make 5% on it until you need it.

P.S. WTH are you worried about taxes for? You don't make enough money to be paying real taxes. Wait until you're in the 33% tax bracket and you're writing checks with 6 figures in them to worry about taxes.