Help a Reader: Back to School

Here's an email I recently received from a reader:

I am off to grad school in the fall (full time) in order to further my career.  As you know, tuition and costs can be outrageous and my wife and I have been having ongoing discussions on how to best pay for it.  We are both in our early thirties, have good jobs, no debt outside of mortgage debt and no kids (kids will come post school).  We currently rent and do not have cars.  We rent my old place in another city since we could not sell it prior to moving (break even after tax benefits).  We live solely on my wife's salary and save mine for cars and a house down payment when we move. 
 
My wife will continue in her current job while I am in school, so we will both need a car.  Thankfully, one of those cars will come from my parents for free (12 years old but runs like a champ) so we only need to buy one which we plan to keep for 8-10 years.  We will have 24k saved, so I would like to buy a new car for my wife in cash in order to have no car payment.  We will have about 30k for a house downpayment, but will rent since we will be moving again after school.  My old place has at worst 25k in equity for when I sell (just a really hard time to sell and have the lease contract).  We have 16k in a taxable mutual fund, and 250k in retirement funds (170k 401k, 80k Roth IRA).  While I am in school, my wife will continue to fully fund her 401k and we will fully fund both Roths.
 
I have a small fellowship, but we have too much for need based aid, and are left with about 32-35k in tuition/costs per year.  Federal loans (unsubsidized) up to 20,500/yr have a 6.8% rate, and after that it is 7.9%.  Due to these rates vs. the rates on savings, we have discussed cashing in the taxable mutual fund to help pay for part of the first year (after we pay the taxes on it), with the remaining part paid with $ from the car fund.  This will leave us with a car payment but I am sure the rate will be better.  The second year might need to come from the house fund, but we are not sure about that yet.  Even home loans have better rates, and we would at least get a bigger tax deduction this way (we phase out of the student loan interest deduction).  Worst case, we take loans the second year but have eliminated 1 year of interest accrual. 
 
Our thoughts are this:  Use the taxable account first and make up the shortfall with the car fund so we have no loans in year 1.  For the second year, use part of the house fund (or the equity from my old place if we can sell it) and take loans if needed. 
 
Thoughts and suggestions on the plan are appreciated.

What's your advice for him?

Comments

[Learn Save Invest]

"We will have 24k saved, so I would like to buy a new car for my wife in cash in order to have no car payment."

My best piece of advice would be to purchase a previously owned car instead of a new one. New cars depreciate in an instant. You can find a car that is just as nice that has been previously owned.

This will also help free up some cash for you, since the car will likely cost you half of what you've saved for.

Good luck!

[Cheapskate Sandy]

I have some suggestions.

1) If you have to buy a new car buy it now. Plenty of companies are offering 0% down and 0% financing for up to 6 years. Take advantage and finance the car at no cost.

2) Use 20K that you had saved for the car on the student loan instead. If your fellowship covers the balance use that money to cover the remainder.

3) If you're anxious about having a car loan, drop the remaining 4K into the loan.

4) For the second year consider getting a HELOC on the home. That interest will be tax deductible and you won't phase out. You will have the option of paying off the HELOC with the home fund if this makes you anxious.

5) AVOID THE PRIVATE STUDENT LOANS

[mashford]

Get a job at the university ... slower, because you have to work, but free! That's what I'm doing ...

[MC]

I'd second the first comment---if you want to save money, why are you planning on buying a new car? Buy a gently used 3-4 year old car and save a huge bundle.

Also, I agree you should look into work part time while you are in grad school. Look for teaching assistantships in your area or try to do some teaching at a nearby community or liberal arts college. You can also tutor undergrads on your own (put up ads in coffeeshops, dorms, at the student union building) or offer prep tutoring for LSAT, MCAT, GRE (whatever test you already took to get into grad school).

[Laura]

law of averages. Out of X amount of scholarship applications, you are bound to get a certain percentage. Fill out 1000 applications. It will be worth the stamps. Also, there are several undergrad programs that offer free tuition in exchange for working. Who's to say there isn't one like that for grad school? have you looked? Have a job lined up before you finish grad school so you can start working right away.

[Philip]

Get a job at one of the hundreds of companies that pay for grad school, and let them pay for it while you earn income. What do you do exactly? A company like United Technologies (225K employees) is always hiring and they pay 100% tuition and fees toward a graduate degree.

I earned my Masters of Engineering (2 years part-time), MBA (same), and I'm currently pursuing a PhD...all on my company's dime. I would say they've paid several hundred thousand dollars by this point. The only personal financial consideration is taxes for education paid for above the IRS's annual pre-tax limit (I think it's $5,250).

[Sallie's Niece]

You have a $12-$15k deficit a year between federal student loans and tuition costs. I would buy a car for $20k (though look into the zero percent financing offers someone else posted above) leaving you $4k plus the $16k mutual fund. That leaves at least $5k towards the second year and I bet if you got a summer or part time job you could make up the deficit towards the second year. Hopefully you will be able to sell your house in a year or so and have money towards the rest. I wouldn't touch your house savings if I were you.

[Old Limey]

It took me less than 3 years to get my MS in Engineering Mechanics and it cost me NOTHING!!

I joined an early bird program at a nearby university soon after moving to California in 1960 to work for Lockheed Missiles & Space Co. I took classes from 7am to 10am three days/week and my company reimbursed me for the tuition. I did have to make up the time of course. The advanced degree paid off for me in terms of raises, promotions and job security. I had two young daughters at the time and as soon as they were in bed by 8pm I was able to get all of my studying and homework assignments completed by working every week day until it was time for bed. I couldn't have done it without the help and support of my wife who was a stay at home Mom at that time. I graduated in 1963 so my situation may or may not be available these days. The reason I moved from a small company in Denver to an aerospace giant in California was specifically because I knew I needed to get the degree and that they would help me get it.

[Curt H.]

Sounds like it's a little late, but I'd agree with some of the folks who advocate finding an employer to pay for it. I'm currently pursuing an MBA at a top 10 school, part time, and my employer is picking up a healthy portion of the tab. They don't have any requirement to stay at the company post-graduation, so my options are open, and I'll be able to graduate without student loans, having paid off my home mortgage, all the while maxing out my and my wifes 401k/403b and making a comfortable, and growing salary.

In your shoes, I'd be considering taking $ from taxable investment accounts to avoid taking out loans (especially since you probably are over the threshold of getting the nice subsidized ones where interest doesn't accrue until graduation). I'd also be looking for a cheaper car - you can get some great cars in the $7-$10k range, feel free to splurge when huge tuition bills aren't on the horizon.

[Steve]

Not sure I agree with everyone's advice to buy an old or new car - you are in a bery unique situation in that you only need a car for the 2 years you are in school and you have a fixed amount of income for that time.

I think that in your unique situation, it makes a ton of sense to lease a cheap car (say a Cobalt for which they have 2 year deals right now with payments plans that work out at about $4500 over a 2 year period). The 2 year term will match your needs perfectly, fix your costs and when you are done with school, you will be able to actually move on to the car you actually want.

Alternatively, if you really want to save money and will be living close to the school, buy a beater - say a 8 year old Toyota Corolla - with luck and a good mechanic, you can get one for about $2000. Since you will be putting very low miles on the car, this should work great even if you budget about $500 a year to deal with big repairs (believe me, $500 will get lots of work done on a car like this).

- Steve

[OP]

Thanks everyone for your input. It is really helpful to get some outside opinions.

[dogatemyfinances]

Depends on how long you are going to be in school. If you're going to med school, well, it's going to be a long slog where you don't have things like new cars or houses.

If you really want a house when you get out of school, you need to hold on to some cash.

I piled every spare cent I had on my student loans and it delayed my house by quite a bit. That student loan payment wouldn't have made a lick of difference to the mortgage company, but boy did not having that 20%.

[Budgeting in the Fun Stuff]

The key is to make the most of the money you have so you can avoid the largest interest rates.

- Buy used if you don't mind.

- If you are sure you want a new car for your wife, the Hyundai Accent and Toyota Yaris are inexpensive ($13,000-$14,500) and get good reviews. Hyundai's having a 3.9% rate special and Toyota is having a 0% financing special right now.

- As people mentioned above, apply for every scholarship you can. They aren't all need-based.

-See if your company would cover any of the cost.

- I'd then start using excess car funds and house funds before taking out loans.

[Stephan]

Definitely look for a cheaper used car, i just did the same. If you are in a money crunch for the next 2 years, why would it even cross your mind to spend 20+k on a new car. Get a used one that will last while you are in school and use the money saved to pay for school
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[Mark]

I did something similar to Old Limey. I did my MBA through distance-learning and my company paid for it. By the way (and FMF will probably love me for this), I did the math and figured out that my "non-Harvard" MBA would pay off better than a full-time program because I did not have to give up any income or take any loans to pay for it.

There are also many people taking night classes. Perhaps this is the new version of Old Limey's Early-Bird classes.

As soon as my young daughter went to bed each night, I hit the books. Four nights a week (Monday to Thursday), almost every week for a few years, I studied two hours a night. I had a pretty busy job involving many plane rides - I must have studied in pretty much every timezone on earth. (I was that guy taking notes from a textbook instead of enjoying the movie.)

It was a tough few years, but I got it done.

[Old Limey]

One other thing that I did when taking classes that really helped was this.

It was always a struggle just getting the professor's notes copied down on paper before the board was erased so I started tape recording the lectures. None of them had any objection.
Then, back at home, when I was studying my notes, if there was something that I wasn't sure about I could go back to the tape and play the professor's words as he was writing a particular portion on the board. The combination of my text book, my notes, and his words was usually enough for me to understand what it was all about.