Help a Reader: Paying for Grad School

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

After a few years of working and accumulating about $60,000 combined wealth between my wife and myself, I've finally found my lifelong passion, which requires me to go to a private graduate school to pursue a doctorate degree.  My question doesn't pertain to whether or not I should go back to school - rather, it's what I should do with my savings.  Also of note, my wife injured herself a few months back so will need a few months of therapy before starting to look for work in our new location.

If you were in my shoes, would you use the entire savings (minus an emergency fund) to fund as much of the graduate education as possible, or would you invest it in some other way?  I have been putting money into my 401K and IRA already, but not sure what I should do with my savings. 

I realize that graduate loans are a hefty 6.8% interest rate (I don't plan on taking Grad PLUS loans, which carry a whopping 8.5% interest rate), but they're tax deductible.  To me, it almost makes sense to try to max out tax shielded accounts like IRA and 529 plans (to pay for grad school) since I should be able to beat the ~ 4.7% interest rate.  What do you suggest?

What's your advice for him?

Comments

[TN]

Find a school that you can be a teaching assistant at. I am at my second graduate school now working on my doctorate. I've been a teaching assistant over much of my time in graduate school and have only recently become a research assistant. I have not incurred any debt for my graduate studies and have also been fortunate enough to have my basic medical insurance covered by the school.

One other way to reduce your expenses during graduate school is to become a property manager for a near campus apartment complex. I've also used this method for 3 years and it has allowed me to continue to contribute to my retirement accounts while I am in school.

I realize these aren't options for everyone, but there are options out there.

[jim]

I would use the entire savings less an emergency fund to fund your college. But I'd probably want to keep a pretty large emergency fund or cushion of cash at the moment considering the wife is unemployed and the husband is a student.

I would not try and 'beat' the 6.8% of the student loan. You have known short term costs for college. Putting the money in IRA or 529 and attempting to 'beat' that 6.8% rate would be gambling on stocks or bonds that could easily go down while you're in school. The stock market is about as likely as not to go down in the next couple years. You're taking a lot of risk if you think you can get a good return in stocks in a short period.

Why do you think that 6.8% student loans translates to 4.7%? That seems based on an assumption of a 30% marginal tax rate. But you're going to be a grad student and your wife is currently unemployed. I wouldn't expect you to be in a 30% bracket in that situation. You may be overestimating the tax benefits of student loan interest deduction. A married couple making up to about $85k would be in the 15% bracket.

[Lynn]

My advice it to look for a TA or RA. You should not plan to your savings to pay for tuition. Also do you HAVE to attend private school for your doctoral program? Is there a similar or related program at a state school in your area? I am a PhD student at a state university and we are allowed to have dissertation advisers who are not associated with our university (We can work with experts from other universities or private companies- there is a vetting process by the university but its straightforward). Our dissertation chair must be from our university but we are given a lot of liberty in regards to the other committee members and the role each member plays, especially for projects involving a highly specialized focus or skill set. This might be a decent route considering you know exactly what you want to do. It would involve you talking with the departments at both schools early.

[KH]

It totally, absolutely, depends on what subject the grad school is for. Because that determines whether grad school is actually a ticket to a job or not.

For example, dental or med or vet or law or nursing (anaesthesialogy, pulminary nursing) or genetic counseling or clinical lab tech etc grad school--go for it! But social work or MBA? Forget it or go for it only after working for a while to see if you really need it because it's probably not worth it.

If your wife can't work, you need a large emergency fund. So take the loan and save your savings.

[jeffinwesternwa]

60k??$$ you're kidding, that' nothing, go work 4-5, 6,10 years REAL 60+ hour weeks and save 500K then reconsider....

[Michael Goode]

Don't accumulate huge debts for something you're passionate about if it won't help you make a living. The grad schools one has to pay for, those in the liberal arts, (and I'm assuming it isn't a professional degree like a JD or MD) generally lead to low-paying jobs. My wife and I both got paid to go to grad school, but we went in the sciences (my wife in chemistry and me in psychology). See this article: http://chronicle.com/article/Graduate-School-in-the/44846/

[Old Limey]

In the current economy and job market $60K would not provide the majority of husbands with much security. I would forget about "Passion" and "Private schools" and come down to earth and concentrate on "Practicality". Find a good job, avoid adding more debt, gain work experience at a junior level and go for part time post graduate education at a state university.

As KH wrote a lot depends upon the nature of your chosen field and the job opportunities and salaries in that field. Your proposed plan places a very heavy burden and responsibility upon your wife, I hope she is up to the challenge mentally and physically, particularly in view of her recent injury.

I worked with a lot of PhD's during my career and it didn't seem to make much difference whether they came from a prestigious private school or a state school, what mattered was how good they were. A few that I knew pursued a PhD but never finished.

[JS]

This is the original question asker. Sorry, I wasn't asking whether or not I should go back to school, as I stated in the original question - it was what I should do with my savings. I will be pursuing a doctorate degree in the healthcare industry, so money AFTERWARDS isn't a humongous issue. Also, the program I'm pursuing does not have public school options so that cancels out state universities.

Anyway, we actually have about $100k of combined savings over 3.5 years of working and my question pertained to what I should do with that $100k when I go back to school - again, not opinions on whether or not you think I should pursue grad school. Also, this career direction is completely different than the job I just quit (finance), so accumulating more experience in this industry has no application towards my future career as a doctor.

It almost scares me to blow my entire savings on schooling (and still having to incur some debt anyway) with only a six month emergency fund left over. I will try to find a part-time job as well to help cushion our monthly expenses.

Thanks!

[JS]

Also, along the same lines - I have the option of pursuing this doctoral degree part-time, but it'd add at least two more years to my program. That would enable me to work part-time and go to school part-time. Although this would prolong the start of my full-time job as a doctor, I wouldn't have to eat into my savings as much as a benefit. What do you think of this option?

[StL Pastor]

Many responses assume you're getting an English PhD-becoming a medical doctor means a very different calculation.

My suggestion-run the numbers-
what would a part time job during the MD make? Say 15000-20,000 (I would guess at most) Would you run the risk of not getting through the program with flying colors? (possibly) How much income would you give up if you delayed your graduation 2 years? Being a doctor is quite lucrative, say 150,000$ per year (this is actually towards the low end, but you don't say what kind of MD you're going to be) and there are definitely jobs out there, so getting through as fast as possible, even with extra debt is probably worth it, since you're trading 40,000$ now for 300,000$ later.

Now, the student loan question-
How much interest would you actually pay on the student loans before you could pay them back after graduation? Assuming 120,000$ in loans after 3 years, you would pay some 45,000$ in 10 years in interest, less if you pay it off more quickly. Is 45,000$ worth the peace of mind? What about 20,000$? Pick your number.

Also, if you're getting federal student Loans, which is what is at 6.8% right now, some of your student loans may be subsidized-my wife's student loans for her PhD program are. Then, you could max out on Subsidized loans, paying off any unsubsidized loans you take out immediately. Subsidized loans don't accrue interest until 6 months after you graduate. Then, you keep your savings, pile up loans until you graduate and start earning serious money, and pay the loans down with your savings before interest begins to accrue, or quickly with a combination of your savings and new income (also, on the 2 year delay-if you're taking out some loans the whole time, and they are unsubsidized, then you really shouldn't delay graduation for 2 years, since that's 2 more years for them to compound).

Finally, you may have trouble beating the 4.7% interest on the student loans (the market does stink), but if you don't contribute to a retirement plan during these year's you'll never be able to make catch up contributions, and your taxes at your planned income level mean that it will be worth it to sock away as much as you can in tax advantaged accounts, even if it means a little more student debt now.

Just my thoughts. Are my numbers close to what you have been thinking?

[DIY Investor]

The day you need to make your tuition payment fund a 529 plan for the amount of the state tax deduction and immediately write the check and close the account. Should be worth approximately $150 on state tax deduction because there is no holding period requirement for most 529 plans. This will help pay for one-half of one text book.
I second the suggestion to do a teaching or research assistantship.

[Jeremy]

From someone who has large student loans, my advice is to use it for grad school, minus an emergency.

I have a nice salary and can afford to service my student loans, but the loans are like an anchor--an anchor that you won't have drag behind your family when you are done with school.

[Doug @ CheapScholar.org]

I have always taken comfort in having a sizable emergency fund.. That being said, you need to determine how much you need to have in the bank to cover incidentals over the term of your educational pursuit. Once you have that number determined, you should have no problem in knowing how much you want to pay up front for your degree.

Since you are going into the medical profession, you may want to maximize your student loans because many health care employers provide loan forgiveness benefits as part of their recruitment strategy. If you don't have any loans, you won't have the opportunity to take advantage of that opportunity.

Hope this helps...

[Stephan]

cant believe some people were judging the the original questioner about the career field he is pursueing, because he is passioante about it. also, an MBA is not a waste, more education is never a waste. if he is going to be happy with his life after getting this degree, its worth the student loan.
regardign your decision, i would use most of it for your education, the market is volatile and you could lose money instead of making money. at least if you spend it on this, you know you will be getting value(the degree) in return.

Preferred Financial Services

[Old Limey]

Becoming an MD is a great goal and I am sure you wouldn't be pursuing it unless you already have excellent academic accomplishments. I have a hiking friend that has two daughters that are doctors. It is a long and arduous path to travel before you reach the goal, but if you have the determination and the love of your life is able and willing to carry a heavy load for you to achieve your dream then it's the way to go.
One of my friend's daughters is an OBGYN, the other is an anesthesiologist and they love their work. The problems are principally that they each ended up with close to $200K of student loans. One has a child and the father is a stay at home Dad. There is also the difficult internship period where they overwork you with very long hours for very little pay. Having very supportive parents could ease the burden and provide some added back up security.

In this low interest rate economy it's very hard to get a good return on your emergency fund without taking on undue risk. It's essential that you invest the money where it is FDIC insured. I have personally had three CDs held in my Fidelity IRA from banks that were subsequently closed by the FDIC, but thanks to that great program started by FDR I didn't lose a penny of principal or accrued interest - just keep the size of the CD plus 6 months interest below $250K to be fully covered. On 1/1/2014 the insured limit reverts back to $100K for non-IRA CDs.

Bottom line, live as frugally as possible, keep the emergency fund untouched and use the rest to minimize the amount of loans that you end up with, and above all treat your wife like a Queen. Good Luck - I wish you all the success in the world.

[jim]

I don't think he's becoming a medical doctor (MD) but instead a PhD in the healthcare field. Theres a considerable difference. He said "I will be pursuing a doctorate degree in the healthcare industry" which sounds to me like a PhD in a health related field. And he says: "the program I'm pursuing does not have public school options" but there are many public med schools.

[jim]

Stephan said: "cant believe some people were judging the the original questioner about the career field he is pursueing, because he is passioante about it. also, an MBA is not a waste, more education is never a waste."

Passions are great. But you have to consider the finances. We wouldn't want someone to go bankrupt in the name of pusuing a passion.

Education itself for education sake is not bad nor a waste. But ruining your family's finances in the pursuit of education is poor prioritizing and not a good idea.

I'm not say that the original poster is doing these things. But the financial circumstances do play a part in deciding if pursuing a career change is the right thing for your family's long term financial survival. So that is why some people might legitimately question if going back to school is the right choice financially speaking.

[jim]

"go work 4-5, 6,10 years REAL 60+ hour weeks and save 500K then reconsider...."

I would have to say I disagree with every part of that advice.

Go to school first so you can get a higher paying job sooner rather than later. If at all possible avoid working 60+ hour weeks since that is not good for you or your family. Don't set out a goal to pile up a mountain of cash before considering improving your education.

[Budgeting in the Fun Stuff]

I think you would want to minimize your debt, so using savings minus an emergency fund sounds good to me. Even if you're a well paid person in a medical profession, you'll want to be debt free sooner rather than later.

I'd go to grad school using as few loans as possible and then continue to live like a student even after you start working so you can get rid of all your debt quickly. Good luck!

[Old Limey]

Jim: He did mention his future career as a "Doctor" however PhD degrees are often obtained by psychologists and healthcare administrators so you could certainly call yourself a "Doctor" without being an MD. It appears that a PhD also does not begin to command the salary of an MD, however it also doesn't require many of the specialized skills required of a physician and can even be obtained at online universities.
As healthcare grows to where everyone is covered it will become more and more a great field to be in and jobs should be plentiful.

[jim]

Old Limey, I think a PhD level job in a healthcare field is likely to be a very good long term career move overall. But PhDs are not usually as lucrative as MDs.
I don't think it matters a whole lot either way. I think we can assume his career path is not frivolous and or a total waste of money or something.

[cherryblossom]

I personally would keep as much money as possible in savings. Use the loans. Being an adult student (non-traditional) and broke REALLY REALLY SUCKS. Get as much subsidized loans as possible. If not subsidized then find a way to PAY THE INTEREST AS YOU GO. This will keep the loan from ballooning into something that is unmanageable.

[bogart]

As a Ph.D. student at a private university, you should be eligible for teaching assistantships, research assistantships, and/or tuition remission (reduced/free tuition). If you're not, that should probably raise serious questions about (a) whether you should be doing this (does the school not find you an attractive candidate?) and/or (b) whether the school in question is really running a good program.

This is coming from someone with a doctoral degree working in a university ...