Approaching an expensive degree

[SeanH]

Hi. I'm attending podiatry school in August. I'll be moving from Texas to Des Moines. I'm curious for a bit of perspective on possible approaches for handling tuition, assets etc. I currently work full time and have every reason to believe I will until I leave in mid-July. No debt of any kind. Paid for car. Its my goal to have somewhere along the lines of $25K in cash when I leave for Des Moines. I have ~$2.5 in a ROTH IRA, $4.7K in a ROTH 401k, $16K in a 401k. I make $47K a year right now. The program lasts for 4 years followed by a 3 years residency (I am hopeful to return to Texas - residencies are paid (poorly !) - have reviewed all Texas podiatry residencies and they start as low as $39k and as high as ~$45k). Subsidized borrowing is no more - I'll be able to borrow a mixture of unsubsidized federal loans at fixed 6.8% and fixed 7.9%.

Tuition is ~$28K. I did acquire a small scholarship which will decrease this amount by a few thousands dollars. The school estimates the total budget for the first year to be $50,806. The other ~$22k consists of some school related expenses like books and equipment and personal expenses such as room and board, telephone, car, insurance etc. The amounts budgeted for many of these expenses are significantly larger than what I currently spend in these categories so I see opportunities for significant savings. I'll post a year of expenses if anyone is curious.

Here's my game plan. Maximize cash on hand while I'm employed. Minimize spending and continue to work towards decreased cost of living both before school and during school.

(1) I was accepted to school in November. Up till November I was saving 20% into my ROTH 401k and 10% into my regular 401k. The contribution goes into a plain old Fidelity 2040 plan. When I was accepted I went ahead and stopped my ROTH 401k contribution. I am still contributing 10% to my 401k (pre-tax). I would only need to contribute 4% to receive my full company match. Should I decrease my 401k contribution to 4%? This would result in increased cash on hand (though always less than you would think because of brackets). I expect to be in a higher tax bracket down the road. I don't intend to leave any free money on the table, but I will only be 40% vested in July so the 4% isn't a huge amount.

(2) My ROTH IRA Contribution was initially $2,500. It has grown to $2,550. I opened this account 9/2011. I like the idea of keeping this account, but I see real expenses that are right here and right now and I believe I can touch the primary principle of this account without facing a penalty. Would you use tap this account if you didn't have to pay a penalty?

(3) I don't believe I can touch my ROTH 401k without paying a penalty. I've read a mix of information (ie. I read somewhere that it can be rolled into a ROTH IRA), but I'm curious if this account can be tapped of principle without a penalty. If that were the case would you tap this account (initial deposits into this account were in 2011)?

(4) What happens to a 401k when you leave a company? More specifically - what is the smart thing to do with a 401k when you leave a company? I do not intend to touch this money as tempting as that would be as I know I would pay a large penalty to acquire it.

Once in Des Moines

I spoke to financial aid and unless you are quite wealthy you will qualify for the full budget in loans each year - in short they will loan you $50k. Per the adviser, the majority of students borrow the full amount from the get go. Tuition is paid in each semester so if you agree to borrow the full amount the loan first pays the school ~$14k, then disburses the remainder of the loan while holding back the second ~$14k which is disbursed in the 2nd semester. Should you choose not to accept the full disbursement you may at any time ask the school for more loan money and you will receive it without too much fanfare or delay. Flexible.

Based on the above I am curious how people would suggest I handle the first year assuming I show up with $25k in hand.

(1) Current favored plan. Accept the $14k initial disbursement towards tuition, but do not accept any additional financial aid for personal use. This plan immediately puts me in debt, but puts the onus on me to control my own money and use it frugally. Ideally I'd retain a significant portion of my own money, borrow the second semester, and end year one only $28k in debt while still retaining sufficient funds to cover the majority of year 2's personal expenses.

(2) Another option. Pay the first $14k myself and then approach the personal expenses in a similar manner. Borrow the second 14k.

(3) I'm not particularly creative so I'm willing to hear new ideas. Borrowing the completely amount and then returning unspent money doesn't sound particularly sound/frugal as I'd just be holding money that isn't mine.

I think that's enough questions for now. Thanks for the feedback.

[NetSkyBlue]

I would not touch the money in the ROTH. You need that to retire. You can roll it over into an IRA, or leave it where it is. Some companies may charge you to manage the funds if you no longer work there, I think. Can anyone confirm?

I'd go with choice #1 with regard to loans. Keep your money, keep their money, then pay back what is unused & what you can afford once you begin to owe on the loans.

I'm in Des Moines too, so welcome. Let me know if you need any tips.

The best one I have for you is to open a Checking account with West Bank. You'll get 2% APY on balances under 30k and I think .05% on the remainder (over 30k) of your balance. Park your money there and earn good interest on it while you're not using it. AFAIK, it's the best rate in town, even if they did just lower it from 3 to 2%.

Are you going to DMU?

[riverwed070707]

I'm in Iowa too! Moved away from Des Moines a couple years ago, but we really loved it there. It's a great city.

Will you be working while you're in school or just relying on your savings if you decide to only borrow what you need for tuition? If it were me, I'd borrow what I needed for tuition and books, find a part time job with flexible hours to supplement living expenses and try not to burn through savings unless absolutely necessary. I definitlely wouldn't borrow an extra $14k "just in case". It's going to be a lot of money to pay back, but try not to think of it as just a few extra thousand -- think in terms of real money. If you were to borrow $14k today, how long would it take you to pay it back? How long to pay back double that? Is that really a difference you want to take on knowing you'll be making less after graduation than you do now? It will be a lot less strain on you in residency and your first few years if you keep your loans as manageable as possible.

[Slug]

You've clearly demonstrated that you have a decent money mindset. Thus, if your loans are in deferral until graduation, I would take every little penny I could get my grubby hands on and park it in a high yield savings/checking account. The plan would be to save as much of this money as possible over the course of your studies and then make a lump sum payment prior to your loans coming out of deferment. That's how I did my MBA at least.

Don't touch anything Roth-related. I had a small Roth when I started school too. It was nice to see something besides my debt growing.

Don't leave free money on the table (however small) so keep contributing to 401k up to company match. Upon quitting roll 401k into any brokerage firm you happen to like (maybe one that has some commission-free ETF's) and allocate aggressively since you're young. Conversely, you could leave it at your employer and plan to roll it over to your new employer in a few years. I would say if you trust the solvency of your current employer over the next 10 years and you are fully aware of the fee structure you're paying vs. the alternatives, just leave it alone for now.

[SeanH]

Originally Posted by NetSkyBlue

I'm in Des Moines too, so welcome. Let me know if you need any tips.

The best one I have for you is to open a Checking account with West Bank. You'll get 2% APY on balances under 30k and I think .05% on the remainder (over 30k) of your balance. Park your money there and earn good interest on it while you're not using it. AFAIK, it's the best rate in town, even if they did just lower it from 3 to 2%.

Are you going to DMU?

Cool. I'm with a small bank currently that pays 2.5%, but finding a 2% that pays to that high a balance and is nearby is pretty swell. I am going to DMU. Interviewed was accepted at several other schools, but DMU just had a lot going for it and was cheaper than everyone else to boot.

Originally Posted by riverwed070707

Will you be working while you're in school or just relying on your savings if you decide to only borrow what you need for tuition? If it were me, I'd borrow what I needed for tuition and books, find a part time job with flexible hours to supplement living expenses and try not to burn through savings unless absolutely necessary. I definitely wouldn't borrow an extra $14k "just in case". It's going to be a lot of money to pay back, but try not to think of it as just a few extra thousand -- think in terms of real money. If you were to borrow $14k today, how long would it take you to pay it back? How long to pay back double that? Is that really a difference you want to take on knowing you'll be making less after graduation than you do now? It will be a lot less strain on you in residency and your first few years if you keep your loans as manageable as possible.

My current job has asked me if I'd like to be a flex employee and I believe I'm going to accept. If I don't have the time to put in then so be it. I also have 2 months off my first year (the other years don't do this) so if I pick up some hours during that break I'd call that a win. I hear you on the debt - I've paid off 1 student loan already and its way more fun spending it than paying it back.

Originally Posted by Slug

You've clearly demonstrated that you have a decent money mindset. Thus, if your loans are in deferral until graduation, I would take every little penny I could get my grubby hands on and park it in a high yield savings/checking account. The plan would be to save as much of this money as possible over the course of your studies and then make a lump sum payment prior to your loans coming out of deferment. That's how I did my MBA at least.

Don't touch anything Roth-related. I had a small Roth when I started school too. It was nice to see something besides my debt growing.

Don't leave free money on the table (however small) so keep contributing to 401k up to company match. Upon quitting roll 401k into any brokerage firm you happen to like (maybe one that has some commission-free ETF's) and allocate aggressively since you're young. Conversely, you could leave it at your employer and plan to roll it over to your new employer in a few years. I would say if you trust the solvency of your current employer over the next 10 years and you are fully aware of the fee structure you're paying vs. the alternatives, just leave it alone for now.

Thanks for the advice. With an extra 7 years of education entering the mix I may need to look into switching the 2040 to a 2050. The recent fed debt ceiling bill eliminated subsidized graduate student stafford loans so they accrue interest the second you take the money.

One last question for the Des Moines/Iowa folk. Good, cheap, clean, fun recreational activities are plentiful in Des Moines? Thanks!

[riverwed070707]

Originally Posted by SeanH

One last question for the Des Moines/Iowa folk. Good, cheap, clean, fun recreational activities are plentiful in Des Moines? Thanks!

Definitely. I don't know what you like to do, but there is a great bike/rec trail, non-motorized water sports at Saylorville Lake, if you're a runner there are a couple great races/marathons (check out dam to dam!), there are places for volleyball and softball leagues all over the city, etc.

[NetSkyBlue]

Originally Posted by SeanH

One last question for the Des Moines/Iowa folk. Good, cheap, clean, fun recreational activities are plentiful in Des Moines? Thanks!

Oh yeah, there's plenty to do. Metromix Des Moines | Your Des Moines Restaurants, Nightlife & Events Guide should have a really good list of events, I always check it when I'm looking for something to do.