Bank Loan for School? Or wipe out my savings account?

**marvholly** · 10-14-2010, 03:32 AM

Why does it have to be ALL one or the other. Many posters come to this site with these either/or proposals for their situation(s).

Can you not use part savings and part loan? Personally, I would want enough left in savings to cover at least 3 months average living expenses + some extra for unplanned things like car repairs or medical/dental issues or a family emergency where I HAD to fly home (grandpa being VERY ill).

**greenmachine** · 10-14-2010, 06:48 AM

Originally posted by marvholly View Post

Why does it have to be ALL one or the other. Many posters come to this site with these either/or proposals for their situation(s).

Can you not use part savings and part loan? Personally, I would want enough left in savings to cover at least 3 months average living expenses + some extra for unplanned things like car repairs or medical/dental issues or a family emergency where I HAD to fly home (grandpa being VERY ill).

Well, the money I stated I would need for school covers tuition+living.

The reason I am wondering about it being all one or the other is because I would like to knock off the largest amount possible from my student loan as soon as I graduate. I owe ~$20,000 so taking off 10-13,000 of that before interest even kicks in could really reduce the payback period. The interest rate on my student loan is prime+5%.

**greenmachine** · 10-19-2010, 07:41 AM

bump; anyone? I'm not sure what to do...

**cypher1** · 10-19-2010, 08:03 AM

Originally posted by greenmachine View Post

hey all,

I will be doing my intership until the end of Dec2011. Based on saving ~1300 a month from now til then and the money I have saved, I figure I can accumulate ~13700 in my Tax-Free Savings account.

I currently have ~$20,000 in student loan debt from my first two years of school. I have one year left and I�ll need about $12k-$14k to get through it.

My highest priority financial goals:
-Pay off student loan ASAP after graduation. (Grad date: Dec2012).
-Buy a home within 3 years of graduation.

I really don�t like the idea of wiping out the $13k I had saved in the Tax-Free account to pay for that final year, I was really hoping to use it as a lump sum to put on the student loan. Would taking a bank loan/line of credit be a stupid idea? I know Canada Student Loans have a tough interest rate that usually drags most new grads down. Thus I�d like to get the principle down on it as soon as I can post-grad. Also, I figure it may be a good idea to have some borrowing history with my bank seeing as I plan on taking a mortgage in the next 3-5 years.

Is it just a matter of evaluating the interest rate on the bank loan vs. the student loan rate?

That's great that you can save 1300 each month while being a student and interning. I will say its a lot easier to spend money (in this case for loans) than save. Most of the experts on this site will say rule of thumb pay yourself first, and keep on emergency fund of 6 months of expenses saved. If thats good, and as the other person suggested, why not pay off a % instead of all in full? You never know what surprises can come up (health, car maintenance, living situation, etc.) down the road. The other questions of bank vs student loan is knowing the rates? Are Canadian/international student loans that much higher for student? That's a start for evaluating rates, and going from there. Otherwise I wouldn't feel comfortable depleting all my savings right away, with nothing to fall back on.

**jpg7n16** · 10-19-2010, 10:05 AM

Originally posted by greenmachine View Post

Is it just a matter of evaluating the interest rate on the bank loan vs. the student loan rate?

No. It's more of a matter of evaluating whether or not you are in a financial position to own a home.

To own a home, you should:

be free of all high interest debt (7%+) [some others here would say be completely debt-free]
have an emergency fund established of 3-6 months (4 mos is fine)
have enough cash to cover closing costs and 20% downpayment (avoids PMI)
buy a home that total housing expenses do not exceed 28% of your gross monthly income (includes mortgage, insurance, taxes, homeowner's association dues, etc.)
be relatively certain that you will remain living in the area for a while (3+ years?)

And I do not think you're in that position, or may not be in 3 years - especially if the student loans are higher interest like you say they are. And that makes the decision between "pay down debt," or "buy home" - a fairly simple one.

So if home ownership is that important to you, you may need to reconsider your self-imposed deadline of 3 years.

**cypher1** · 10-19-2010, 11:16 AM

Originally posted by greenmachine View Post

Is it just a matter of evaluating the interest rate on the bank loan vs. the student loan rate?

Originally posted by jpg7n16 View Post

No. It's more of a matter of evaluating whether or not you are in a financial position to own a home.

Jpg, with that first quote I believe Greenmachine was basically asking if the taking a line of credit/personal loan with their bank would be better than doing a student loan for comparing each interest rate for tuition. I think they're just wondering which would be better route, and since to we don't know current rates of interest for this situation, none of us can give definite answer. The mention of home purchase within 3 years is pertaining to the personal bank loan suggestion. I apologize if I misinterpreted all this.

**greenmachine** · 10-19-2010, 11:59 AM

Originally posted by cypher1 View Post

Jpg, with that first quote I believe Greenmachine was basically asking if the taking a line of credit/personal loan with their bank would be better than doing a student loan for comparing each interest rate for tuition. I think they're just wondering which would be better route, and since to we don't know current rates of interest for this situation, none of us can give definite answer. The mention of home purchase within 3 years is pertaining to the personal bank loan suggestion. I apologize if I misinterpreted all this.

You've nailed it, that's what I am wondering.

Student Loan Rate: P+2.5 (currently P @ 3%) so if it were to kick in today (which it doesnt, not till I am done school) it would be 5.5%.

Ideally, I would like to purchase a home within 3 years but its not a "self-imposed deadline". I'd graduate with <$20,000 in debt and worst case, it would be around 5% (dependant on Prime).

So that's:
-less then $20,000 in debt.
- more than $115,000 starting salary
- Company paid mortgage assistance of 34% of my salary (ontop of the $115K), paid quarterly (taxable)
- Company payment of $20,000 (sometimes more, but at least 20K) for downpayment. (taxable)

**jpg7n16** · 10-19-2010, 01:28 PM

Oh I thought you were evaluating which to pay towards, the "bank loan" (which I mistakenly thought was for your house) or your student loans.

In this case, you would look at after tax rates of interest. Normally, you'd get to deduct your student loan interest, but since your income will be so high - you wouldn't qualify for the deduction.

And so yes - in your case, it's just a matter of choosing the lower interest rate.

(5.5% is not as terrible as your OP made it sound - some student loans in the US run 6.5%+)

**greenmachine** · 10-19-2010, 01:36 PM

yeah, I didn't realize until the other day it was P+2.5. I had read in other places it could be as high as P+5!...

Bank Loan for School? Or wipe out my savings account?