A friend recently asked me for advice on how to pay for graduate school. I realized during our conversation that a lot of people don’t understand the mechanics of the payment – hence, this post.
Payment is different from financing, but it is a related subject. Financing is where the money comes from. Payment is how the money gets to the bursar.
My friend has some undergraduate loans at 4% interest. New graduate school loans would come at 6% interest. She has some retirement savings, some stock given to her as a gift, and a savings account with a few thousand dollars in it. She will be going to graduate school full time, but she plans to work with a catering company for extra work as her school schedule allows.
So here is what I figured out for her. First, she should NOT touch the retirement money, as the tax penalties are too great and she should not lose progress in saving for retirement. Second, given that her undergraduate debt has a lower interest rate than new debt would have, she’s better off keeping it with a deferment. Third, she should sell the stock and use it to pay for her first semester’s tuition. That way, she’ll accrue less interest over the course of her academic career.
The savings account and catering gigs should go toward living expenses, to the extent possible. She may have to use some student loans for living, but that is a better option than putting expenses on her credit cards.
Finally, I told my friend to think about repayment as she thinks a about job opportunities. She is in a marketable field and has been accepted into a top program, so that will help.
The process is similar for families looking at undergraduate bills. The parents should not touch retirement. They should try to pay more cash in early years so that there is less interest owed at graduation. The parents should think about current income as a first source of funds, even if it’s a small source ($100 a month is better than zero), and the students should think about what work they can get to cover even a few expenses along the way.
