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[metaquizzick]

Hi everyone. This past academic year, I took out student loans to cover the cost of my tuition, plus about $5,000 to put in an emergency savings fund. Because I went basically straight from undergrad into graduate school, I wasn't able to save anything in between. I am worried that with the current academic job market, I will graduate and find myself looking for work for several years, which inspired me to take out the extra funds.

Most financial advice insists that students should only borrow what they absolutely need while in school. Is this advice appropriate anymore, given the current economic environment? Or did I do something imprudent?

Thanks.

[flamglam]

Meta, in the long run five grand isn't too much, particularly in relation to what you likely have already borrowed over the course of your education. Anyone with student loans (myself included) is just plain screwed no matter how you look at it. They cannot be discharged in bankruptcy. They will follow us until we draw our final breath. Thankfully I'm too old for forced conscription. By all means, try to avoid private loans (those not backed by the Dept of Ed). Loans held by the Dept of Ed are eligible for income-based repayment.

That said, if you borrowed money on which you are likely paying at least 7% interest to put it in a savings account that is drawing not near that much, then I'd say that you are losing money on the deal. You might be better off to purchase a new computer, pay your rent, or buy a car with those funds.

I would say that you should prepare yourself to work outside your chosen field to support your loan burden. You may find this to be an unappetizing necessity.

[madhatter]

Hmm. Considering that you are paying interest on this money, it's not really a savings account. It's a line of credit. Unfortunately, you've drawn that line of credit long before you plan to use it.

[clean]

There are a lot of issues here.

Why can you not work or earn some extra money over school breaks?  Could you earn 5K over the summer?

Are you in PhD school.. that would prohibit (usually) any other work, but would include a stipend and usually health care while on campus... what would an emergency be?

Does this borrowed "emergency fund" make you feel better so that you are more likely to buy crap, or eat out more often or otherwise blow money you really dont have or should otherwise be saving?

When do you graduate?  what field?  How long do you expect to be out of work (and being out of work in your field is not the same as being 'out of work').?

the more you borrow now, the more you will have to pay back later.  That extra few dollars now may seem great, but it can sap your income for a decade or more later.  Is that extra cup of coffee, new computer, dinner now worth the decade of sacrifice? 

On paper, you could borrow it now, and if you didnt use it, write a big check when you land on your feet.  However, most people who just graduate "NEED" (yea) oh so many things... furniture, new car, vacation, fancy food, and justify that they have "Earned" it or "Deserve" it.  IF you think that this money will really go toward crap, then no dont borrow it.

further, if you had a true emergency and ran out of money, do you have family that could help some? 

finally, IF you did have a true emergency, and went hundreds of thousands in debt to a hospital or something, (and remember, you should already have some health care through school, even if it is just their walk in clinic, there are legal remedies available.

So do you really NEED this extra loan?

[metaquizzick]

First and foremost, I am a very frugal person. I have lived without cable for several years, I do not own a car, I take public transit everyday, bring my lunch everyday, etc. To answer your questions, Clean:

- I am in an MA program. I do work while I'm in school to cover food, living expenses, etc., but I live in one of the most expensive cities in the country, therefore my work funds do not go far. Therefore any "extra" funds I earn in the summer will be saved when permitted (as I am also saving now) but it will not add up to $5,000.

- The $5,000 does not inspire me to "buy crap." It is in a savings account, and will likely be put into a high-yield 3-5 year CD in the coming months, which will not be touched. I am also putting my work money into the savings fund whenever permitted ($100-200 per month on average).

- I graduate with my MA next year, but I will be continuing on to a PhD and will likely finish in 5-7 years. I am in the social sciences. I only "expect" to be out of work based on what my colleagues tell me and the zeitgeist of this fora. I am trying to be prepared, mentally and financially, to not have a job when I graduate.

- I do not have family who can help me. This is what frightens me most. My father is an unemployed, nearly homeless alcoholic. My mother cannot pay her own bills and gets her electricity cut several times a year because of it. My extended family is also poor (trailer poor) and I am not close to them.

- I do not expect my "emergency fund" to cover hundreds of thousands of dollars of unexpected hospital bills -- why would I? But I would hope that it could cover 3-5 months of rent (outside the city) if worse came to worse.

[metaquizzick]

Considering that you are paying interest on this money, it's not really a savings account. It's a line of credit. Unfortunately, you've drawn that line of credit long before you plan to use it.

Oh, and to Madhatter -- I feel that there's no reason to assume that I'll have a decent "line of credit" in the future. I do have some credit cards, with decent limits, but I prefer not to use them. Borrowing on 6.8% student loan interest is better than borrowing on 20%+ credit card interest. But maybe I'm buying in to too many "doomsday" scenarios that everyone seems to be talking about in the future of credit.

[hipgeek]

I have done the same thing myself, meta, for similar reasons.  I am frugal, come from poverty and have been unprepared in financial emergencies in the past and learned some hard lessons that don't bear repeating.

However, why ask if you what you did was wise?  By your responses to clean and mh it seems clear to me that you already are pretty confident that you made the right choice.

[flamglam]

Meta, even the highest yield CD does not earn even half the interest, these days, that you are paying on what I am assuming are Stafford loans. So in the end, you're losing money. In other words, the interest you must pay OUT on the loan balance exceeds the interest you will GAIN from the CD.

Maybe you can buy some property in Detroit and flip it later...you can actually buy a home for about that much in some areas.

That would be a wiser investment than earning 3% interest on money you're paying 7% for the privilege of saving.

[madhatter]

Considering that you are paying interest on this money, it's not really a savings account. It's a line of credit. Unfortunately, you've drawn that line of credit long before you plan to use it.

Oh, and to Madhatter -- I feel that there's no reason to assume that I'll have a decent "line of credit" in the future. I do have some credit cards, with decent limits, but I prefer not to use them. Borrowing on 6.8% student loan interest is better than borrowing on 20%+ credit card interest. But maybe I'm buying in to too many "doomsday" scenarios that everyone seems to be talking about in the future of credit.

I really don't understand this decision-making process. Right now, you're not saving money, you're carrying debt. You don't see this?

Putting your $5000 of borrowed money into a 'high-yield 5 year CD' only serves to reduce your interest on your debt. A 5-year CD will earn you a small fraction over 3% at today's interest rates, while the interest on your loan is accumulating at twice that rate. Both rates will be affected by rising interest rates, but the CD will be locked in at the 5-year rate whereas your student loan will reset annually. However, you can save hundreds of dollars right away by paying back the $5000 and negating future owed interest. Or do effectively the same thing by subtracting the $5000 from any future student loans you need to take out for actual expenses. Take the money you were planning to use to pay off the student loan and put it into a real savings account.

[fizmath]

The borrower should not be losing anything due to interest if he/she is in school and the interest is deferred.

You just lose the guarantee/origination fee.  I say keep a decent nest egg in reserve.

[dr_zack]

This plan may cost you a little in the long run, but I understand the security - mostly mental - that it provides.  I did the same thing, and it helped.  My best advice is to try to position yourself to be as competitive as possible when you finish your PhD.  I worked hard at that, and found a great TT position in 6 months (and had another offer).  Work on publishing NOW, network NOW, participate in conferences NOW.  No guarantees, but it's my experience and it worked for me.

[cranefly]

I borrowed more than I needed during my PhD years. Turns out, I didn't need it then--I needed it AFTER, when I graduated and couldn't find a job. So the money came in handy, and I wouldn't have been able to get any money to live on otherwise, so it probably saved me from living on the street.
Do I wish I didn't have to spend it? Oh hells yeah. I'm still paying that off. Was it useful? Oh yes.

[octoprof]

First and foremost, I am a very frugal person.

Not if you are going to borrow money you don't need at this time.