Dear Dr. Don,
I hold a bachelor’s degree, thanks to my parents who paid for my college expenses out of their own pockets. Next up is graduate school. I will be attending a 17-month accelerated nursing program and will be funding this stage of my education myself. I have obtained a school-of-nursing grant, federal direct subsidized and unsubsidized loans, and a Perkins loan. The amount remaining to cover the full cost of attendance is $64,886. At the same time, I have $54,000 tied up in the stock market and $15,000 in savings. My question is whether it would be better to sell some stocks and use the money to fund a portion of my program, or to take out a private loan (or a combination of the two).
I know I would have to pay taxes on the money obtained from selling stocks, but the current interest rate on a private loan would be around 10 percent, which is significant. An expert’s advice would be much appreciated.
— Margaret Matriculates
It’s great that your parents were able to pay for your undergraduate degree while keeping you debt-free. It sounds like you’ve worked through the financial aid process for graduate school and have all the potential aid lined up. You should be able to find something cheaper than 10 percent for a private student loan for the balance of your cost of attendance.
You didn’t mention federal Graduate PLUS loans, which can be used by graduate students. People think that PLUS loans are just for parents, but they’re also for people like you. The PLUS loan rate is 7.21 percent for the 2014-2015 award year. You should be able to fund the balance with a PLUS loan. A co-signer is only required if the graduate student has a challenging credit history.
Should you sell your stocks to pay for these costs or take on additional debt on top of the loans you’re receiving through financial aid? From a financial perspective, you should borrow if you expect the after-tax yield on your portfolio will exceed the after-tax cost of your debt. (Student loan interest may be tax deductible.) The problem is you just don’t know how the stock market will perform during the time the student loan debt is not fully paid.
Where you work after completing your education might influence your decision to take loans versus cashing in your investments. You could decide to take student loans while you’re in school and then decide after graduation whether you want to cash in part of your portfolio to pay down debt.
Otherwise, I suggest that you sell off some of your investments, with an eye toward minimizing the tax impact from the sales over the time you’re in school. You still need about $65,000 to finance your college costs even after receiving your aid package, which includes a collection of student loans. Keep some money in reserve. Just don’t drain all of your savings and investments.
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