Dear Dr. Don,
I’m 18 and have $4,000 in the bank. I will soon be attending a four-year state college in which my first three years of tuition will be paid through a previous 529 college plan investment by my parents.

I do not qualify for any grants but will receive around $4,000 per year in scholarships. I will be living on campus in a fairly expensive dormitory that includes my meal plan, totaling $11,000. My parents estimate they will give me $8,000 per year to help pay for college. With my parents’ $8,000 and my scholarships of $4,000, that only leaves a $1,000 difference after paying for my dorm.

I’m sure my books and other fees will exceed this amount, so I will be taking out a college loan, most likely a Stafford loan. I plan to get a part-time job working at least 20 hours per week, earning around $8 to 8.50 an hour.

My question is, would it be more beneficial to invest my $4,000 and any money accrued through my job that I don’t need for emergencies into a mutual fund or an investment in an exchange-traded fund? Or should I pay as much toward my college miscellaneous fees upfront to avoid having to take out a larger college loan that will lead to more interest and higher payments over a longer period?
— Zachary Zeitgeist

Dear Zachary,
Stafford loans come in two flavors: subsidized and unsubsidized. The subsidized loans require that you demonstrate a financial need. The unsubsidized loans do not require financial need.

You’ve been through your first round of submitting your Free Application for Federal Student Aid, or FAFSA, and know where you stand on aid. If you don’t have any real expectations of demonstrating a financial need in future years, then that’s not an issue in holding on to some of your cash.

However, since unsubsidized Stafford loans charge interest while you’re in school, you’re better off delaying taking out the loans until you need the money. Use your earnings from your part-time job and spend down your cash reserve in the early years of your college career. As you point out, it has the benefit of reducing the amount of money you need to borrow in student loans in the early years of your studies.

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