<p>Hey,
So I have a sizable trust which was, of course, seriously devalued as a result of the stock market dip. It has been suggested to me that maybe I should take out student loans (dunno if I’ll qualify for subsidized Stafford… so other loans) to pay what I have to for education. I could either take money out of the trust to pay the interest as it pops up (so it doesn’t compound) or defer all payment.
Of course this is in hopes that the trust would regain (in time, four years, well say) its ground and hopefully make some good money. </p>
<p>Does this plan sound like it makes any sense? To take out loans and repay them later with a trust, which I already have? My guess is that if the trust doesn’t grow at a faster average rate than the interest on the loan then the idea would be hurt me. I’m not exactly sure though. I know that its impossible to truly guess how something will grow in the stock market - but would you say it’s really rare that I would benefit from this (growth>interest)? </p>
<p>I am hoping to use some of the trust for life after undergrad (post-grad (likely PhD) or otherwise), but at it’s current value, I don’t think it could pay for all of undergrad.</p>
<p>I don’t see how it is practical to take out loans for undergrad. I would think it is better to use your trust towards undergrad, and then, if necessary, take out loans for grad school. </p>
<p>I would think that as long as you have that trust available, you will get stuck only qualifying for the most expensive unsubsidized student loans. But if you spend your trust on undergrad, then you probably can get the better rate student loans for grad school (if you end up having to pay for grad school - sometimes you can go to grad school for cheap/free if you become a T/A, or if your employer will pay for it.</p>
<p>Your general approach is good: to buy time for your assets to recover. However, there are more ways to accomplish this than taking out loans. Regardless of the plan you adopt, there is will be risk because we don’t know which direction the market is headed or how fast it will recover. Fortunately, you only have to pay for college a semester at a time so your plan can evolve over time. If you are a HS senior, you won’t be paying much of anything until around August 1, 2009. Your 2nd semester payment would be a little over a year away. Hopefully, for your sake and the sake of all of us, the economy will rebound and the market along with it. Plan for the worst and hope for the best. Good luck.</p>
<p>You can’t defer payment for an unsubsidized loan and with a trust sitting there you likely won’t qualify for a subsidized loan.
I would think about a tuition pay plan where you pay the tuition in 10 monthly payments. There is a small service fee. That way you can draw money out of your trust as you need it and hopefully give most of the money time to recover but I don’t see the wisdom in borrowing money at a higher rate than the interest you are earning on the money in the trust.</p>
<p>Yeah, i think the things like Stafford unsubsidized still allow you to defer payment. The thing I was saying was: </p>
<p><strong>in hope that the trust would recover faster than the rate of interest on the loans</strong>* (anyone that’s knowledgeable about this (stocks/loans/economics) please tell me if this is completely unreasonable, unlikely, possible, likely due to the crash and its hopefully soon recovery, ETC!!!) </p>
<p>Would it be smart (given whats in stars) to just pay the interest on the loans with my trust, so that the loan interest DOESN’T COMPOUND??</p>
<p>I was hoping that by just paying interest, I wouldn’t take too much out of the trust so that it could still recover and its gains/recovery would compound, while the loans wouldn’t compound. This way, again hopefully, the trust wouldn’t be completely eliminated, and loans wouldn’t be at $200,000</p>
<p>Yes, I think unsubsidized loans like Stafford and stuff allow deferment of payment.
With that, I was hoping that i could do this:
Take out loans to pay what I need.
Simply pay the interest on the loans as the interest accumulates… that way the loan does NOT compound (100$ x 1.04 = 104… 104 x 1.04 = 108.16… paying interest on interest).
***HOPEFULLY the growth in the trust will be faster than the interest paid on the loans. Is this completely unreasonable (anyone that knows much about stocks, the economy, loans, etc?) or would it be possible? likely? unlikely?</p>
<p>That way, I the trust could recover/compound, while the loans don’t grow/compound much. Hoping that this would result in me not losing my whole trust. If I took all the money out to pay directly for education, the 40+k a year would be removed from investments = can’t grow, and I probably wouldn’t even have enough to pay all 4 yrs.</p>
<p>Think of the interest compounding as borrowing additional money at the same interest rate as the original loan. On the payment side, there is really no difference between paying off the interest and paying off the loan. Both will save you money by avoiding further interest charges. However in your case you don’t have any debt yet. You’re only trying to determine if you should take on debt or draw from the trust fund.</p>
<p>Sometimes it is more advantageous to invest money than to pay off a loan with a low interest rate. A couple years ago I bought a CD that returned 5% rather than paying off a 3.5% car loan early. My return was better on the CD, even after taxes. In this case investment is preferred over debt reduction, but that’s not usually the case. The difference between my CD and your trust fund is the degree of certainty involved. My 5% return was guaranteed, whereas your return on the equities in your trust fund is highly uncertain. It could be 20% or it could be -10%.</p>
<p>What you are really asking is, “will the return on my trust fund after taxes exceed the cost of any loans I take out?” If the answer is ‘no’, then that is an argument against taking out a loan. If the answer is ‘yes’, then take out the loan. The information needed to answer this question is:
How much will be borrowed and at what interest rate?
What are the up front fees associated with borrowing?
What return can you expect from your trust fund?</p>
<p>1 & 2 are at least knowable, may be not now, but at some point in the future. 3 is unknowable, especially in the short term. So the answer to the question has to be ‘maybe’. However, when 1 & 2 are known it is at least possible to know what kind of returns would be needed from your trust fund. If the break-even point (effective interest rate including up-front fees) is 6% you may think it is worth the risk of keeping your trust fund invested. If the break-even point is 9% you may feel differently. I know this isn’t the answer you were hoping for but you’re up against the nature of market uncertainty.</p>