Paying for Grad School: Refinance or Student Loan?

[dogagility]

Fellow Bogleheads,

I’d like your thoughts on which path to choose regarding paying for graduate school. Thanks for taking the time to read/respond.

Our daughter is attending graduate school. She will graduate in two years with a master’s degree in a medical field that is lucrative and stable (starting earnings for new grads between $125K-160K) and with plenty of job opportunities. All graduates receive multiple offers even before graduation. She likes the field and has no intention of not pursuing it.

To finish graduate school, my daughter will need to obtain a $90,000 loan. (She has no loans/debt whatsoever at this point.)

As I see it, there are two choices for obtaining this money (interest rates too high with Federal loans):

Choice 1: A 5 year variable rate private student loan with parents (us) as a cosigner. Interest rate of about 5.5%. Unknown loan origination fee (perhaps $2k). Monthly payment of $1725. $13,100 total interest paid over 5 years. Total fees and interest paid would be about $15,000.

Choice 2: Cash-out refinance of our existing mortgage. Plenty of equity to cover the $90K. Current mortgage is a 5/1 ARM at 3.29% with 4 years remaining on rate. New 5/1 ARM interest rate would be 2.94% with closing costs of $3K. Monthly payment minimum of $375 until graduation; daughter would increase payment after graduation to pay off the loan within 5 years. About $7000 total interest paid over 5 years on the additional $90K. Total fees and interest paid for the “student loan” would be about $10,000.

With either choice, we (the parents) are ultimately responsible for the loan since we would be a co-signer for the student loan or be responsible for the mortgage.

Out daughter is very responsible, and we don’t foresee there being any issue with her paying us back. With choice 1, she would be sending a monthly payment to a bank; with choice 2, she would be sending us the monthly payment.

Given the fees and interest savings of about $5000, we are leaning toward choice 2.

Are there any considerations we are overlooking?

[Startingover2019]

I went to medical school and don’t remember ever asking my parents to co-sign for any of my loans. They were about 120k. Didn’t ask them to sign for undergrad either.

If her income is going to start at 125k and you yourself say that she is “very responsible”, why do you even feel the need to be involved?

She’s an adult now. Let her do adult things and pay for them on her own without involving you. It’s part of life. So is paying interest on a loan.

You as a parent need to learn to let go as well. She doesn’t need you for this. Why do you feel the need to save her interest when she can afford it without tying up your house in more debt?

[JPH]

Is she an only child?

[Brianmcg321]

Choice 1 and 2 are both terrible ideas.

What happens if she fails out?

Now your in debt and have nothing to show for it.

If she is so responsible, she can get her own loan.

[ncbill]

Fellow Bogleheads,

I’d like your thoughts on which path to choose regarding paying for graduate school. Thanks for taking the time to read/respond.

Our daughter is attending graduate school. She will graduate in two years with a master’s degree in a medical field that is lucrative and stable (starting earnings for new grads between $125K-160K) and with plenty of job opportunities. All graduates receive multiple offers even before graduation. She likes the field and has no intention of not pursuing it.

To finish graduate school, my daughter will need to obtain a $90,000 loan. (She has no loans/debt whatsoever at this point.)

As I see it, there are two choices for obtaining this money (interest rates too high with Federal loans):

Choice 1: A 5 year variable rate private student loan with parents (us) as a cosigner. Interest rate of about 5.5%. Unknown loan origination fee (perhaps $2k). Monthly payment of $1725. $13,100 total interest paid over 5 years. Total fees and interest paid would be about $15,000.

Choice 2: Cash-out refinance of our existing mortgage. Plenty of equity to cover the $90K. Current mortgage is a 5/1 ARM at 3.29% with 4 years remaining on rate. New 5/1 ARM interest rate would be 2.94% with closing costs of $3K. Monthly payment minimum of $375 until graduation; daughter would increase payment after graduation to pay off the loan within 5 years. About $7000 total interest paid over 5 years on the additional $90K. Total fees and interest paid for the “student loan” would be about $10,000.

With either choice, we (the parents) are ultimately responsible for the loan since we would be a co-signer for the student loan or be responsible for the mortgage.

Out daughter is very responsible, and we don’t foresee there being any issue with her paying us back. With choice 1, she would be sending a monthly payment to a bank; with choice 2, she would be sending us the monthly payment.

Given the fees and interest savings of about $5000, we are leaning toward choice 2.

Are there any considerations we are overlooking?

Is her medical field eligible for this scholarship?

https://en.wikipedia.org/wiki/Health_Pr ... ip_Program

[campy2010]

Choice 3. Federal student loans in her name only (no parental co-signing).

Most medical systems are non-profits and students can take advantage of the PSLF forgiveness program as a back-up.

[Flora]

OP already stated that rates are too high with federal loans.

OP wants to help out his/her responsible, adult daughter. I would feel the same way.

I would go with Choice 2.

[Nate79]

So you have no money and neither you nor her can cash flow the cost of school? And there is no cheaper alternative? No way to delay and save up cash? Get a hospital to pay in exchange for future employment? Because what you have laid out funding with debt is a horrible idea.

[StoopieHippo]

OP already stated that rates are too high with federal loans.

OP wants to help out his/her responsible, adult daughter. I would feel the same way.

I would go with Choice 2.

You say this like they can't be refinanced later for a lower rate. She COULD pay the interest while in school (or OP can pay and she can pay them back) then refi once she's graduated or work for a nonprofit for loan forgiveness. Then the OP wouldn't have any loans in their name but could still help out.

[CrazyCatLady]

As someone who paid off huge, high interest loans, I can appreciate your wanting to help your daughter. I don't know that I would want to risk losing my house if they can't be repaid, however.

Another thing to think about. God forbid it ever happens, but if you take out loans/co-sign/refi your mortgage to pay for her schooling and then something happens to her (ie car accident) which prevents her from working, you will be on the hook to pay those loans. Is that something you can afford to do?

If she took out the higher interest rate loans, would they be subsidized or unsubsidized? If she gets subs loans, maybe you could contribute some cash to pay principal while she is in school which would lower the amount due when she graduates and maybe counterbalance the higher interest rates?

[stoptothink]

This is absolutely not worth the risk to save a few thousand dollars if daughter will (upon graduation) immediately make $125k+. Have her take out her own loans, in her own name, like 95% of people who get medical training. With a little bit of sacrifice the loans would be gone in less than a handful of years.

[CyclingDuo]

Fellow Bogleheads,

I’d like your thoughts on which path to choose regarding paying for graduate school. Thanks for taking the time to read/respond.

Our daughter is attending graduate school. She will graduate in two years with a master’s degree in a medical field that is lucrative and stable (starting earnings for new grads between $125K-160K) and with plenty of job opportunities. All graduates receive multiple offers even before graduation. She likes the field and has no intention of not pursuing it.

To finish graduate school, my daughter will need to obtain a $90,000 loan. (She has no loans/debt whatsoever at this point.)

As I see it, there are two choices for obtaining this money (interest rates too high with Federal loans):

Choice 1: A 5 year variable rate private student loan with parents (us) as a cosigner. Interest rate of about 5.5%. Unknown loan origination fee (perhaps $2k). Monthly payment of $1725. $13,100 total interest paid over 5 years. Total fees and interest paid would be about $15,000.

Choice 2: Cash-out refinance of our existing mortgage. Plenty of equity to cover the $90K. Current mortgage is a 5/1 ARM at 3.29% with 4 years remaining on rate. New 5/1 ARM interest rate would be 2.94% with closing costs of $3K. Monthly payment minimum of $375 until graduation; daughter would increase payment after graduation to pay off the loan within 5 years. About $7000 total interest paid over 5 years on the additional $90K. Total fees and interest paid for the “student loan” would be about $10,000.

With either choice, we (the parents) are ultimately responsible for the loan since we would be a co-signer for the student loan or be responsible for the mortgage.

Out daughter is very responsible, and we don’t foresee there being any issue with her paying us back. With choice 1, she would be sending a monthly payment to a bank; with choice 2, she would be sending us the monthly payment.

Given the fees and interest savings of about $5000, we are leaning toward choice 2.

Are there any considerations we are overlooking?

Since enough savings for her college education were not built up over the previous 22 years to cover both her undergrad and grad school, we would suggest that you do not ruin your retirement and take any loans out in your name. Do not consign. Do not use your primary home to finance it. Nice to want to help, but in our opinion that build up should have been done in the previous 22 years - not now.

With the situation you find yourself in, your daughter needs to take the loans in her name and she can aggressively pay them back once employed, living on the cheap during the first years of her employment. If her field has starting salaries in the $125-160K, she will easily be able to aggressively pay her loans back in the first few years of her employment. She is also young and can work and study at the same time to help cover non-tuition costs.

Our advice: put this one on her. Do not put it on yourselves at this point since that amount was not saved in the two prior decades to cover it. Focus on your own saving for retirement and worry about your own house's cash flow - not hers.

[eye.surgeon]

Bogleheads are brutally unsentimental as a whole. Let me go against the grain and say if you can financially afford to help her, do so. I would co-sign rather than refinance personally. I have 3 children, 2 of whom are in college, one in grad school, and I have promised them I will pay for whatever education expenses they have that are facilitating a productive career. I can afford to cash flow it plus a 529. My parents did the same for me, it didn't ruin me. My children are my greatest asset, I wouldn't bankrupt myself or sacrifice my retirement plans to help them, but I certainly wouldn't refuse to help simply on some principle.

If you can't afford to help, then of course don't. by that i mean if having to pay off her defaulted loan or if paying off your HELOC is a hardship, then let her do it on her own. For most here, $90k is not a financial hardship but it would change your daughters life.

[themuse]

Sometimes paying higher interest is worth it for the financial discipline that one acquires. This is a good example. Let her get the higher interest loan and manage it.

You can always tell her that you will use option #2 if she ever feels stressed.

You can cash flow whatever you can for years 1 and 2.

You can pay off the loan after year 2 (once she has a job), and she can pay you back from her earnings to save on additional interest.

Important for you to maintain flexibility.

[Monsterflockster]

It doesn’t sound like it but is her job eligible for public service loan forgiveness? If so set up loan repayment via her income & the rest will be forgiven after 10 years (given she stays in the field & does appropriate paperwork).

[Xrayman69]

Choice depends,

Is your family (Your spouse and yourself) determined to float your daughters education. Can you afford to suck up the 90K base if she is unable to repay (you or the creditors), Do you have the resources to cash flow, I suspect not, otherwise you would have stated this as a choice.

School loans need not be co-signed by you, very little benefit other than a fraction of a point discount. Risk benefit ratio disproportionate so don’t do this, have her obtain on her own basis. Educational loans interest is not tax deductible (less important in current tax structure). School loans are not permitted to be abolished with bankruptcy declaration (thy can’t repossess the knowledge gained.

Refinancing gives a pretty low interest rate- points and interest are tax deductible. If your family is determined and can afford to absorb the 90k without issue this is not unreasonable. This would be our family’s choice if in this scenario. Similar to financing a car at a low interest rate and taking the loan amount otherwise and investing (arbitrage gain assuming investments increases).

She is your daughter and thus this is NOT only a financial and business decision as many on this site may wish to simplify. This is a family and emotional decision that can be done with both love and logic. I commend you on raising a daughter who clearly has been successful in her career pursuits and development.
.

[dogagility]

Thanks for all the replies.

Our question is related to minimizing the cost of the loan (i.e. fees + interest). We believe that mortgage refinancing is the way to go, given the savings of $5K in fees/interest.

We are not concerned about our daughter paying her way or having "skin in the game". She will pay off the 90K loan without any problem.

For clarification, we have enough money for our own retirement.

We also have about 40K "extra" in our 529 after paying 125K for each of our two daughter's college education. One is a junior undergrad, and the other has started her masters. We intend to use the 529 money to "pay" for our oldest daughter's masters but, in reality, intend to put 40K of the loan money into our accounts (thus not having the earnings subject to penalties or taxation).

[White Coat Investor]

Fellow Bogleheads,

I’d like your thoughts on which path to choose regarding paying for graduate school. Thanks for taking the time to read/respond.

Our daughter is attending graduate school. She will graduate in two years with a master’s degree in a medical field that is lucrative and stable (starting earnings for new grads between $125K-160K) and with plenty of job opportunities. All graduates receive multiple offers even before graduation. She likes the field and has no intention of not pursuing it.

To finish graduate school, my daughter will need to obtain a $90,000 loan. (She has no loans/debt whatsoever at this point.)

As I see it, there are two choices for obtaining this money (interest rates too high with Federal loans):

Choice 1: A 5 year variable rate private student loan with parents (us) as a cosigner. Interest rate of about 5.5%. Unknown loan origination fee (perhaps $2k). Monthly payment of $1725. $13,100 total interest paid over 5 years. Total fees and interest paid would be about $15,000.

Choice 2: Cash-out refinance of our existing mortgage. Plenty of equity to cover the $90K. Current mortgage is a 5/1 ARM at 3.29% with 4 years remaining on rate. New 5/1 ARM interest rate would be 2.94% with closing costs of $3K. Monthly payment minimum of $375 until graduation; daughter would increase payment after graduation to pay off the loan within 5 years. About $7000 total interest paid over 5 years on the additional $90K. Total fees and interest paid for the “student loan” would be about $10,000.

With either choice, we (the parents) are ultimately responsible for the loan since we would be a co-signer for the student loan or be responsible for the mortgage.

Out daughter is very responsible, and we don’t foresee there being any issue with her paying us back. With choice 1, she would be sending a monthly payment to a bank; with choice 2, she would be sending us the monthly payment.

Given the fees and interest savings of about $5000, we are leaning toward choice 2.

Are there any considerations we are overlooking?

I think it is a bad idea for you to go into debt for your child's education. If you have cash, give her that. If no one has cash, then she should be the one who borrows.

Not only does the debt go away if she dies or is disabled, but it may also be eligible for PAYE/REPAYE/PSLF forgiveness.

[petulant]

Thanks for all the replies.

Our question is related to minimizing the cost of the loan (i.e. fees + interest). We believe that mortgage refinancing is the way to go, given the savings of $5K in fees/interest.

We are not concerned about our daughter paying her way or having "skin in the game". She will pay off the 90K loan without any problem.

For clarification, we have enough money for our own retirement.

We also have about 40K "extra" in our 529 after paying 125K for each of our two daughter's college education. One is a junior undergrad, and the other has started her masters. We intend to use the 529 money to "pay" for our oldest daughter's masters but, in reality, intend to put 40K of the loan money into our accounts (thus not having the earnings subject to penalties or taxation).

The cheapest form of debt is often going to be a mortgage, but you can go get quotes on variable student loans after graduation. Variable 5-year loans may be competitive with your 5-1 ARM rates once she has a job and you're the cosignor, assuming she has some kind of credit history by then (any CCs?). She can use federal loans to pay for school and then refinance to private once she graduates. The best rate to lock in today is probably the mortgage though.

But you've heard many giving reasons not to use your debt to pay for your child's education. You yourself admit you have significant cash/liquid assets to contribute. Consider providing what you can from 529 and cash then letting her get a federal loan for the rest. At some point your child has to get independent and responsible rather than having a parent handle it all, and a small student loan with your guidance is a great way to start.

[deltaneutral83]

Bogleheads are brutally unsentimental as a whole. Let me go against the grain and say if you can financially afford to help her, do so. I would co-sign rather than refinance personally. I have 3 children, 2 of whom are in college, one in grad school, and I have promised them I will pay for whatever education expenses they have that are facilitating a productive career. I can afford to cash flow it plus a 529. My parents did the same for me, it didn't ruin me. My children are my greatest asset, I wouldn't bankrupt myself or sacrifice my retirement plans to help them, but I certainly wouldn't refuse to help simply on some principle.

If you can't afford to help, then of course don't. by that i mean if having to pay off her defaulted loan or if paying off your HELOC is a hardship, then let her do it on her own. For most here, $90k is not a financial hardship but it would change your daughters life.

Money decisions probably don't need to be made with sentimental value in mind unless you can cut a check and be done with it or you can fix the situation rather quickly if you get stuck with the bill. Sounds like the OP would rather not get saddled with 90k worth of debt, so co signing or what have you seems like a bad option with his house secured as the collateral. The amount of extra interest which is relatively small compared to $90k and the protections afforded the OP with the child taking out the loans makes total sense to me. We are talking a couple thousand dollars which protects the OP against the child becoming disabled or just changing their mind and not paying as agreed for whatever litany of reasons. Again, if the OP can cut a check or move some things around and pay it off quickly, then that is a separate discussion.

Also not sure why people are suggesting the public loan forgiveness program for a $90k debt with a projected income more than 1.25x that. Could easily take care of the debt inside of two years instead of being a slave for 10 years and being subjected to the whims of the govt and otherwise giving someone else control over your life for such little in return (0.75x first year's income) and changes to the program nullifying the original agreement. Plenty of horror stories about that out there.