Paying for school
July 1, 2009 1:55 PM   Subscribe

I have a pretty big tuition bill, even after Stafford and Perkins loans are applied. Can't pay it in cash. Should I take out another loan or take money out of the mutual funds?

The thing that sucks is I had thought I could use all the money in my mutual funds to pay the school bills in the first place, and then when I started school last fall I lost nearly half of it. So far I didn't have to touch it, but it looks like tuition got raised and even if I saved every penny of my summer job I'm not going to be able to cover it with my bank account.

If I take out another loan, I have to pay interest on it. If I cash out my mutual fund, I'll basically be able to cover my bills for the rest of the year (and then I graduate) but I'll never see the money I lost in it ever again.

One other thing, so the money I have in the mutual fund now is about the same as how much I started with, seven years ago, but not accounting for inflation. So on the face of it you could argue I didn't lose any *actual* money, but if you account for inflation, I did. The question I suppose is whether I should wait for that mutual fund to recover or just cut my losses and use it so I don't incur more debt.

Sorry if this seems like a basic question. I am horribly bad with financial things, so the answer is not entirely obvious to me.
posted by anonymous to Work & Money (6 answers total) 1 user marked this as a favorite
Maybe it's too late for this, but when I was in a similar situation I wrote to my dean and told him how different my financial situation was at the time, compared to when my college initially put together my financial aid package. He was able to get me a small grant in addition to my normal loans and such. It didn't near cover the whole difference, but every little bit helps.
posted by lampoil at 2:31 PM on July 1, 2009

your school should have a financial aid counselor who can help you out a bit, as well as a 'student emergency loan fund' that can at least cover a little bit. if you're terrible at financial things, you should go talk to someone who isn't
posted by Think_Long at 2:49 PM on July 1, 2009

granted, my answer sort of ignores your mutual funds thing . . . so, disregard for now i guess. cheers
posted by Think_Long at 3:14 PM on July 1, 2009

The losses on your mutual fund are basically a sunk cost, for your decision you should ignore it. You lost that money and it really has no implication (except tax). What you need to consider is whether you believe there is a reasonable chance that the gain on the mutual fund will be higher than the interest on the loan. If so, take out the loan. If the chance of the mutual fund outpacing the interest is low. go with the loan. It all depends on the interest rate of the loan and your expectation of gain in the mutual fund (and tax considerations, though I assume you do not make enough that this would matter much).
posted by Brennus at 3:37 PM on July 1, 2009

Brennus has the right approach. Forget about the fact that you already own the mutual funds. The way to think about it is whether you would take out a loan tomorrow in order to buy those mutual funds. There is risk in that strategy but the level of risk depends on the interest rate at which you can borrow (including the possible tax deduction). If you can borrow cheaply, the risk is lower than if you have to pay a higher rate. If you decide you wouldn't borrow in order to buy the mutual funds tomorrow, you should sell them to pay your expenses.
posted by JackFlash at 4:25 PM on July 1, 2009

If you can borrow the money with a loan that has payments deferred until you finish school, this might be your best choice. That way, when you do finish, you can either pay them over time or immediately by selling some of your shares in the mutual fund.

I'm not terrific with math, but I think the only way to know for certain the best answer is to know what the stock market will do. It's because you don't know this that you don't know which is best. If it were me, I'd borrow the money instead of cashing out money in the mutual funds. Either way is a gamble, but that's the way I'd gamble (and I'm frugal with money, and do not carry loan debts except a modest mortgage).
posted by Houstonian at 12:47 AM on July 2, 2009

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