Shall I get greedy or follow my heart?
July 10, 2008 12:15 PM   Subscribe

It it worth it for me to put an amount of money into an immediate fixed annuity and take out a loan to pay for tuition, or is it alright to just pay off my tuition with the money available to me.

Hello, yet another question on tuition unlike those in the past. I realize the best person to speak to would be a financial planner, but I don't think the amount is enough to warrant an independent planner.

I'm currently still in college and I have 34K in CD's that will mature very shortly. I have taken out a loan last year and I want to do everything I can do to prevent doing that again. I strongly want to minimize the amount of debt I graduate with.

I am being offered an immediate fixed annuity on the 34K which will lock up the principal for five years and give me a payout on the interest every quarter. If I do this, I will undoubtedly have to take out loans for my remaining years in school. I am weary of the annuity for this reason, along with the fact that they grant high commissions.

What I would like do is to simply use this money to pay for the rest of my education. No harm in that, right? Put it in a high yield savings account and take it one year at a time. Can anyone give me a reason why this would be a bad idea or otherwise work against me?

I've been told that this is not necessarily the best way of handling my money, and that I should try and gain capital off of it while I'm in school so that I can make a down payment on an apartment or car or whatever when I graduate. I feel that a large sum upon graduation that will probably just go to my loans would not help me much.

Is there any alternative? Is it imperative that I rapidly try to accumulate more wealth on this sum of money and dive further into debt, or is it okay to spend it on my tuition with less stress upon entering the "real" world.
posted by saxamo to Work & Money (5 answers total)
I think we might need a little more information - what is your earning potential after college? That would help - if you can deduct the interest on your student loans it is more than worth it to keep them.
posted by MeetMegan at 12:33 PM on July 10, 2008

I took a 'pay in cash' route with my masters, in a very similar situation to yours and I'm glad I did. I can't speak to the fixed annuity other than to say that it would be undoubtedly more expensive from a fees/commission stand point.

The other avenue to explore are student loans of the federal variety that may offer very low interest rates - enough that you'd prefer trying to invest a little of your $34k cash in an attempt to do better than you're paying in interest on the loan.

However, remember that $34k won't likely earn you very much money over the next few years if you stick to secure / safe investments like money markets and CDs. Even at 5% you're only talking about ~$4500 compounded over three years. Not so little to scoff at, but worth noting that it isn't that much.

Might as well leave school debt free, in my opinion (which is just that: an opinion).
posted by mbatch at 12:35 PM on July 10, 2008

There are two questions here:

1) Is it better to leave college with more loans but more cash, or with less loans but less cash?

There are upsides and downsides to each. I think the answer really depends on your goals and your comfort level, and it sounds like you know what you want to do.

"Can anyone give me a reason why this would be a bad idea or otherwise work against me?"

I mean, there are possible downsides. For example, if it's a question of taking out an extra $5K in student loans in order to keep $5K in cash rather than putting $5K of stuff on your credit card, that might be a good tradeoff. But I definitely don't think it's any kind of huge mistake to use the money to pay for school (and it's not like you can't decide to use part of it to pay for school and part of it to save/invest.)

2) If you do want to save/grow your money during college, is the annuity the best way to do it?

You haven't given the details, but I'd just encourage you to look at the numbers and the fees very closely. I don't know much about annuities but my general impression is that very often they turn out to be a bad deal. Would you really be coming out ahead when you factor everything in?
posted by EmilyClimbs at 12:56 PM on July 10, 2008

You are on exactly the right track. Just put the money in a savings account with a decent rate and pay for school as you go.

You'll make a little money on interest, and you'll graduate debt-free. Win-win.

Trying to get tricky is just going to get you in trouble.
posted by designbot at 1:58 PM on July 10, 2008 [1 favorite]

Response by poster: Thanks for all the help so far. Lots of good insight on the matter.

I'm a theatre tech major at a small-ish state university. That being said, Earning potential after college is not great, but I'm not too worried as I live very frugally.

The annuity was actually something offered to me through a family friend. It sort of came out of the blue and the the benefit my family saw to it was that it would lock up money that I would have after I graduate, and the interest would give me something to live off of in the meantime.

The questions EmilyClimbs posted are spot on. I guess I do want to leave with less loans and less cash...and it seems like that is what I am probably going to do.
posted by saxamo at 9:38 PM on July 10, 2008

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