‘Is it worth using her HYS to pay tuition first, then use federal loans?’: My fiancée just got into med school and has savings. Should we invest or take out loans for her tuition?

Hi Money Minder,

I need a bit of financial advice related to my fiancée. She’s just got into med school and has been picking my brain about money stuff. She worked during her gap year and has saved up around $40-45k. Most of it’s in a high-yield savings (HYS) account, with less than $5k each in a 401k and an investment account. She’s debt-free for now, which is a relief. I’ll be covering all our costs except for her education and I’m stuck on the best way to handle her tuition payments. She’s going to be offered around $40k in unsubsidized federal loans and $20k in PLUS loans.

Should we dip into her savings in the HYS to cover some tuition first and then use federal loans, or is it better to take out federal loans for all four years? Her yearly tuition is about $33k.

Would it make more sense to invest more of her HYS? The HYS offers around a 4% return. Would it be smarter to try and get a better return by investing more into her general investment account, hoping it’ll grow more by the time she’s out of school?

What’s the best overall setup for her?

Thanks a lot for your advice!

– Financially Puzzled

Response from THE MONEY MINDER:

Hello There,

Hi,

Congratulations to your fiancée for getting into medical school! It sounds like both of you are at an exciting and pivotal moment in your lives. Navigating finances during this period can indeed be tricky, so let’s delve into the specifics you mentioned.

Given her financial status, it’s important to weigh the benefits of using her existing resources versus relying on federal loans. Firstly, her HYS (High Yield Savings) account yielding around 4% is a decent return for a savings vehicle, especially in a relatively low-risk scenario. Borrowing federal loans, particularly the unsubsidized ones at around 40k and PLUS loans at about 20k, needs a thoughtful approach as these loans accrue interest from the moment they are disbursed.

One practical strategy could be to avoid exhausting her HYS entirely, as the liquidity might come in handy for emergencies or unexpected expenses during her studies. However, using some portion of it to offset her tuition costs can be wise. For example, using around $10-15k from her HYS each year can reduce the amount she needs to borrow and subsequently reduce the interest burden. This still leaves a decent buffer in her savings to tackle any immediate needs.

In terms of investing more of her HYS, it’s generally risky to invest money that could be needed in the immediate future. The stock market offers higher returns but also comes with volatility. Given her 33k annual tuition, she might need to access funds quickly if an emergency arises. While investing for long-term growth is advantageous, it’s crucial to balance it with security and liquidity.

The best overall setup for her probably involves a combination of using savings and federal loans. Specifically, she could allocate a certain amount from her HYS to pay a portion of the tuition each year while still taking out federal loans for the remaining balance. This approach balances reducing loan amounts with keeping a safety net in place.

A feasible split could be using $10-15k from her HYS account each year for tuition and borrowing the remaining amount needed through federal loans. This method reduces debt accumulation while also retaining liquidity. Post-graduation, she can focus on aggressively paying off any accumulated loans as her earning potential increases.

Balancing between immediate financial prudence and long-term growth is key. As circumstances change, reassessing and adjusting the approach will also be necessary.

Wishing you both the best in this exciting journey ahead!

Sincerely,
THE MONEY MINDER