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Apparently paying cash for something is now headline news

Apparently paying cash for something is now headline news

“CNN.com Recently Published/Updated – Student cashes in savings after private loan falls through”

My first thought when I saw that headline was, “Huh? Paying cash for school is now headline news? I guess people really DO assume that you can’t go to school without loans anymore.” So of course I clicked through. Turns out it was an article about how a company had suspended its student loan program.

But there was a part of the article that I just didn’t get:

“Eric Hahn thought his financial situation was set after he was approved for a private student loan with an 8 percent interest rate to supplement his federal education loans.

Just a few weeks later, Hahn, 21, was forced to cash in his savings and investments so he could make his rent and tuition after finding out that the lender, MyRichUncle.com, had suspended its private student loan program.

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Eventually, the country’s leading student loan provider, Sallie Mae, approved him for a private loan at 12 percent.”

So wait. He had the money available in savings and investments to pay for school and rent in full, so he cashed it out. But then — big relief! — he was able to borrow at 12% instead? Maybe I’m missing something, but is anyone making 8% to 12% on their investments right now? (If you are, please tell me where.) It doesn’t say that he raided a retirement account; it just says “savings and investments”. Why on earth would you want to go and borrow money at high rates when you have the cash to pay for school?

I guess I just don’t get it.

View Comments (5)
  • I think it’s a psychological and an emotional thing, and yes, logically, it doesn’t make any sense but I can understand it.

    For instance, right now, I have enough money saved up to pay off my car loan. The interest on my car loan is 6% and the interest I earn on my saving’s is only 3%. So the logical thing would be to use my savings to pay off my car loan and put the money I have allocated for my car payments every month towards supplementing my savings, right?
    Well, it took a lot of time and effort for me to save up what I have. To me, my savings represents responsibility, stability, financial safety, hope, freedom, etc. To have a big chunk of that gone- it would be a blow to my morale. My monthly car payment is very manageable. I look forward to the day it’s paid off but it’s not a financial strain on me- it doesn’t cause me any stress. I know my emotions are causing me to make a poor financial decisions.

    Granted, his situation is a little different. He’s locking himself into a 12% interest loan when he has no idea what kind of income he’ll have after he graduates. Still, maybe, to him, his savings and investments represents something more important to him than money.

  • Here’s something regarding student loans that I’m struggling with, and I’d like to get your opinion. I am recently married and am the sole income-earner while my husband goes to medical school. I consider myself pretty good at saving – a 6 month emergency fund, put 20% down on a house this year, contribute monthly to my retirement accounts – but I could definitely be doing more. While I would have to substantially reduce my savings if we paid his tuition now instead of having him take out loans, it certainly seems like it would be a better move for me to reduce the loans as much as possible and pay now instead of needlessly paying that interest. (There is a certain amount that can be subsidized, so I think he should take that out regardless and pay back as soon as he is finished with school.)

    DH has two older siblings who went through medical school and are now making a very nice income, and their opinion is to take it all out in loans – it’s quick to pay back once you are working, you can deduct the student loan interest, and if anything were to happen to DH (God forbid), the loans would be in his name and I wouldn’t have lost anything. (I don’t know if this is true.) I can’t tell if their viewpoints are different because they locked in such good interest rates when they were in school and because they both went into one of the highest paying fields, so the loan payments are a drop in the bucket for them. Also, while I hate to say this, but protecting myself financially in the event that DH and I divorced before he started earning money is something I feel like I should take into consideration. (My own father recently screwed over my mother financially, so while this isn’t a romantic thing to think about nor do I think it will happen to me, I want to make sure this won’t happen to me.)

    What do you think is the best course of action? Try and reduce the loan amount now even if it would take up a large percentage of my income, or take it all out in loans and pay it off once husband is working, when it should (hopefully) amount to a small percentage of our income?

  • Ken, I agree.

    Jin, it probably is a psychological thing, but 12% is a lot.

    Bruce, what did he do to his tax situation? I wouldn’t have a clue about that…

    Laura, unfortunately I have no idea. I think your situation is one where emotions probably will come into play pretty heavily, especially based on what happened with your parents. Divorce is an issue that no one wants to think of, but it happens so often that it would be foolish not to consider the potential ramifications of that possibility. If it were me I would probably do a combination of the two — take out some loans and pay for some of the schooling, mostly because I’m not the most decisive person on the planet. Also, maybe you could look into a post-nup if it would help you feel better?

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