What would you do if you knew you would have 130k in student loans?

Question

My wife will be going to graduate school this fall. We are blessed in the nature that her parents paid for all of her undergrad and she has roughly 30k left in her college fund. Most of the graduate programs run around 25-30k per year. Her school will take approximately 6 years.

What would you do in my position to prepare for the day that bill comes knocking?

Would you save the 30k to cover payments when they come due and take out the full amount or pay for the first year out of pocket then apply for loans?

Thoughts are:

Mutli with enough cashflow to cover the student loan payment as it comes due. The goal here would be to acquire the multi within the next year or two so it "builds up" funds years before we need them.

SFR's purchased at a 65-70% ARV in an A class neighborhood. Rent them out in the meantime and cash out refi or sell retail when the time comes. Hoping that appreciation helps as well.

Any other ideas?

Jon Holdman · Answer

I'd first start by being dang sure that $120K college bill was a good investment.  Many degrees are just about useless from a job perspective.  STEM (science, technology, engineering, math), medical, and legal are about the extent of useful degrees.

I say that because if you're spending that sort of money (and six years of your lives) you should expect the resulting job prospects will enable you to pay back these loans.  So, my answer is really, use what cash you have, borrow what you can, work and pay the bills while she's in school and plan to use the income from her new job to pay off the student loans.

If the question is, "can I invest enough over the next six years so the cash flow from the investments makes the payments", then that's just a math problem.  Getting a 10% cash on cash return on rentals is doing pretty well.  Most areas won't generate that return, some will do a bit better.   What would the repayment terms be?  A $120K loan at 6% for 10 years would have monthly payments of $1330, about $16K a year.  That means you need to have about $160K invested in rentals in the next six years.  Assuming 20% down, that's $800K in property.  And good rentals, not just anything you can find.  Can you pull that off?

SFRs in class A neighborhoods rarely make profitable rentals.   Prices are way too high vs. rents.

A house purchased in 2002 was worth a LOT less in 2008.  OTOH, a house purchased in 2008 was worth a lot more in 2014.   What will prices be like in 2020?  Your guess is as good as mine.  But they are nothing more than guesses.

Finding anything now where purchase plus rehab is under 70% of ARV?  Very tough.  Maybe not true everywhere, and I know a lot of people are still feeling pain, but we are in a boom time right now.

Jon Holdman · Answer

Sorry, but I doubt it.   Career prospect for psychologists are very limited. My wife's a master's level psychologist, with several additional credentials.  The PhD does open up some doors that a masters won't, but its still not going to pay anything like a MD, law degree or any engineering degree.  For my wife, its a calling.  The last job my wife had paid her absolutely squat to sit in a room of felons getting out of jail and try to get them on a better track.  At 10:00PM.  In a seedy part of town.  Alone, other than the folks in her group.  The reward is that she occasionally runs into someone who tells her how much of a difference she made in their life.   But its not money.  So, I won't say this is a bad idea.  If that's what she's drawn to do and you can afford that bill, go for it.  Just don't expect a big monetary reward.

And don't spend six years doing this.  Doesn't take six year to get a PhD if she's going full time.  Get in, get done, and move on with your life.

If I were to take $30K in cash, borrow another $120K and buy a property I'd certainly expect it to be generating a return.  I'd want to be getting enough rent to cover the debt service, all expenses and still leave some money in my pocket.

Michael J. · Answer

I second @Jon Holdman , she should put a lot of thought into this degree before starting. I too have a degree and it is worthless considering the field i'm currently in. however i'm currently paying a 20k loan and wish i had the extra money to put towards saving for a down payment.

On the other hand, i did gain a lot by going to school.

Shawn Mcenteer · Answer

My personal opinion would be do all you can to get that 30k in REI.  But I only say that because from my experience college was meh and looking back at it it would have been nice to have put the 75k spent on college into properties.  For your scenario once you spend that 30k on college its gone. If you can purchase a property (MFR preferably) and live rent free while someone else gives you equity long term you will make the 30k back and then some.

For me college had little impact on where I am today.  I am a project manager for my father in-laws company and am a realtor working with a member from BP.  I am only saying this because I want to make sure spending high sums of money on eductions is the right thing to do for your situation.

Karl James · Answer

I'd listen to a few Dave Ramsey podcasts - Dave and @Jon Holdman

are equally adamant about ensuring you are getting degrees that are valued in the market place.

Account Closed · Answer

If you can do this, I'd suggest you have your wife get a job instead of going to grad school.  If you can save $20k/year from her job, you can build a nice real estate portfolio in 6 years.

Her $30k college fund can get 1 property in year one.  You should be able to get this $30k back after a cash-out refinance with 75% LTV.  You can buy 2 properties in year two with the original $30k and her $20k savings in salary. In year three, you should be able to buy 3 properties. Rinse and repeat.  You would own 21 SFHs.

By then, the cash flow from these properties should be able to pay for her grad school if she still wants to go.  It's tough to get ahead in life when you started out in a hole of debt.  Whatever decision you guys make.  I hope it's the right one.

Best of luck.

Ryan Billingsley · Answer

@Ryan  D.  30k would be a great way to help buy your multifamily while your wife attends school.  With the right property this will allow you to live rent free, build equity, and save money for more investment properties.  By the time she graduates and starts paying her school loan.  You will have that 30k plus thousands more.  Years down the road, 30k will be chump change.  :)

Kendall T. · Answer

I would recommend real estate should be purchased first,when the money is rolling in, it. Could then pay for her schooling

Daniel Mohnkern · Answer

@Jon Holdman, ditto.  That money could go far in real estate investing.  I would hope her job would warrant that type of expense.  I would expect her job to pay for the expenses of her job...

Let's flip this around.  If you were to borrow that much money for real estate investment properties, would you expect her new career to pay those loans off or would you expect those properties to pay for themselves?

If an investment is worth the price, then that investment should be worthy of paying for itself, right?  After all, if it can't, was it a good investment?

Mark Freeman · Answer

I wish I could get my college money back including lost income over the years I was in school and put it into real estate!

What would you do if you knew you would have 130k in student loans?

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