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Should I borrow to fund my degree or use savings?

Katie Schenk - April 06, 2017

Should I borrow to
fund my degree or use savings?

This isn’t a common question, but that shouldn’t surprise you – especially if you’re considering an international grad degree. Few people have enough money sitting around in savings and bank accounts to pay their tuition outright. If you are that lucky, we’re certain your financial advisor or money manager will tell you how to manage your educational finances.

For the majority of international grad students, you may want to read on – even if you don’t have enough savings to pay for university. The question may become relevant to you while preparing your international grad school finances – or while you’re in the repayment cycle.

Consider the end question

The question of borrowing money versus using savings resembles a much more common question: should I use savings to pay for credit card debt?

And, if you put some numbers to this situation, it becomes even easier to understand how similar these questions can be.

Pretend you have $6000 in credit card debt and $6000 in your savings account.

Current financial logic suggests that you should use your savings to pay your credit card debt. Why? Because you’re likely paying around 18 percent per month on the credit card and earning something closer to two percent on your savings.

Essentially, you’re spending $1080 on the debt while you’re earning a mere $120 on your savings.

If you calculate your options based just on the numbers, your best choice is obvious.

But, the world isn’t just numbers. There’s a reason you have savings accounts; you want a secure home in a safe neighbourhood, or you want a buffer in case you lose your job; there are countless reasons and motivations.

This isn’t a black or white question with a choice of two answers; there is plenty of grey in the middle. You don’t need to use all of your savings to pay off all of your debt. Throwing $5000 from the savings account towards the credit card would reduce the interest (at a theoretical 18 percent) down to $180, and while would only be earning $20 on the savings account, you’d be saving $800 a month.

Now, of course, these equations are never that smooth. There are complexities and accumulated interest, and maybe you need to dip into that $1000 because you need to replace the brakes on your car or whatever they case may be.

A look at priorities

We can’t tell you, even in this hypothetical situation whether you should put $4000, $4500, or $5000 towards debt. We won’t even tell you whether you should put any of your hypothetical savings towards debt.

Maybe you need that money in the bank because job security isn’t the best at the moment; maybe a family member is ill. Whether you would keep your savings or pay off your debt is totally up to you. It’s entirely possible that you won’t sleep well without a large cushion in the bank. Or, maybe, the debt is keeping you awake at night.

The point is that it all boils down to your priorities and the actual figures you have in front of you.

So let’s take it back to a realistic savings versus student loan question.

Imagine you’ve been admitted to your dream school and they’ve even awarded you a generous scholarship package. Imagine too that your company is willing to sponsor a chunk of your tuition and your parents can’t wait to gift some money towards your international degree. 

Sure, this sounds rather too good to be true – and for most students, it usually is. But, just imagine that, after piecing together all of these funds you have a choice of using $15K in savings or borrowing the same amount in student loans. Which is the better option?

Again, we can’t answer these questions – for any one. It boils down to what you want to achieve and how likely you are to do so.

The obvious and immediate answer would be to look at the figures and work out some calculations as we did with the hypothetical credit card debt. But, the world is still not black and white, and neither are these equations.

You’ll still need to consider your priorities – and some questions that relate to life outside of your bank balance. There are truly dozens of queries that can help you with these decisions, but you should probably start with these.

What’s the job security like in your field? If there is high and rising demand for the skills you’ll have after graduation, you can really spend some time thinking through the loan versus savings question. If you’re almost certain that you’ll find a fantastic job and do so quickly, you may want to hold onto as much of your cushion as you can until you do so.

Are you moving into a high-earning field? Again, if you think you would be able to make higher payments or repay your loan sooner because of your earning potential, a savings balance may allow you to be picky about the position you accept after graduation.

Do you have a safety net of any kind? If you can avoid trading in the last of your safety net for those first few months when you’re still looking for a job or settling into one, you probably want to do so. There are moving costs and emergency expenses to consider. It’s worth remembering that in any of these cases, you can take a loan and repay it early using your savings as long as your loan provider allows for early repayment. (Prodigy Finance does.)

Where is your savings kept? International students, especially those from developing countries, know that anything can happen when it comes to currency exchange. If you have a bank account in a strong, relatively stable currency, you may want to hold on to that. If your account is in a country that’s recently dealt with depreciations against stronger currencies, it’s possible that you want to use as much of this money as possible to avoid double losses later on.

But, these are merely theoretical questions, answers, and situations; none of this should be taken as financial advice. You will need to establish your own priorities and consider your individual goals.

If you have the choice between using savings or taking a loan, you should consult a trusted (and registered or licensed) financial manager. A grad-level degree is an investment, after all, even if it feels like expenditure at the moment. 

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