<p>DS just got offered a sweet summer internship paying ~$3K/month for 3 months with free housing provided. He will obviously have some expenses for food and incidentals, but not too much (they are also paying moving expenses & free bus pass). </p>
<p>He's finishing off his freshman year at a "meets need" Profile school. His contribution from summer earnings is ~3K/year (but will go up starting junior year due when he files FAFSA/Profile with those good earnings for 2012). </p>
<p>In addition to his 3K contribution, he has $7500/year in loans. $4000 is a subsidized loan directly from the school that does not accrue interest until after graduation, but will eventually be charged 8% interest. The other 3500 is an unsub Stafford at 6.8%. Our agreement with him is that he is also responsible for the cost of his textbooks, school supplies, and some incidentals (we pay laundry, trips home, and his cell phone). He has been working during the school year to cover that, and has been quite frugal. He has about $2K in the bank right now.</p>
<p>Assuming that he will have money left over after expenses and taxes and after paying his student contribution we are wondering what is the best advice to give him. Some possibilities:</p>
<p>1) Pay off the unsub loan
2) Take fewer loans for sophomore year
3) Put the money in a Roth with the plan to use it to pay off student loans when he graduates
4) Put the money in a Roth with the plan to really save it for retirement
5) Save some of it for his 2012-13 books/incidental expenses and not work during school</p>
<p>or of course some combination of the above. </p>
<p>My gut says to reduce the loans, one way or the other, but is that really the best plan?</p>
<p>He did sign himself up for a LOT of credits for the fall (some of which he is convinced won’t be too much work) so not having to work at least for the fall might be very appealing. Although I think he likes the job he had this semester, so he might want to keep it.</p>
<p>DS also has landed on a nice internship totaling to over $16k in 3 months. We are assuming his expenses would be around $3K for 3 months which will leave him with $13K less taxes. We haven’t received his sophomore year financial aid package yet. Assuming his aid package doesn’t differ much from last years, this is the plan:</p>
<ol>
<li>max out Roth (he already contributed some to his Roth this year from the job at school).</li>
<li>put the rest towards fees this year and avoid unsub loan if possible. </li>
<li>use the rest (if any) to pay off unsub loan from freshman year.</li>
</ol>
<p>Interesting, Arutha. Why are you suggesting Roth before loan avoidance/payoff? I know it is great to save for retirement for a young age and compound interest, but he’s going to be paying more on his unsub loans than he’d earn in his Roth, so it seems better to “invest” in paying off the debt first.</p>
<p>If he were only earning enough to cover his expenses, would you advise him to borrow money to make the contribution to avoid losing the opportunity?</p>
<p>As a personal finance instructor, my 2 cents worth is to fund the Roth. Play with a future value calculator to see the marvel that is the power of compounding.</p>
<p>I get compounding, but you’re compounding interest (at a higher rate) on the loan as well. Do you advise people to borrow money to fund a Roth if they can’t afford it? Because that is essentially what a student would be doing if funding a Roth instead of paying off or avoiding a student loan.</p>
<p>You’re not compounding the interest on the loan for 50 years as you would be the growth. The Roth is such a wonderful opportunity, I’d hate to see him pass up tax free compouding for that length of time. What’s the interest rate on the loan? Student loan interest is tax deductible making the effective interest rate even lower than the stated rate.</p>
<p>This sounds like a remarkable student given the offer of that much money at such a young age! Best of luck with the decision.</p>
<p>As a follow-up, we ended up deciding, with him, that he would take fewer unsubsidized loans. However, in September he had to put $2K down on an apartment for Junior year (yes, they sign leases a year in advance!) and then didn’t have enough left for his student contribution and textbooks for spring, so went back and took 2K of the previously declined loans. And… in retrospect, that’s a good argument for doing the loan avoidance first. Because he was able to go back and get the loans when he needed the money, but he wouldn’t have been able to take the money out of a Roth (without penalties) or un-pay-off his other loans. Just another factor to consider if anyone else is making this decision.</p>