Need advice: Use severance money to pay for school, or get a loan?

This is a question for a friend of mine, “Abby.” Abby got laid off from her job and is getting an approx. $60,000 severance check. Part of this money she will need to live on while looking for another job (however the job market is hot, and she has a great resume, so it shouldn’t take too long - hopefully). Abby is also halfway through a master’s degree program. She has 4 semesters left, which she will have to pay approx. $5,000 per semester out-of-pocket (for a total of $20,000 over the next 12 months).

I should now add that Abby would like to purchase a house in about a year, and it would be really nice to have as much of that chunk of severance money available to put down on a house. So the question is, should Abby pay the $20,000 for school out of the $60,000 severance? Or should she get a student loan?

I think it would be best to get a loan to pay for school so that she can preserve that cash for a down payment on a house. Over the long run, it will be cheapest overall (due to the reduced mortgage payments). What do y’all think??

And my next question is, how does one go about shopping for a loan for post-graduate education loan?

She really needs to consult with a financial advisor of some kind. I can think of three questions off the top of my head that need to be answered before she can decide what to do:[ul][]How much of an effect will the extra $20,000 have on her mortgage payments?[]How much extra income can she expect from earning the master’s degree?How much interest can she earn by investing the money, and how does that compare to the interest rates on student loans?[/ul]Since she has four semesters left for half of a master’s degree, it sounds like she’s going to school part-time. Has she considered going to school full-time and living off the severance package? Has she also considered the risk of taking on a mortgage without a current source of income?

[QUOTE=ultrafilter]
She really needs to consult with a financial advisor of some kind. I can think of three questions off the top of my head that need to be answered before she can decide what to do:[ul][li]How much of an effect will the extra $20,000 have on her mortgage payments?[]How much extra income can she expect from earning the master’s degree?[]How much interest can she earn by investing the money, and how does that compare to the interest rates on student loans?[/ul][/li][/QUOTE]

I can think of one more: How will having thousands of dollars in student loan debt affect how a bank views her as a potential risk?

Good call.

The master’s program is designed for working professionals, therefore it’s part-time by design… So she can’t go full-time. (The two-year program consists of 7 semesters, back-to-back).

She wouldn’t even think about getting a house until she had a job. I estimate that it will take her 1-3 months to secure a good job. The jobs she is well-qualified for (even without the master’s degree) have a salary range of $80,000 to $100,000, and her field is HOT in the Washington DC metro area (high-tech with a top-secret security clearance).

$80-$100k in the DC metro area? Hope she doesn’t mind living out past Leesburg.

Well plus her significant other’s income, they will easily be able to afford to live inside the beltway.

LOL, I don’t make that much and I lived inside the Beltway for several years before I moved to CA a year ago… And my brother makes just above $100,000 and he owns a single family home (on his own) in a very nice part of Arlington, so… And my aunt makes far less than that and she has a nice townhouse in Reston. So I guess I’m not quite sure what you’re saying.

If that’s the case, she’d be best off using the cash to pay for school. Student interest rates right now are higher than mortgage rates, and if she’s young and has $60K in her pocket, she’s unlikely to qualify for a low-interest, subsidized loan like a Stafford. She’s looking instead at higher interest rates and having to pay the interest during school. If she and her SO have the money to afford a mortgage, $20K isn’t that much more to add to the mortgage, and the interest rate on it will almost certainly be lower than what she’d pay on a private student loan.

Sounds logical… thank you!

Any other opinions out there?

Take time off and finish school.