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Buy or rent in grad school

Question: I am 35 and entering grad school in the fall of 2010. I will be unable to work during Grad School and have no savings aside from a Roth IRA valued at 5k that has been dormant for years. I will be moving soon to go to grad school and need to determine if it would be better to rent while I'm in grad school or if it would be possible to purchase a house and rent out some of the rooms in order to help pay the mortgage. Would this even be possible given that I would not be able to afford more then a 2% down payment? Would the prospect of becoming a new home owner and grad student simultaneously limit my ability to receive either financial aid for school or a loan for the house? The one thing I have going for me is excellent credit (760). Is it worth keeping the IRA considering it is not growing and I am unable to contribute to it or would it be better served as a down payment? Robb, Minneapolis, MN

Answer: It' seems to me that to be going to grad school and buying a home and not earning an income is a recipe for financial trouble.

What's more, under most circumstances I'm against buying a home when people can only afford to put less than 10% down--and a 20% down payment is much preferable. The inability to put down a large down payment is a strong signal that renting is the better choice.

Now, I doubt that a mortgage lender would do business with you since you're going to grad school and can put so little down. Thankfully, the bubble days are over. But even if it was possible, I wouldn't do it. Renting is the smart, low-risk way to go from a financial perspective. You can always become a home owner after you've gotten your degree and landed a good job.

As for the Roth, leave it alone. Sure, you can't contribute to it at the moment. But it the investment money will compound with time. When you start earning a paycheck after graduation you can start contributing to it again.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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