Wednesday, May 25, 2011

Saving for your MBA (or other graduate degree)

I've been getting more visitors from Google lately which is really exciting.  I'm sure the feeling will wear off but it's a pretty cool feeling to know that people are searching for things on Google (which I do all the time) and finding my blog and the information they're looking for in what I'm writing.  ... or at least trying to find information here.  I've been looking over the key words that get people here and it's fascinating.  Most are pretty spot on to what I'd expect like "student loan debt mba out of control", "mba debt" and "six figure mba debt".  Others are a bit weird like "federal student for mba", "to beat the odds", "for the local library system", "i'm glad i went to business school" (that's always good to hear) and "moneymamba" (wrong blog).

But some searches are legitimate questions relevant to this blog and I'd like to address them as time goes on.  At least that way your question eventually gets answered even if the answer isn't here when you first look.  In theory if I do this I should be writing stuff that answers questions that people actually have instead of just what interests me. But let's be honest there will be plenty of that too.  So today I'd like to address the person who came here looking for "saving for MBA". 

Personally, I think if you're planning to pay for an MBA yourself (and if your employer isn't offering it's best to assume this, better safe than sorry) it's incredibly valuable to save for it.  The financial benefits of saving are two fold.  First, you will have savings to pay for a portion of your MBA and will incur less debt.  Second, you will be used to living on a little less and your lifestyle will cost less both during and after school so you will take on even less debt and be able to pay it off faster.  Let's say you save $5,000 in a year for your MBA that you would have otherwise spent.  Assuming you maintain the reduced spending, you will have $15,000 less in student loan debt when you graduate and the space in your budget after graduation to pay the rest off on a faster schedule.

So if you want to save there are three main places to put the money.  Which one you choose will depend on a variety of factors in your situation.  Let's do some pros and cons for each and just keep in mind that none of these are mutually exclusive and, in fact, you'll be in the best shape if you maximize the benefits from each.

Roth IRA
Pros: This might be the most advantageous savings vehicle for students headed to schools with very liberal need-based aid policies.  The contributions to a Roth IRA account can be withdrawn at any time and for any purpose penalty free and many schools will not count the assets in the account as being available to fund you education, resulting in more aid.  The FAFSA does not include retirement accounts either.  So here you can save up to $5,000 per year without being penalized for it in the least depending on your school's policies. 
Cons: Although earnings accumulate tax free, you will have to pay income tax on them if you use them for qualified educational expenses.  If you withdraw the earnings for non-qualified expenses you will also have to pay a 10% penalty.  Also, if you're using the Roth as a savings vehicle for grad school you can't be using it for retirement, which is a big bummer since it's savings power can really compound over time and retirement savings take the best advantage of this.  You can't re-contribute for the years of contributions you pull out for your MBA so the opportunity to grow retirement savings tax free would be lost for those years.

Pros: A 529 plan is most advantageous when you have time on your side.  The growth in a 529 plan is free from federal tax when used for qualified educational expenses.  There are also many states that offer significant state income tax benefits when you invest in your state's plan.  
Cons:  Withdrawals from a 529 plan that are not used for qualified educational expenses are subject to a 10% penalty and you will have to pay income tax on the earnings.  Like a 401k, you will have fewer investment choices in a 529 plan and they may be really good options or really poor options.  There may also be fees associated with administering the plan.

Online Savings Account
Pros: This option offers the most flexibility and simplicity for your money with no penalties, fees (if you select the right bank), tax implications or paperwork for withdrawals.  When you use this money to pay for qualified higher education expenses you can claim a Lifetime Learning credit or tuition and fees deduction on your federal tax return.  You cannot claim these benefits for money used from a 529 plan (you'd sort of be double dipping for benefits if that makes sense).
Cons: However, savings accounts also offer the fewest benefits in many ways.  There are no tax advantages to a savings account and savings account balances are considered fully available and liquid in financial aid formulas.

So what does this mean? Well, if you're fortunate enough to have a lot of disposable income you probably will want to contribute to all of these and max out the Roth IRA.  If your state offers tax benefits for 529 plans you may want to compare those benefits to the lifetime learning or tuition and fees deduction you might otherwise be able to claim further down the line.  Odds are that you'll have plenty of expenses left over to claim on your federal return even after using all of your 529 money simply because business school is so expensive.  The state tax benefits may also be more worthwhile since you are making money now, but will be making a lot less while you're in school.

Once I knew I was interested in business school I started a 529 for myself since my state had a decent plan and offered some income tax benefits.  I continued maxing out my Roth IRA but invested more conservatively; I didn't want the value to tank just before I needed the funds for business school. I also put any ideas of creating a taxable investment portfolio on hold and started putting away large amounts of cash to pay for my degree.  Currently I'm trying to avoid withdrawing any money from my retirement accounts, even my Roth, to pay for my degree.  I'd like to keep those funds for retirement.  I'll probably revisit this later this summer and next year as I pay for my first and second years.

 Regardless of where you put the money and your strategy, any savings you accumulate will benefit your finances in the long run.  Most schools discount the value of your savings to reward you for having accumulated them and to encourage more students to do the same. This means when you have $1,000 in a savings account your aid will not be cut by the whole $1,000.  You'll still come out at least a little ahead for having put the money away.

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  1. Good tips on the Roth IRA and 529. Wish you had started blogging about this topic a few years ago, so I would have known about the 529 plans haha.

    One idea that I've been implementing is maxing out my 401k contribution. Once school starts I plan to roll this over my Roth IRA and take advantage of the fact that I'll have zero income as a student to minimize the tax on earnings.

    This could be used to help pay for tuition also, but like you said, I'd rather avoid withdrawing from my retirement accounts.

  2. Paul,

    I wish I had started blogging years ago too, it's a lot of fun. I don't know what I would've been blogging about though since an MBA was just a pie in the sky idea then.

    I've also been maxing my 401k, but I'm not sure yet if I'll roll it over and convert to a Roth. I need to do more research and have questions about how the conversion is reported on my taxes and treated for financial aid purposes. I also don't know if I'll have the money to pay the tax on the conversion without eating away at the principal. It's definitely worth looking in to.

  3. This will be good for me once I get my MBA. I think my company will reimburse a portion of tuition but I'm not sure how much yet. Nice post!

  4. That's great to hear there have been visits from google search engines!

    It's always entertaining to read what the key words are that lead someone to a page :)

    I've been saving like a madwoman for September too, but still wary that its not enough.

    Keep up the good job!

  5. FSYA - Tuition reimbursement is really nice. I'm jealous!

    youngandthrifty - I'm also wary that my savings may not cut it, but hoping for the best. Good luck with your own savings :)

  6. That MoneyMamba searcher is me ;) I use Google Blog Search to find links to my site, since only non-www. links to my site create a pingback.

    Nevertheless, I'm amazed at what people will type into Google. It appears they'd tell Google everything about themselves.

  7. Another pro for 529 is that the contribution limits are much higher, often > $300k depending on the state. With Roth IRA, you can only put in up to $5k per year if your income qualifies.

  8. Do you know if 529 funds and online saving account funds are treated the same in the financial aid calculation?

  9. I went to and saved my son $5,000 on his Graduate degree. I thought it was a joke, but the money was reduced from tuition just for using the site as a click-through. I didn't have to register or anything! NICE!

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