Thursday, May 19, 2011

Why I'm passionate about graduating without debt

So the title of the blog is "No Debt MBA" and I've set myself a goal of graduating from a top rated business school with an MBA and without any debt, student loans or otherwise, while knowing that the program's total student budget is around $165,000 for two years.  I only have $107,000 and $70,000 of that is in retirement accounts that I don't want to touch and while I just got a wonderful financial aid package this still sounds a little crazy, right?  To make up the gap of around $59,000 ($165k cost - $37k liquid assets - 2*$34.5k aid) it seems like I'm going to have to eat cat food, be a hermit, and never sleep or study because I'm working so much.  I'm pretty sure that that's not going to be true.  At the very least never studying and or socializing would seriously hinder the two biggest goals of most MBAs - learning and networking, defeating the purpose of getting the degree in the first place.  But I also can't say I know where all of that money is going to come from yet either.

Regardless, you may be wondering why the heck I'd put myself through any of this.  You might say that student loans are supposed to be good debt after all.  They're cheap money and are to make an investment in your future.   People do it all the time and do just fine.  No one says you have to take out loans for the whole thing, but do yourself a favor and relax about the whole money bit so you can really get the most out of a once in a lifetime experience 

Most of that is absolutely true.  But none of it is absolute fact.  While student loans are considered "good" debt, they're also the hardest type of debt to get rid of, following you even through bankruptcy.  Student loans are for life and maybe even beyond if you have cosigners.  They also aren't particularly cheap right now.  Though I've yet to look at private loans, students are generally advised to look at Federal first and those are fixed at 6.8% and 7.9% at the moment.  Federal student loan rates have not really followed the market down and aren't really cheap money in this economy.  Jumbo mortgages can be had for less interest and fees.  I've also previously discussed the cost of student loans - by paying for the degree with loans I'd pay for it at least one and a half times.

I'm also concerned with the risk of overburdening myself with debt, banking on a job search two years from now in an economy that may still be sluggish.  There has been plenty of news coverage recently of students graduating from programs with six-figure debt but unable to find a job.  I know someone who graduated from my school of choice and nearly a year after graduation still hasn't started work, though she did finally secure a position.  Though I don't know the specifics of her financial situation, I imagine having a typical debt load would be extremely stressful during that year of searching.  Sure student loans can go into deferment for a number of reasons but the vast majority of student loans will accrue interest during that time.  If you graduate with a "typical" debt of $87,000 then the first year of deferment at 6.8% is nearly $6,000.  At 7.9% it costs you $7,000.  The interest compounds - imagine the magic of compound interest working against you.

So really I guess what it boils down to is that I'm concerned about risk.  Risk that the job market might not be so hot when I graduate, risk that my new shiny MBA degree might not do the career magic that $165,000 price tag implies, risk that I won't be able to pay my loans, risk that I won't want to take a job where I can pay my student loans.  I also would like to be able to work for motivations other than money in my career and have freedom to pursue my own interests and projects or start a business eventually.  All of these worries lead me to think that minimizing my student loan debt would be a really worthwhile investment for me.  But while I was thinking about this I had the small epiphany that I could just try not to have any debt at all.  I mean, who knows? Graduating with debt may be an entirely doable proposition, but I would never know unless I tried.  By setting a really challenging goal for myself I think I'm more likely to succeed at my base goal of reducing risk and increasing freedom through minimizing debt.  Plus not having a single student loan repayment bill show up one month after graduation would be a really sweet graduation present to myself.

I'm not against debt in and of itself.  I do believe in leveraging debt in some situations, though I never have.  But I also believe that student loans, especially once they exceed $25,000, would be a significant hindrance to my career, freedom and choices.  I also know that without this goal I would still worry and be anxious about my financial situation and any student loans I took out.  If anything I hope this route is less stressful because I'm meeting my fears head on and doing my best to address them. 

What do you think about my goal?

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  1. I'm doing something similar to you. I'm completing my MST (Masters of Science degree in Taxation). Price tag is approx. $35k. I know, not nearly as much as your school, but still a significant amount of money. I do work full time and my employer givies $5k towards the degree each year. The rest I am cash flowing. I already have 13k of student loans and I don't want anymore! I'm looking forward to reading about your journey.

  2. MissGina - Like you say, $35,000 is hardly chump change. Congrats on not adding to your student loans! Hopefully I'll be as fortunate as you ;)

  3. Interesting. What sort of aid did you get for $34k? How did you get it?

    My question is this what city are you budgeting $21k for room and board? I can tell you multiple cities that it will be very tight.

    Also the medical is minimal coverage having gone to a "top 5" program. And any medical expense could end up costing you the projected savings. But MBA school also allows you to work between years one and two. So it's not a bad deal.

    My DH pay as you go for his MBA but he had a phd already so working was a better idea.

  4. LAL, the $34k is grants. My package also included Stafford loans and other loans. I got it by applying for financial aid from my business school.

    The $21k figure for living expenses might seem tight but I'm already living on significantly less than that in the same city as my business school so, fortunately, I know it will be doable. I expect expenses to go up once I start the program because of more eating out and bars and whatnot to get to know my classmates, but will be keeping a close eye on it.

    The insurance rate is for the school's group coverage for each year. I'm not entirely sure of the details of the plan, but hope it will at least consist of catastrophic coverage.

    I think if I were in a different place in my career an executive MBA would have been an appealing option since it is much easier to pay for and allows you to keep working.

  5. If you are going to a top MBA school, you'll command a median total income of around $120-$150,000 a year after graduation. Hence, I wouldn't worry about $50,000-$150,000. Because 5 years later, you'll be making $300,000+.

    It's hard for people to see it during school, but there's A LOT of money after graduation.

    Best, Sam

  6. Sam,

    I agree that there can be a lot of money after graduation, but that money isn't guaranteed and I think I'd enjoy it even more without student loans hanging over my head.

    That being said, there are certainly plenty of people who agree with you and it's been a very common attitude among the business school students I've met so there's definitely truth to it. My personal feelings just differ.

  7. I love this post - it's an inspiration. I definitely want to minimize my debt, even though I doubt I will be able to graduate with no debt from my MBA. My current plan is to save up $40,000 in cash for the MBA. My mom has said she will put money from my grandparents' estate toward my education, and I decided to forgo the $10,000 she planned to give me for a wedding for school costs instead. So that's another $40,000-$50,000 from family. If I can get some grants, even $10,000 a year, that'd help tremendously. My goal is to graduate with less debt than I would make in my first year out of school. So I want to be very conservatively and keep my loans in the $60,000-$70,000 range.

    I think Sam's income projections are true for some career paths (notably finance and maybe consulting), but some things I'm going to consider are 1. can I get into this industry? 2. how long will I be in this industry (i.e. will I ALWAYS be making $200K a year?), 3. do I want my decisions about a career to hinge solely on my ability to service the debt?

    I prefer to keep my projections less rosy (although just by going to bschool is a tremendous leap of faith and sign of optimism, one can argue) just to be safe.

  8. Well Heeled - You and I seem to have a similar attitude towards paying for our MBAs. Having $80,000 to $90,000 saved to pay for your MBA is huge!

    I think your point about income is spot on, especially considering if you can make that level of income for years and years on end.

    Sure I might get a fancy pants finance job paying $300,000 right out of school, but what happens if I burn out after a year or two, get fired, or find something else I want to do that pays a whole lot less? Student loans seem to have a lifespan of about ten years and assuming I can and want to make six figures for their entire lifespan is tough for me. I'm getting an MBA to have options, to have to solely base my career decisions on being able to pay my loans would defeat the point.

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