10 Things To Know Before You Go To Big Debt Grad School

Guest Blogger: Matt Miner is the CEO of Design Independence, a company offering personal coaching for individuals looking for help with things ranging from student loan debt management to job interview strategies to personal budgeting, as well as business owners looking for advice on sales management, recruiting and retention, and manufacturing process improvement.

Many of our clients at Carolina Wealth Stewards find themselves at a stage in life where they’re trying to help their children or grandchildren navigate their higher education experience. In some cases, this means providing financial assistance; in other cases it means simply providing guidance and advice during the decision-making process.

Matt Miner recently published an article to help provide some guidance on grad school decisions, and he’s been kind enough to share it with us here, so that you can pass the wisdom on to anyone who's trying to make a decision about grad school…

10 Things To Know Before You Go To Big Debt Grad School

1.  Big debt will change your decision-making process (even if you don’t believe it will)

When you come out of school with BIG DEBT it will affect your decision process about everything from your monthly budget to the risk you can take in your career to your range of choices for entrepreneurship.

When I emerged from grad school, my minimum monthly student loan payment was about $1600.  My income was too high for any of the interest to be deductible, so every penny of that payment was funded with after tax funds.

2.  You don’t know how your desires and abilities will change over ten or forty years

When you borrow for school, you do not know how your life will unfold over the coming decades. You are signing up to make that payment, no matter what your desires or abilities become over that time. Your family will change. Your interests will change.

You’re also assuming you’ll get the type of job with the pay you want.  While the strength of the school you attend will play a big role here, in every class there are some students that struggle with job placement.  If you graduate into an economic contraction, which realistically affects perhaps three classes in ten (for example, 2001, 2009, 2010), even more members of your class will struggle, regardless of how strong your school is.  And the ones who will struggle most are the ones with the weakest “why” for being at school.

3.  Growing your annual pay from $80,000 to $130,000 results in a ~30% increase in take-home pay after accounting for taxes and loan repayment, not a 62.5% increase.

Even if you graduate in a decent or great year and get the job you want, here’s how the math will work.

The average student entering an elite business school is walking away from perhaps $80,000 in annual cash compensation.

My assumptions for the following calculations are:

1.       Single filer

2.       Standard deduction

3.       No dependents

4.       10% of gross pay deferred to 401(K) plan

5.       Ignore state income taxes

At $80,000 per year, you’re paying payroll taxes (employee portion only) of $6,120 (6.2% Social Security Tax and 1.45% Medicare Tax) and Federal income taxes of $11,184, leaving you the following to invest, fund your lifestyle, and give away.

Annual Salary: $80,000

Payroll Taxes: ($6120)

Federal Income Taxes ($11,184)

401(K) deferrals: ($8,000)

Take-home pay: $54,696 per year or $4558 per month.  You can reference some of my assumptions here.

The average student graduating from a top-ten business school is will earn in the neighborhood of $130,000 in their first full year out of school.

At $130,000 per year, you’re paying payroll taxes of $9232 (6.2% Social Security Tax on first $118,500 (2016) and 1.45% Medicare Tax on $130,000), and Federal income taxes of $22,899, leaving you the following to invest, spend, or give away.

Annual Salary: $130,000

Payroll Taxes: ($9232)

Federal Income Taxes: ($22,899)

401(K) deferrals: ($13,000)

Take-home pay: $84,869 per year, or $7072 per month.  You can reference some of my assumptions here.

But now, based on an average loan balance of $106,000, you have a monthly loan payment of $1177 ($106K at 6% for ten years).  Your true increase in take-home pay is from $4558 to $5895 ($7072 - $1177).  This is a $1337 increase in monthly pay, and now you have outstanding debt of $106,000.

Also, your family life may be getting more complicated.  You’ll want to find more money to save, either so you can retire someday, or perhaps to invest in a business.  Your career desires may begin to change.

4.  Borrow no more than absolutely necessary to finish your program.  You’ll have to decide what is absolutely necessary, but it has something to do with “living like a student,” rather than living like a rockstar.

When you lever up for school, it is imperative that you borrow no more than absolutely necessary. Here’s why: Time isn’t money. Throw that axiom out. Time is life. When you give your time to anything (typing some words into a computer, having breakfast with your children, or working at the office for twelve hours) you are spending your life.

For every dollar you borrow, you are trading your future life (with interest!) for that dollar.  And although fancy, high-stakes meetings, four star hotels, and black cars are enticing, let me share one fact and one opinion.

A fact: employers are no more generous with compensation and perquisites than they have to be to get and keep the employees they need. It’s a pure trade: their money, your life.

An opinion: unless you love the work, the juice is not worth the squeeze. There is nothing ultimately satisfying about fancy meetings, elite hotels (between midnight and 6 am please!), and car service when you’re apart from those you love, ragged out from long days, and working toward what is ultimately someone else’s goal.

Read the rest of the list at Design Independence...