No Debt MBA

If you're one of those fortunate people that has family that wants to help pay for the back breaking cost of professional school or other graduate degree, congrats!  Not everyone is so lucky! Having them help is easy.  They can cut you a check, start a 529 for you, or contribute directly to your school. However, if your family is really generous, to the tune of more than $13,000 you'll want to beware the gift tax.

The Gift Tax
If someone gives you more than $13,000 in cash, stocks or whatever in a year, then they are liable to report the gift to the IRS and pay a gift tax on the excess over the $13,000 annual exclusion.  You don't want to pay gift tax or have your family pay the gift tax, trust me.  The current gift tax rate is 35%.

Now let's say your family really wants to contribute $25,000 per year to your education.  There are two ways around the gift tax.  The first is to have your parents make gifts of $12,500 each to you.  Each gift is under the $13,000 limit so no gift tax.  But the better way would be to have your parents send a check directly to your school.  Money sent directly to the school for qualified educational expenses is not eligible for the gift tax.  This is an important distinction to make.  $25,000 check to you from one person - gift tax.  $25,000 check to your school for qualified educational expenses from one person - no gift tax.  Got it?

Effect on Financial Aid
But wait, you're saying, won't the check from my parents reduce my financial aid?  Depending on the amount and the school it definitely could.  In fact, if the contribution is high enough that you're concerned about the gift tax it's very likely that the gift will reduce your financial aid.  One way of looking at this is that it's unlikely that the school will reduce your aid dollar for dollar.  Your parents may contribute $25,000, but the school may only reduce your grants by $20,000.  You still come out ahead - less debt for you by $5,000.  Schools typically have these policies to encourage students to find outside scholarships and reduce the school's financial aid burden.  Their treatment of family money may vary.  

So let's say you want to have your cake and eat it too - get money from your family AND keep your existing aid package.  Well this is a tall order.  Many schools will require you to disclose all sources of aid during your financial aid application and a big ol' check from your parents would definitely qualify in their eyes.  But some schools don't ask and some only ask above a certain threshold, like $10,000.  This is a gray area. Perhaps your school doesn't ask and you've decided it's okay and ethical not to tell.  Maybe you want to keep it on the down low anyway.  Your parents could give money directly to you or pay your rent but remember to keep the gift tax in mind.

The safest way to have your parents contribute would be have them help pay down your student loans after you graduate.  At that point you've received any aid you're going to get and you no longer have an obligation to report outside aid. You can also still deduct the interest paid on your student loans even if your parents pay for it.  The one downside here is that you're back to being concerned about the gift tax.

Conclusion
Count yourself lucky if you have family or friends who want to help with your education.  Regardless of how they contribute and how much you're still better off than you were without their help.  Watch out for the gift tax and properly report any financial help you get.  Most of all make sure to thank them!

Poets and Quants recently published an article that was near and dear to my heart called "25 B-Schools That Lead To The Most MBA Debt".  These guys got a hold of data from US News on average debt for 2010 graduates of various business schools. They spend the first half of the article talking about year over year changes, how quickly (or not) people pay it off, and how big the numbers are.  But the second half was more interesting to me.  This part focused on how much less debt Harvard and Stanford grads had than their Wharton peers.  If we look at required cost of attendance for some of the "top 5" schools and the debt figures from the article you notice something pretty interesting:





For most schools, cost and debt are heavily related.  These are the blue diamond schools on the chart: Haas, Booth, Kellogg, Tuck and Wharton.  When you slap a linear trend on there you get an r^2 of .97 which is a pretty strong indication of a correlation.  The trend says that debt is roughly equal to three times the required cost minus about $24k.  So add in living expenses, some capitalized interest, a laptop and subtract some aid.  The equation isn't particularly meaningful and the sample size is small.  But HBS and Stanford are nowhere near that line.  

The author of the article concluded that the reason that HBS and Stanford are different is that they give out way more need-based aid than their peers and that need, not merit, is their primary methodology in distributing funds.   


For the graph above the debt numbers are from the Poets and Quants article and the required expenses are from Business Week's MBA program profiles.  Sloan is not included since it appears that they didn't provide debt information to US News and thus weren't in the Poets and Quants article.


I found this pretty fascinating.  The idea that a school's aid policies and budgets can make such a huge impact on a student's debt load is impressive.  Of course I've made my decision on where to go, but if you were looking at business schools would you let this information sway where you applied or accepted?

I'd like to keep a record of how my finances change as I go through my MBA program.  I'll post now, while my savings are almost as high as they'll get, sometime this summer or early fall after I've paid my first bill and probably quarterly thereafter. Here's where I stand financially:

Account	Balance
Cash	$30,000.00
Credit	-$1,000.00
529	$8,000.00
Retirement	$70,000.00
Net	$107,000.00

Cash is my checking and savings accounts.  I'm definitely going to use some of this along with my 529 to pay my tuition bill this summer but will leave a portion for living expenses.  Credit is my current credit card balance which is paid off at the end of every month.  Retirement accounts are the bulk of my assets with about $25,000 in a Roth IRA.  I don't think I want to liquidate any of these to pay for my MBA though the Roth's contributions would be penalty free.  As you can see I may need a minor miracle to meet my goal of not resorting to student loans while also not touching my retirement accounts.

Do you track your net worth?  How often do you check?

It's tax time again and while I, like everyone else, hate paying up today I'm looking on the bright side.  I'm am currently singing the praises of my 529 account.  What's that and why are you so damn happy about it, you ask? Let me explain.

529 Accounts

A 529 account is designed to be a tax-advantaged savings plan.  These accounts are set up by states or education institutions to help families (or individuals!) save money for higher education expenses.  They're named for the IRS Code section which set them up.  Every state offers at least one 529 plan now but not all 529 plans are created equal. Like a 401k, 529 plans have limited investment choices that vary by plan.  Some state 529 plans have an array of low-cost Vanguard index funds while others have meager choices and high fees.

Tax Advantages

The big advantage of these accounts is that although your contributions are not Federal tax deductible, the growth is tax deferred and tax free if used for educational expenses.  That's a big deal if you start saving for your child's college education 18 years down the road, lots of time for growth to compound.  It's not as big of a deal if you're me and only started saving in a 529 for grad school three years ago but it is nice.

However, there is an additional perk.  Some states sweeten the deal by offering state income tax deductions or credits based on your contribution to their 529 plans.  So you'd have to be filing income taxes in that state and you'd have to contribute to that state's 529 plan.  But the payoff can be big.  Check out Pennsylvania.  In 2009 they offered a dollar for dollar income tax deduction for up to $13,000 in contributions to 529 plans per beneficiary. So if you have two kids and two parents the parents could deduct up to $52,000 on their state tax return.  That's pretty huge.  

Not all states offer tax benefits for their 529 plans.  You can find a comprehensive list and check for your state at FinAid.org. If your state doesn't have an income tax or doesn't offer tax benefits for 529 contributions you may want to compare your state's plans with other available plans to look for low fees and better investments.

So basically today I'm getting a nice chunk of change off of my state taxes while knowing that the money I've invested is growing tax free for my MBA.  It makes me pretty happy.

Do you have a 529 plan?

So what really is a top-5 business school?  I've claimed that I've been accepted to one, but by whose standards? So last night I went digging.  I pulled the most recent rankings from Bloomberg/Business Week, Financial Times, US News, and the Economist.  Now the Financial Times and Economist rankings include international schools, but I'm just looking at those in the US below.  Check it out:

School	Business Week	Financial Times	US News	Economist
Booth - UChicago	1	12	5	1
Harvard Business School	2	3	2	4
Wharton - UPenn	3	1	3	8
Kellogg - Northwestern	4	21	5	16
Stanford	5	4	1	7
Sloan - MIT	10	9	3	13
Tuck - Darthmouth	14	18	7	2
Haas - UC Berkeley	8	25	7	3

The only school that manages to make it in to the top 5 in each set of rankings is HBS.  Stanford and Wharton are always top-10, but the rest vary widely.  So how do I stack up?  Let's just say that my school is listed - I'm hoping to stay anonymous here.  But beyond that I think I've picked the business school that best suits my needs and I'm quite happy with it.  Honestly, I don't put much value in the rankings anyway - they rarely seem to reflect my values and offer an absolute answer when there really is none.

What do you think of school rankings?

Since I may have to take out student loans to pay for my MBA no matter how hard I try not to I've been starting to educate myself on what my options are.

Student loans come in two primary flavors - Federal loans and private loans.  I'm starting with Federal since there's only one source making it easier to know what's up.  Federal loans are sometimes need-based and come straight from the Department of Education.  They seem to be generally perceived as the safe bet - lower fees, interest rates and better terms.  Undergraduate students have different programs and terms and will usually have parent finances considered unless they are an independent student.

The Department of Education offers several different loan programs. You can't borrow more than your cost of attendance minus any other financial aid. So say your school says its student budget is $100,000.  That would include tuition, fees, books and estimated cost of living.  Then the school is really nice and gives you $40,000 in grants.  You can only borrow a total of $60,000 from the Feds ($100,000-$40,000).

Federal Loan Programs:

Stafford Loans

Direct Subsidized Stafford Loans
Need-based, amount determined by school
Up to $8,500 per year
Max: $65,500
Interest rate: 6.8% fixed
Fee: 1%
Do NOT accrue interest while in school more than half time, during grace periods or while deferred

Direct Unsubsidized Stafford Loans
Not need-based, amount determined by school
Up to $20,500 per year (includes subsidized up to $8,500)
Max: $138,500 (includes subsidized up to $65,500)
Interest rate: 6.8% fixed
Fee: 1%
Interest accrues starting when first paid out. You can pay the interest while you are in school and during grace periods and deferment or forbearance periods, or you can allow it to accrue and be capitalized (that is, added to the principal amount of your loan). If you choose not to pay the interest as it accrues, this will increase the total amount you have to repay because you will be charged interest on a higher principal amount.

PLUS Loans

Not need-based, amount determined by student
Max: Cost of attendance (aka the $100k from the example above) minus other aid (for an example total of $60,000 in PLUS loans)
Interest rate: 7.9% fixed
Fee: 4%

So it looks like subsidized Stafford loans are by far my best option on the Federal side.  Interest free while in school is pretty nice and the fee isn't exorbitant, but enough to ensure that the loan isn't really free money.

So I was recently accepted to a top-5 MBA program.  A business school that makes mommy and daddy proud and will be a great long-term investment for my career.  I'm going.  Sent in the deposit and applied for financial aid.  Popped some champagne and had a good celebration.  Now I'm looking at the price tag and trying to keep my jaw off the floor. 

I've never had any debt before and, although I know it's hardly realistic, I don't want to start now.  My dream goal is to graduate with zero debt.  No credit card debt, no car loans, no personal loans and no student loans.  Of course the first three are easy - it's what I've been doing for years.  It's the last one, no student loans, that's going to be a sticking point.  But I can dream, right?

Anyone out there tried to do something like this?