No Debt MBA

So I'm halfway through my first year of two for my MBA.  It's funny to realize that I'm a quarter of the way done when I feel like I've just barely gotten my legs.  The last few months have been filled with ups and downs, more ups but it's still been a stressful, all consuming time.  The first bit was overwhelming because of the new routine, people, culture and trying to figure out how everything worked on the fly then once I got settled into a routine recruiting hit.  Recruiting is stressful on its own but the evening events messed up my carefully crafted schedule a couple days each week.  I couldn't bike because of the suit and the late wrap up time.  I had to find odd pockets of time to prep for classes.  I was hardly ever home.

I'm looking forward to coming back after new years.  I feel comfortable with what's expected of me academically and in recruiting now, know where my limits are, and have a lot of the logistics figured out.  I'm hoping to be less stressed and spend more time getting to know people better.

On the money side I'm still going on cash.  This month will be the first where I'll need to transfer money out of savings to pay my credit card bill (in full, of course).  My checking account is too low to pay the bill and I want to keep a buffer in there too.  I'd just been cruising on my last two months of pay from this summer that I'd left in checking so far.  Not even two full months of work, but more than four months of living expenses. It's good.

I need to decide ASAP if I'm going to pay spring tuition and fees in this year or next. Either way the money will come out of savings too.   I think I should be good to ride out the academic year on my savings account to a hopefully lovely cushion of a paying summer internship.  Knock on wood for me. 

I'm pretty happy with where I'm at money-wise right now.  My goal of no student loans is looking more attainable every month (knock on wood again).  My spending is at a level I'm comfortable with and more importantly my standard of living is as well.  I'm feeling healthy and comfortable.  I haven't been worrying about a little money to go out and have fun or have people over for dinner.  At the same time I've been pretty good about eating our own cooking which saves money but also keeps my diet better balanced.  I've also been using my bike or feet for transportation which helps me get a little extra exercise in too.  Finally, I just haven't had time to spend money on things that aren't important to me.

I want to give myself a solid pat on the back for how I've been doing.  It hasn't been perfect but it's a huge amount better than it would be if I said the hell with it or ignored it.  Going forward I want to maintain this balance and try to squeeze a little more fun with my SO in.  How does that sound as a resolution for the new year?

I wanted to take a post to get back to the basics of my goal of graduating debt free.  I feel like the core message of financial benefit has been lost amid all of the lifestyle issues and deviation from the norm.  I figured doing a straight financial discussion of foregoing student loans to pay for my MBA would be a good follow up to the post about debt in general.  To some extent the analysis presented in that post is the analysis I went through when deciding to try to pay for my MBA in cash, on top of non financial issues.

When deciding to avoid student loans when getting my MBA I wanted to minimize the negative impact that paying for an MBA would have on my finances.  Sure there's a big potential upside to an MBA but it comes at a cost and I wanted to minimize that cost.   I had a fair amount of cash in hand earning piddly rates and after financial aid and some personal budget cuts I could project a chance at needing no debt at all.  In general, paying cash is always cheaper than paying with some sort of financing with the only caveat being interest and fee-free loans and opportunitiy cost.

Fundamentally, what I’m saying by paying cash is that the cost of debt for business school is higher than the risk-adjusted rate of return I expect on my investments/cash over the next few years.  The risk-free rate is historically low right now while student loan rates are not.  Even subsidized Stafford loans still have a 1% disbursement fee and they’re going the way of the dodo for grad students next year.  I might be able to take that money and generate around $150 at best in profits through a CD but then that return is taxed and there is a risk of a paperwork snafu or fee that would eat a lot of the return.  The gain from a CD seemed minimal enough to be foregone and potential downside from losing money in the stock market or other investments too high.

The interest rates on non-subsidized loans right now are 6.9% or 7.8% for Federal loans and the lowest I’ve seen for private loans is 6.25%.  All of these have disbursement fees, typically 1-4%. I can’t guarantee that my investments can beat that, particularly after taxes and fees for both the loans and the trades, and my personal preference is to discount returns heavily with risk so the off chance of beating the market and returning 30% on my investments isn’t appealing to me.  Therefore, the best financial decision I can make is to pay for my MBA in cash.  After I potentially run out of cash it still doesn’t make sense to take out student loans at 6%+ APR, instead I’d liquidate some of my investments in my Roth IRA since I can access without penalty and, again, can’t find a risk-adjusted rate of return that turns an after taxes and fees profit that beats the cost of the student loans.

Drawing down a traditional IRA over taking out student loans would also make sense since these funds can be used penalty-free for educational expenses.  Plus, while in school you won’t be earning a full-time income so your tax rate on the IRA funds is likely to be fairly low.  You have to pay taxes on it as some point so the question becomes if you think your tax rate will be substantially enough lower in retirement that the cost of cashing your IRA is higher than the cost of student loans.  This is highly unlikely.   The only scenario where debt would be cheaper would be in comparison to 401k money.   However, most students will leave their employers when coming to business school leaving them free to roll the balance of the 401k into a rollover IRA which then allows distributions for education expenses without penalty.  I don't anticipate needing to do this (at this point I have hope of not even touching the Roth IRA), but do know that it would be my next step if my Roth IRA is exhausted. 

Bottom line is that by using cash to pay for my MBA I’m minimizing my cost of capital and opportunity cost, making the overall cost of paying for my degree cheaper, and increasing my potential return on investment. Minimizing debt just makes good financial sense.

Right now my best estimates put me within striking distance of being able to achieve my goal over the next two years.  There are some big assumptions in there: a budget of $800/month living expenses, working full time until school starts and successfully getting paid at the same withholding rate as my last check, not owing a big tax bill, my school doesn't reduce my financial aid and that I'll get a paying internship next summer that pays about average for my school. With all of those assumptions plugged in, I'll be $100 short of meeting my goal.  That number isn't at all meaningful, of course, aside from telling me that it's possible to meet my goal but it'll be close, because there are so many assumptions playing into it at this point.

But that $100 gap assumes I use all of my liquid savings and 529 balance. In other words, my checking account would be empty, I'd have no non-retirement savings and no buffer and I'd be about $100 short just before graduation.  I'm actually really happy with that answer right now; it's way closer than I thought I would get when I originally set my goal.  However, now I'm wondering how close I can actually cut it.

I've never had a true emergency fund, per se, but I've always had enough liquid savings on hand to cover a new (to me) car, a year's worth of living expenses or more.  Now all of that has been earmarked for tuition, living expenses and so on and will very rapidly disappear.  This year I'm less concerned for;  I have enough in cash right now to pay all my living expenses plus a six-month buffer even after paying for my tuition, fees and supplies.  That buffer will, hopefully, grow through the end of this summer as I continue to work and be paid.

Next year, however, is a different story.  From my best estimates, I'll pay my business school bills and have just enough left over to cover expected living expenses and not a dime more.  No emergency fund, no slush fund of savings, nothing.  So I'm wondering how I should approach this and thought it would be better to come up with some strategies now, while I still have savings and options, rather than later when I'm already down to minimal to meet expenses.

I do have a few options, but I'm not sure which is best:

1. Wing it - It's in the future, I have family, friends and a SO who can help me out and who knows what will happen between now and then (This option terrifies me more than a little. Neurotic planner, who me?)
2. Loans - I could accept enough loans to constitute an acceptable emergency fund but not take distributions unless I'm in a real bind.  
3. Roth IRA - I have about two years worth of living expenses in a roth IRA that I'm currently planning not to touch.  I'd like to avoid dipping into them since you can't put the contributions back later.
4. Something else?  - I currently have no plans to work, I could set up a formal loan arrangement with an interest rate with my SO, or some other plan.  You guys have any ideas?

 So I'm looking for any feedback or ideas for all you smart readers and bloggers out there on how to approach this.  I'm kind of drawing blanks on how to decide.

Of course I also need to figure out what size of emergency fund is appropriate for my situation.  Here are some factors:

1. I have good health insurance
2. I'm not planning on making money while in school, though I might take a job if it was a good fit
3. I won't have dental dental insurance 
4. My SO will continue to work and has a separate and large savings slush fund, but we maintain separate finances and I would like to do this on my own.
5. Cash on hand when I apply for financial aid again this spring might ding my financial aid for next year
6. My fixed costs are very low once the business school bills are paid.  Rent is $400 plus utilities and groceries are $12.50 a week for my share and that's about it.  (Thank you mom and dad for the family cell phone plan and car insurance.)  Realistically irregular expenses and utilities will keep my minimum spending above $500 a month but I might be able to get down to $600 in a crunch situation.

 So, all my wonderful personal finance gurus and amazingly opinionated readers, tell me what I should do!

So I have some good news.  I recently received the official bill for my first semester at business school and assuming that the spring bill is the same I will be paying for the entirety of my first year bill in CASH! I sort of knew this was coming but didn't want to announce it until my aid was on my bill and credited.  Forgive me if I'm a little cautious when someone's offering me $34,500.

So the official bill came and I can just write a check for it which is pretty awesome.  Plus I'll have enough to cover living expenses for the year and, if I stick to a budget, as of my bank balances right now I'll have $6,000 left over for next year plus I won't have touched my 529 or retirement accounts.  I'm also expecting to have a few more paychecks coming in from my job before I quit to start school (don't worry my boss is in on it).

Though my ability to pay in cash wasn't decided by this, I got very lucky recently when my parents discovered that the 529 they'd started for me to pay for undergrad wasn't empty.  There was left over money in it because of the scholarships I received while in school, but for years we all thought it was on the order of a few hundred dollars.  Well I asked them to call and check the balance and billing method so I could apply what little there was to my tuition bill and my mom got a surprise.  There's actually $4,000 left in my undergrad 529.  This money will pay for a portion of my tuition this fall and will give me a boost in how much I have saved for living expenses and my second year of business school.

I am so lucky to have parents who saved for my college education and I was so fortunate to receive scholarships and work opportunities to defray the costs for them.  It's a very pleasant surprise to find these efforts are still paying dividends!  I'm also lucky to have a boss and workplace that is supportive of my plans for graduate school and have accommodated my requests for an end date close to when school starts.  This arrangement allows me great lead time to hand off all the projects I'm currently working on and allows me to put away as much cash as possible for the coming lean income period ;)

So I'm incredibly happy that in the next week or so I'll be writing the check that will put me a good chunk of the way towards meeting my goal of graduating debt free.   I was wondering if it would be fun to have a progress bar on the blog?  I like seeing them on other blogs and I could update mine by knocking off living expenses from the student budget each month and making big progress when I pay a bill from school.  However, it might be a bit deceptive since I plan to live on less than the student budget and I'm receiving a good chunk of aid. Thoughts?

Also, YAY!

Recently there have been several posts floating around praising the Obama's financial situation after the recent release of their tax returns.  Sure there may be a few quibbles about their investments being too conservative, but on the whole bloggers have been supportive and positive.  There are good reasons to do so - the Obamas have several million in assets and over a million in income.  The first family's assets are safely and patriotically invested in treasury bills and a low cost Vanguard S&P 500 index fund. 

But their finances haven't always been this cushy.  Both Obamas graduated from Harvard Law School with significant student loan debt:

“We left school with a mountain of debt,” Mr. Obama said in 2008. “Michelle I know had at least $60,000. I had at least $60,000. New York Times

Sure they've now paid it off and congrats to them for doing so, but it certainly wasn't quick or easy and I don't envy them going through the process.  Barack's student loans were not only for Harvard Law but also from his undergraduate degree from Columbia:

Mr. Obama personally took out $42,753 in loans for Harvard Law School, on top of several thousand dollars for his undergraduate education at Columbia University. New York Times

Paying off those loans sounds like a long and painful, sometimes shaky road the Obamas traveled:

“We’re making it easier to repay student loans so kids don’t graduate like Michelle and I did with massive loan payments each month,” he said. “It was more than our mortgage for 10 years."  Reuters

Obama wrote "Dreams From My Father" and "The Audacity of Hope," which secured his once precarious personal finances. Arriving for the Democratic National Convention in Los Angeles in 2000, his credit card was rejected when he tried to rent a car. Obama in December recalled a difficult period when he wasn't flush.  "We're not that far removed from struggling to pay the bills," he said. "Five, six years ago, we were still paying off student loans." LA Times (Apr. 2010)

For reference, Obama graduated from Harvard Law School in 1991.  So according to the quote above the Obamas took at least thirteen years to pay off their student loans and for at least ten years of the thirteen their payments were more than their mortgage.  It could have been even longer than that since Audacity of Hope wasn't even published until 2006.  Barack also had his credit card declined, though the article doesn't say why it implies that it was due to financial mismanagement or reaching his credit limit.  Michelle also felt that her student loans constrained her career options:

She resolved to leave the law firm and mentor young people from the neighborhood she grew up in. But she was daunted by how little money she would make, and feared she would not be able to pay back her sizable student loans. Obama convinced her that if they married and combined their incomes, they could afford a more frugal life. Newsweek

That quote makes it sound like the Obamas got married for financial reasons. The Obama's have also said that the only way they got out of debt was through the royalties from publishing best sellers:

Michelle Obama ... told women at a town hall meeting .. that when she and her husband left law school, the monthly payments on their school loan debt was more than their monthly mortgage payment, and that they only got out of that debt when Barack Obama wrote his two best selling books, "The Audacity of Hope" and "Dreams from My Father." USA Today

What are your odds of publishing a New York Times best selling book?  I'd never wager my financial security on it.

The Obamas have been highly successful.  Barack has broken down numerous barriers.  But had I been in their shoes I would have likely made very different decisions.  Both Obamas have accomplished a lot and can serve as great professional and ethical role models, but they could never be true financial role models.

Who are your financial role models?

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?

Today is a good day.  I got my financial aid package and the news is excellent.  They've approved me for some Federal loans, no surprise, and given me the maximum amount of subsidized Stafford loans - the best Federal loans to have.  But the best news is the grants.  Drum roll please......................................

So I've been wrestling with how to track my progress here and still remain anonymous.  I need to look at how much my program costs versus how much I have and track the remainder (I hope) or the resulting debt.  If I put up my school's exact student budget it will tell you which school I go to which is a little too close to home for my comfort. So I think I will take an average of the "top 5" MBA programs' costs and use that instead.  So my student budget for the blog will be:

	Top 5 Average
Tuition and Fees	$53,946
Health Insurance	$3,153
Room and Board	$21,088
Books and Supplies	$4,163
Total	$82,349

It's not precise, but it's a reasonable benchmark.  When I get my aid package I think I'll scale any grant money I get based on how the average budget compares to my actual student budget so the remainder ends up the same.  The cost after aid is what is really important here after all.  Does that sound reasonable?

I'm trying to get my MBA without incurring any debt. I got in to the program of my choice, set a goal, and have some savings.  Unfortunately there is a seemingly enormous distance between what I have saved and what this degree is going to cost.  So I have a few strategies up my sleeve to help narrow the gap.

Apply for financial aid
This one's a no-brainer.  I've applied for financial aid and am hoping for some very generous results (fingers crossed!).  I also tried to tilt the answer in my favor as much as I could.  I had the opportunity to pre-pay our rent for the next six months and did so.  This lowered the cash balances that I reported and will reduce my living expenses over the next several months.  The application asked for tax returns and mine indicated I was due for a big refund this year so I made sure to note that I'd already received it and it was included in my checking account balance.

Live on a tight budget
I've heard stories about MBA students treating their two years as an idyllic vacation time, jetting off to foreign countries for weekend trips.  Suffice to say this has not been and will not be me.  While I don't have an explicit budget (yet) I do have mental ballparks for spending categories, track every penny I spend, and am ruthless about cutting back where needed.  My school's room and board budget is about 50% more than what I currently spend.

Earn some money
I will be working through to the beginning of the MBA program if possible and plan to work as much of next summer as possible.  Travel again comes up here a lot as a worthwhile option but if my significant other can't come it isn't nearly as much fun.  So I'm working as much as possible during the summers.  I'm also getting some feelers out on maybe doing flexible part-time work during the school year.  I'm not sure yet if I'll be going forward with this though, it will depend on what opportunities are available.

Those are my three big tactics right now - earn more, spend less, and hope the school foots a good chunk of the bill.  I'll be digging into each of these more over the coming months.  We'll see if I come up with additional strategies as I go.

What would you be doing in my shoes?

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?