Anybody else doing a Top-10 almost completely with debt?

Question

I'm looking at the two year budget for Kellogg, I thought it would be like $160k all in. But its $167k....and that's based on 2013-2014, so will probably be about $180k all in after you factor two tuition raises and KWEST (plus I have about $20k left from undergrad, so I should be a nice smooth $200k all-in debt).

I'm sure it'll be fine, I'm assuming I have a good chance of getting one of those $135k consulting jobs going to kellogg, and summer internship/signing bonus/etc will decrease the amount a bit, but still scary to look at! Coming from a $100k a year job though, ROI calculation won't be too pretty, but I'm sure it'll be worth it long-term.

Flyte · Answer

Yeah I hear you on this one, I have a decent bit of savings, which if I used it would maybe cover 1/4 of a year, so pretty much all debt. Those consulting jobs hopefully will come through ha ha.

mgg234 · Answer

Ya I'll have about $20k in savings, but I feel like summer trips, new clothes, kwest, etc will burn through most of that before classes start. I'm quitting June 12th, maybe i should've worked an additional month, oh well.

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mba2016er · Answer

Ok I'm glad you raised this point. i'm looking at Kellogg too and right now I'm kind of stressing over loans. I luckily didn't have any undergrad loans but this will be the first time I will be massively in debt.

Somehow I lucked out and got ~$70k scholarship from Kellogg so that definitely helps, but that's still around $120k i'll have to fund myself. The sad thing is I have a mid-$100k job and I've been working for almost 5 years and I somehow only have about $30k in liquid savings (my IRA and 401k are decently funded) to pay for this! I've been reading other threads that people somehow have 2 full years saved and i'm like... seriously have you been living at home/eating ramen/staying in on weekends for the last several years? I do live in NYC where everything is 10x more expensive...

So I'll graduate with like ~$100k in debt but I have no idea how I'm going to pay for it. The sad thing is I'm likely going to change careers and will be making less post-MBA than I am right now. Given I haven't managed to accumulate any material savings recently I struggle to think how I'm going to repay that. Realistically even if you get a consulting job you're not paying back loans all that quickly.

Maybe the trick is to not live in New York... I have no idea!

brandon432 · Answer

I'm married, so my situation is a bit different because we have some income. That said, I'm still taking on close to $150k in debt. Plenty of folks go this route; just make sure you have your numbers dialed in. Here's a quick, dirty, and conservative calculation.

-1st year comp at MBB or 2nd tier consulting firm - $135k + $25k signing + $25k year end = $185k
-This is $85k more than your (or my) pre-MBA salary. Call it a $50k net increase.
-Factor in interest, modest raises, and modest bonuses and you're looking a loan payoff of 150 / 50+ = 2-3 years and a break even (opp cost) of 350 / 50+ = 5-7. Add a year if you let your quality of life improve significantly after school.

Some other things to consider when figuring out your cash flow (disclaimer: I'm not a tax advisory. Do your own research.):
-You can take either a $2,500 deduction for tuition and fees or a $2,000 Lifetime Learning Credit (generally a better deal). This applies to 3 tax years if you're a full-timer.
-You will likely have a significant internship salary in the range of $22-29k. You will also be in a fairly low tax bracket.
-You have some flexibility on when to take your full-time signing bonus. Most people opt to take if during fall of their 2Y. During that tax year, you'll likely only have an intern salary and your FT signing bonus, which helps with taxes.
-You can deduct up to $2,500/year in student loan interest. Coupled with a lower interest rate, this may make interest-only repayment while in school an attractive option.
-Deducting tuition as a business expense. Unless you have a great tax lawyer and are sponsored, don't even try it. You will get audited and the criteria for meeting this deduction are very stringent.
-If you are in a state (like Illinois) with tax-advantage 529 plans, don't forget to contribute. I contributed $20k to mine and 3 weeks later withdrew it. Results: $20k (max allowable) tax deduction @ 5% (IL flat rate) = $1,000 net benefit. This will apply during 3 tax years.
-This one doesn't really help your cash flow, but is a great hack for long-term income. Your years in school are likely your last years of IRA eligibility. You are also in a lower tax bracket than you have been or ever will be again. If you have an IRA/401k, seriously consider a Roth conversion. I'm planning to convert $50-60k over 2 years. Basically, I'll pay the 15% income tax now and the money will grow tax free. I won't have to pay 25-33% when i withdraw it in retirement.

mgg234 · Answer

Thanks man, you're way more knowledgeable on taxes than me! For 529 plans, how do I set it up? Can I just deposit my savings into it?

Whats the advantage of moving my 401k into a Roth IRA....is it because I have a lower tax rate now than I'll have when I'm old (If so, should I do it next year when my income is lowest?).

Any resources you have to read would be great. I tried googling some of the stuff you mentioned, but there doesn't seem to be a good over-encompassing site with what I should be doing now and over the next year or two.

starryeyes85 · Answer

Thanks for the awesome advice! Would definitely love to check out some additional resources as well.

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brandon432 · Answer

I could be making all of this up. Do your own research! I used https://www.brightstartsavings.com/ for my 529 plan. Super easy to setup online. There is another provider called Bright Directions, but I think I would have had to go through a broker to establish an account with them. Yes, I put some savings and cash from other accounts in the plan for a week. I selected the Money Market investment election to ensure the value did not fluctuate. I then transferred in back to checking/savings. Note, this is an Illinois deduction only, not a federal one, so one would have to have Illinois income liability for it to have any effect. More info here: https://www.savingforcollege.com/529_pla ... plan_id=16 Regarding IRA and 401k plans: Most employer 401k plans are fairly limited in terms of the investment options they provide. Since I was no longer employed by the plan sposnor (i.e. my old company), I was able to establish a rollover IRA to provide more options and avoid non-employee account maintenance fees. It was also a good way to consolidate several 401k's that I had from multiple employers. Generally, IRA's are offered by fund companies (Vanguard, Fidelity, etc) and brokerages (Schwab, Etrade, etc). I chose Vanguard because they waive fees for account holders and I like their fund selection. More info: https://www.marketwatch.com/story/how-to ... 6212047593 Roth conversion is a separate animal from the rollover and a bit more complex. Roth IRA money is taxed prior to contribution, whereas 401k or "traditional" IRA money is taxed on withdrawal. Basically, I was in the 25% bracket before school, will be in the 15% bracket during school, and will be up at 33%+ for the rest of my life. Converting means transferring some money out of my rollover IRA to my Roth IRA and paying the (15%) income tax on it now, avoiding the income tax (33%) later. Aside from the savings due to the tax rate difference, it also offers flexibility. When I'm old I could, for instance, withdraw from my 401k up to the 18% tax bracket ceiling and then withdraw whatever else I need for the year from my now tax-free Roth account, avoiding the higher brackets altogether. Or, if a taxes go up for 5 years, I could only withdraw from Roth only, waiting until rates went down to withdraw from my taxable 401k/rollover IRA. Note that I will have to pay taxes in the years I convert, and paying those taxes from my IRA funds significantly erodes the benefit of the move. More info: https://taxes.about.com/od/retirementtax ... rsions.htm Finally, here's some info on the federal credits and tax deductions. I would guess that 90% of grad students take the LLC. https://www.irs.gov/publications/p970/

coolguy314159 · Answer

Good advice floating around here! Can someone comment on MBA loan timing (especially current students)? It may be another way to save a few bucks down the road: timing-of-mba-loans-169611.html

brandon432 · Answer

Answered in the other thread. Short answer: Timing is already optimized by the bank/school to reduce interest costs.

chromium73 · Answer

Borrowing half from the bank of my parents, hope Im still a good credit

astryker · Answer

You guys are brave!

I lucked out -- got a Park fellowship at Johnson, and my current job will pay a year's severance when I leave (about $62k) -- so I'm hoping to do it with minimal debt. Which is a BIG deal for me, since I'm married with two kids.

Honestly, there's a strong sentiment here at GMAT Club toward attending the best school you can get into, regardless of debt, but I don't think I could do it! Faced with the choice, I would take a full ride to a program ranked 11-25 over full price at a top 10.

brandon432 · Answer

It really depends what you want to do. That logic is sound for many career paths. For others, there can be a huge difference between schools (even among M7).

farful · Answer

I was thinking of taking everything out of my IRA to fund for my education.
What made you decide to keep your 50-60k IRA (turning it into a Roth IRA) vs using it to fund your MBA?

brandon432 · Answer

Didn't like the idea of robbing my future. 10% tax penalty, on top of regular income tax makes it pretty unattractive. Depending on your state, you could be liquidating at $0.50-0.60 on the dollar.

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mgg234 · Answer

I believe there's a education exception for IRA (but not 401's) in which you don't have to pay the 10% penalty.

farful · Answer

From what I've been reading, there is no 10% tax penalty (though correct me if I'm wrong), but it does get taxed as regular income tax. Given that there is no 10% tax penalty, do you have different thoughts on this? Relevant link: https://gmatclub.com/forum/straight-answ ... l#p1274042

brandon432 · Answer

Even without the 10% penalty, I'd still prefer to take out a loan at 3.5-4.5% than take money out of the market that's doing significantly better than. If my loans had come in at 8%, maybe my thinking would be different.

Beckham123 · Answer

Thanks mate! This sure helps. Although i've got to admit, the last para is another language altogether to me.

mgg234 · Answer

Just to close the loop here, I ended up doing it mostly all in debt (I had ~10k saved, and ended up getting ~$12k a year from Kellogg after I filled out the FAFSA).

Anyways, I'm super glad with the decision. I got one of the consulting internships that will potentially pay for my 2nd year of school, with a starting salary of $140k...so very happy with my decision and ROI. Don't let fear of debt prevent you from going to your dream school. (Also, business school is a ton of fun and way better than working.)

Anybody else doing a Top-10 almost completely with debt?

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