I was very eager to attend graduate school right after undergrad. I thought it was the only way to get to D.C. and/or being taken seriously. I highly recommend listening to the several graduate school podcasts I’ve recorded to get a better insight into graduate school and how to use it. When deciding on whether to attend graduate school and which to attend there was one thing I never really thought much about.
If I had a time machine I would go back and let 30 year old me slap 22 year old me across the face, literally! 22 year old me never thought twice about the financial consequences of taking out student loans.
A few weeks ago a member of D.C. Hopefuls Fellowship reached out to me with exciting news. He had been accepted to his second graduate school program and offered a full scholarship! He is now faced with a difficult choice. Attend school A, which has the great reputation, is located in D.C., and offered him $20,000 off tuition, which means it will cost him about $40,000 to attend or chose school B, which is not as well known (still a great school), the program is a different style, it is not located in D.C., and the cost would be $0 thanks to the full scholarship. We spoke for a long time about the pros and cons of both schools. Each as very different things to offer and I know he will have a successful career regardless of what he picks. Eventually the conversation turned to money. After talking about it for a while I sent him the email below.
“I can’t stop thinking about this an
d here is one way to look at the true cost of grad school. If you go $40,000 into debt it will take you 26.5 years to pay it back paying at $215 a month. Over that time you would pay $28,000 in interest I gave you a 4.5% rate, which is strong, my wife and I both started at 6.8%. So that degree ends up costing $68,000. So the true cost if you choose to pay it off long term is $68,000 not $40,000.
If you want to get aggressive and do $285 extra, totaling $500 a month you would be debt free in 8 years. You would spend $7,600 in interest at that low rate of 4.5% which makes the degree cost $47,600.
BUT if you attend school B you would be debt free after you graduate in two years. Over those same 26.5 years you could take that $215 a month and put it into a 401k or any mutual fund. At the end of those 26 years you would have $144,000 in the account. This is assuming the market grows at 6-8% while historically it grows around 12% over long periods of time. If you did the $500 for 8 years you would have over $60,000 in that account.
In 10 years you will be 32 years old. You could be 8 years out of graduate school and have $60,000 (possibly as much as $80,000) sitting in an account. Or you could be 32 years old and just paid off your debt and be at $0 because most of your expendable income was used to pay off debt.
Debt is a dangerous thing and I don’t want you to fall victim to the ‘oh well school debt is good debt.’ I borrowed $65,000 to go to graduate school and I seriously regret it. I do not regret attending graduate school but I regret putting myself in such a financial bind. I could have slowed down and gone to graduate school over 3-4 years trying to pay as I went or attended the school that was half the price.
Here is something pretty depressing. I graduated in August 2011 and decided to not start making payments until January 2012. This was allowed and because I had no understanding of interest I thought ‘hey why rush to pay these back.’ So my actual $58,000 degree ended up being $65,000 as some interest accrued while I attended school for two years and the rest accrued while I waited to pay them back. My wife had taken on more debt than me and I am proud to say as of Christmas 2017 we have paid off over $250,000 in debt. On one hand it is an amazing accomplishment but it is also sickening to think about where we might be had we done it differently. My wife could not be a nurse anesthetist had she not gone to graduate school and my degree has paid serious dividends in my career but we could have been smarter. Had I simply attended a lesser known school for $20,000 instead of $65,000 we could have an extra $45,000 sitting in our account right now. That is the difference in a down payment or renting another year.
Beyond simple finances I am a living example of debt hurting your career. I have sat at a job I truly HATED because I couldn’t afford to take a pay cut or miss a single paycheck thanks to debt. When you are young you need to be flexible and agile while debt makes you slow, complacent, and STUCK. Bad financial decisions at 22 can slow your career so be wise and cautious as you make any financial decisions.
I’m not in the financial advice business but your professional career is not a vacuum. The steadfast spirit applies to all aspects of your life. Making bad financial decisions can stall and/or disrupt your professional flexibility.
Stay Steadfast,
Tommy Pevehouse
*Here are the links I used
http://www.free-online-calculator-use.com/early-loan-payoff-calculator.html
https://www.investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator