Now that everything is pretty much set in stone for everyone what are you doing to finance your MBA? I have $40k in my PA that I'm debating on whether to liquidate and put into my living expenses.
These are some general questions you should ask yourself before you sign on the dotted line. For those interested in banking post-MBA this should be a good start to learn your debt skills:
Federal vs. Private - Do you think you'll need the benefits of a federal / grad PLUS loan?
Fixed vs. Variable - Variable rate is currently lower than fixed but things may change. If your rate is tied to prime or LIBOR it's hard to imagine it not going up after 5 years.
Deferred vs. In-school - Are you willing to make interest payments while in school?
Other Discount - Graduation, good grades, depositing with bank, autopay
Cosigner - Usually will get additional discount
Origination Fee - PLUS has fees
Length of Repayment
Refinancing Options
I've been getting some real crappy rates. My credit is in the high 700s and getting 6% variable from Discovery with cosigner and 6.15% from CharterOne without. Ugh.
Another topic, which I didn't really want to get into but someone has asked me about, is tapping into your 401k and IRAs. Sounds pretty silly if you ask me.
If you calc out your NPV on taking money from your 401(k) or IRA I would think you're going to be way negative compared to just leaving those funds in place and taking the debt financing, especially once you factor in the appropriate fees and opportunity costs.
You should definitely max out any staffords you're offered (currently fixed at 5.41%), and I would still take grad plus over private financing, even after factoring in the origination fee (btw, regular staffords have an origination fee as well, but it's only 1% vs. 5%) due to the fixed nature and no requirement for a cosigner. I think 0.5% is a reasonable premium for a fixed loan over a variable.
Actually, your NPV will completely depend on 2 things: 1) rate you use for stock market and inflation and 2) whether or not you plan on paying back the 401k.
If you do plan on paying back the 401k, chances are your loan rates will be higher than your market return less inflation. I would bet that it actually makes sense to pay for loans with your 401k if you have the discipline to pay it back.
The loan gets paid back with after-tax dollars, right?. If you're doing banking, consulting, etc, that could mean paying $1.50 gross on the dollar.
I just finished my 1Y. My loans for this year looked like this: Loan 1 - Discover - private - 75% of COA - variable 4.25% after discounts (2% grad reward actually drops it ~3.5% effective) - no fees - full deferral - cosigner and I both 780+ FICO Loan 2 - CharterOne TruFit - private - 25% of COA - variable 3.25% after discounts - no fees - interest only payments in school - consigned as above
I split them to balance the benefit of the lower rate for interest-only with cash flow concerns. I didn't need the full COA, but decided I'd rather have a $10-15k cushion at these rates and take less money at (probably) higher rates (given new debt/equity ratio) next year.
Last note, if your state offers a tax-advantaged 529 plan, use it. I contributed excess loan money to my 529, withdrew it a week later, and saved 5% in the process.
Can any other incoming MBA students share variable rates you've been offered?
I do think 6.15% is pretty good for a fixed rate. The lowest Wells Fargo was offering for fixed was 7.5%. I think I'm going to opt for Commonbond. The fixed interest rate and the origination fee was lower than the PLUS Loan. The interest rate for a 15 year loan is 6.75% compared to the Graduate PLUS at 7.4%.
Also, one thing to note. Find out what credit agency each loan provider uses to determine interest rate. I ran a credit check my credit score ranged from low 700s to high 700s. You can just ask them what they use.
this is not an advertisement, BUT, I've talked to the guys from Commonbond, https://commonbond.co/ and they actually have a lot of information and can advise you on the hierarchy of your loans. They don't offer floaters, just fixed, but I think they do know what they are talking about. this was started by a Wharton guy who was completely flummoxed by the whole financial aid process. Sounds worth looking into
Heard good things about this company as well
you can finance an education, you cannot finance retirement. I'd stay invested.
ah I am definitely not touching my retirement account. I have a separate personal account for investing that's not retirement that's fully invested in stocks. Was wondering if I liquidate that to pay vs. loans.
retirement doesn't necessarily mean just IRA money, any money that's used for retirement. what's the personal account for? play money? play money is stupid unless you have several million and it's less than 5% of your total net worth. if it's a rainy day fund, don't touch it. if it's for the future (retirement), don't touch it. if you have a rainy day fund and this is extra money you don't care about, liquidate. I personally don't mind debt for something like education, because the interest you pay can be overcome in the market if you're savvy and patient.
hmm okay thanks! I wasnt sure but have heard that people use the interest rate as your minimum required rate of return as a gauge to see if you should take out loans or not, but I actually agree with your perspective more. I also would rather have the cash flow just in case on top of my emergency fund
I was considering dipping into the IRA but I learned that you can't continue to contribute to it if you make over $129K, which I hope to get to soon after B school.
This would be a Roth IRA only where your contribution is capped based on salary. You would still want to make the 17.5k (current) contribution cap to a normal IRA if your taxable salary was above 129k...
I had Federal PLUS loans at 6.5% all through b-school and hated it. After you graduate, if you went to a good program, there are banks that will refi all of your student loans for ~3.5%. Definitely makes it easier to get ahead on the principal. I'd recommend not touching your p.a. until second year, when you may opt to use if for travel, moving expenses, bottle service etc. Loans suck tho, no doubt.
why did you hate the grad PLUS? and yea I pretty much decided not to touch my PA at this point.
Thanks to @"Betsy Massar" I looked into CommonBond. Not sure why but was offered 6.85% fixed with deferred.
Here's a summary of all my loan apps so far for $60k. All variable except for CommonBond:
Discovery - 5.99% $25 per month in school with cosigner, 6.49% without cosigner CharterOne - 4.99% with cosigner, 6.15% without cosigner and interest payment while in school Wells Fargo - 4.99% without cosigner, cosigner waiting approval CommonBond - 6.85% fixed all deferred without cosigner Sallie Mae - In Process
Cliffnotes: Apply to a few of them since they seem to be all over the place.
From what I remember, CommonBond only offers fixed, right? was that what you meant by "not sure why"? I am curious about what you decide. I know many students who are interested in hearing about this
Nah I was confused :) I thought 6.45% was their advertised rate but turns out it was the 10 year fixed that was 6.45%; the 15 year fixed is 6.85%.
Yes I'll definitely report back. I still have to figure out if refi is possible at all these lenders before I sign on the dotted line. If I can refi to below 4% for grad+ I'll probably go with that
You may want to check out Citizen Bank. They gave me a great
Thanks KF! I actually pmed you on GC earlier this year when I was applying. Thanks for all your help over the past year :)
This is a great thread. Didn't have to take out loans for undergrad and now the whole idea is pretty daunting for MBA.
Are there any other tips or pointers out there from past or current MBA students about taking out loans? Did you actually stick to the proposed budget from the school?
I got a 3.75 through Wells Fargo after all the discounts. They initially came at me with like 5% after discounts and I told the girl on the phone that it was a ridiculous rate given their low was like 3.25% with discounts. Then she told me to hang on, put me on hold, and came back with 4.5%. I said that again I thought it was insane that they were trying to get me on that high of a rate when I have a prime lending credit score, have a mortgage with them, brokerage and checking with them, etc. She put me on hold again and came back with 4.25%. Went through the same spiel and ultimately ended up getting and accepting 3.75%.
TLDR; Negotiate with them because the initial rate they tell you isn't hard and fast. You will be leaving money on the table.
Yes! Negotiate, negotiate, negotiate! Wells Fargo offered me 4.74% variable at first. I then told them that SallieMae was offering me 4.25%. WF then lowered my interest rate to 4.24%. I applied to SoFi and received a 3.91% interest rate. I sent Wells Fargo this document, and they lowered my variable interest rate to 3.75%, which I accepted.
If your not satisfied with your rate, leverage other options and your existing relationships with the bank.
You guys have it lucky, when I did my MBA the rates were much higher (Grad PLUS was 8.5%), although programs were cheaper so it evens out some. I refinanced with Social Finance (sofi.com) and have a variable rate tied to LIBOR currently under 4%. I don't know if they just refinance or if you can actually originate though.
Wow, 6% or higher sounds very stifling.
I got a variable, with co-signers (all of our credit 810+), currently at 2% through sallie-mae, check them.
Fiscally conservative IlliniProgrammer here. From a tax perspective you should absolutely pay taxes on that money in your pre-tax 401k during the middle two semesters of your MBA. This will hopefully be your last year in the 15% federal tax bracket and you should milk that to it's full advantage. That means doing Roth conversions and recognizing gains in a year where you are in a low tax bracket.
Furthermore if you find yourself going into the same industry that you left when you started your MBA, and your MBA improves job skills, you can deduct the cost of tuition, subject to AMT. (This is assuming that you have income- EG a 401k rollover or withdrawal to deduct against)
Now, should you withdraw? Your 401k offers a lot of tax advantages, but your student debt offers a lot of disadvantages. You can't discharge it in bankruptcy. If you get a decent job, the interest probably isn't tax deductible. And if you withdraw from your Roth IRA to repay student loans later, you suffer a penalty (if you withdraw within 5 years of conversion) AND pay taxes on additional gains.
I concede people are reasonable to disagree with me, but I think withdrawing some from your 401k to pay for school- especially if you used it as a savings vehicle for school in the first place and made extra contributions with this is mind- is not a horrible idea.
If you are getting unsubsidized loans at 6.2%, if you believe that you will probably have those loans paid off before you die, and if you think the risk-free rate is less than 2.2%/year, it's hard to make a case for keeping that money in an iRA. It implies the tax benefit of your IRA gives you a 4% boost on annual returns. With LTCG + state taxes at ~20%, that means you'd have to average 20%/year on returns in your retirement portfolio to realize 4%/year in tax benefits. I just don't see that happening.
So I can make a good case for drawing down your 401k to pay student debt costing you more than 6%/year. For loans with interest rates below 3%, if you don't feel any differently with a loan or a lower IRA balance, it is harder for me to argue against keeping your 401k intact.
Either way, you need to have your mind made up by the time your spring semester tuition payment is due. Federal law requires you have to make the withdrawal within something like 30 or 60 days of the payment date, but out of conservativism, I would literally have Charles Schwab cut Princeton a check directly to prove to the IRS that I never touched the money myself.
I agree, but I can't stress enough that you need to have the discipline to make payments to your 401k about equal to what the loan payments would have been (in addition to the 10-15% you normally save during FT work); otherwise, you will end up with a significantly lower amount of money when you retire.
I love it when fiscally conservative IP chimes in on things, as I know a lot of people that feel the same way because of my Asian heritage!
I already am doing the 401k -> regular IRA -> Roth IRA conversion. just to add onto what you said, definitely use your own money if possible to pay the taxes rather than take the $ out of the IRA so you can leave it in to make more $.
as for drawing down 401k, to be technically correct it'd be drawing down from IRA right? I think it's pretty bad 99% of the time to keep your 401k instead of rolling over to vanguard's low-cost ETFs due to fees. So right now I'd pay taxes on the 401k->IRA money to convert to Roth IRA, then take out some of the Roth IRA to fund MBA. that's what you're saying right? just double checking.
This can get into some complicated tax issues. The ability to take a deduction for the cost of an MBA is not that common and can get you audited quickly. From some of the cases I have seen, the deduction is usually only upheld when the individual does not receive a promotion or new job, thus only completing the degree for their personal advancement in their current position.
http://m.us.wsj.com/articles/SB1000142405274870353510457464658296510166…
In Publication 970 the IRS lays out the requirements for deducting tuition. The IRS claims that it has to be a program of less than 12 months but that's not actually in the IRC and the Tax Court has not been enforcing that to the best of my knowledge.
I got advice from my Tax Lawyer/ CPA Dad on deducting my MFin. He has about 40 years of experience. Based on his analysis I clearly qualified for the deduction. You should definitely consult a CPA on deducting this. There are also Ebooks written by CPAs out there.
You may very well get audited for the deduction. I have not yet heard from the IRS on my 2012 return, and I managed to buy audit support from Turbo Tax for $19.99 after they called my audit risk very low (adverse selection FTW). My business deduction for tuition expense was also about the same as my 1099T.
TLDR: Read IRS Publication 970, consult 2010 Tax Court ruling on deductibility of MBA tuition.
My first year I took out $50K with Discover at 3.25% floating and funded the rest with Federal at 6.8%. Second year took out $60K from Discover at 4.25% floating (I guess I was highly leveraged so my credit took a hit) and rest with 5.41% Federal. There was few thousands in lower interest Perkins and few thousand in higher interest PLUS (which I paid off as soon as I got my signing bonus check). You'll definitely go over COL assumptions the schools put out, especially if you have a car or something that they don't account for. Didn't touch my 401K, which enjoyed a 40% run up in the two years I was in school.
Federal Stafford maxed out at 20K or something for me. If you think you'll make into consulting or banking type jobs, better off taking private floating over PLUS if you can get something under 4.0%.
That's great that everything worked out for you. However, some of us who are looking at going to business school in the next year or two are looking at the market, which is hitting new highs, and getting a bit nervous.
Hindsight is 20/20.
haha yes...I've gotten a few calls from recruiters for post-MBA positions that I actually would probably be interested in the last two months or so. The job market is ridiculous right now and making me wonder if I made the right decision :X
I actually got audited for it in 2012 filing after claiming 55K+ in tuition expenses. The rule is something like you have to go back to same job, but the degree has to help with advancement. I had a new offer letter from my former consulting firm with massive salary bump and I was still on leave of absence when I got audited, so they let me go. My leave of absence paperwork also clearly highlighted need for MBA and all that stuff. My argument was something along the line of it was necessary to gain further skill and make me a more valuable employee, as shown by the salary bump for same position within the firm.
Don't think it'll work if you switch jobs/industry. But yeah if you are going to claim it, read up and have proper documentation handy. I actually didn't know they were so strict, but lucked out with my situation.
I think calling it a pipe dream is a little extreme. At the very least the term "pipe dream" depends heavily on your situation. I deducted it on the advice of my CPA. Publication 970 specifically allows it:
http://www.irs.gov/publications/p970/ch12.html
http://poetsandquants.com/2014/01/04/is-your-mba-tax-deductible/
http://www.generationtax.com/mbataxdeduction.html
IMHO it's more likely to be a valid deduction if you made associate at your bank before leaving, and you're going back to a similar role in the same industry. If you were an IBD analyst and you get an MBA to work in business development at Pfizer, you're probably screwed on the deduction. If you worked in Equity Options Sales at Goldman Sachs, made associate or found yourself in some situation where it's more indefinite period of employment than two-years-and-out, got an MBA, and went back to a job in Equity Options Sales at JPM, you have a much stronger case.
My situation is that I worked for five years at a BB. My final job was a desk strategist in Equity Options, a job which I had held for over two years. I got an MFE. In the new group I am working for on the buyside, I'm doing similar work, we have people with just undergraduate degrees in CS and Engineering and they otherwise have similar professional backgrounds to mine.
The Education is not required by law or my employer to keep my existing job. It does maintain or improve needed skills in my existing work. It is not needed to meet the minimum requirements of my existing trade or business. It does not qualify me for a new trade or business. It is therefore qualifying work-related education. (See figure 12-1 of Pub. 970)
There is some debate over whether you can deduct if you are studying full-time for more than 1 year. My understanding is that the IRS will fight you on this, but the Tax Court does not enforce this rule.
Occasionally you may have to wind up in tax court to stop the IRS from denying your deduction, but it's a fairly straightforward process and many people successfully represent themselves pro-se with a little bit of help on the sidelines from a tax lawyer. You may also get audited, but IMHO, calling up your university to get the tuition bill and getting your former and current employer to write a letter stating that you didn't qualify for a new industry is a lot easier than rummaging around your apartment looking for 2-3 year old receipts from the Salvation Army and Nature Conservancy.
In any case, the surest way not to get the deduction is to not deduct it.
I thought all student loans had a prepayment option.
I am really not an expert on this stuff. I do know that if you are earning $1 mil/year with IBR, you don't have to pay $5 million in interest.
All the ones I've looked at did, but it's pretty tough to make a blanket statement. Private lenders can write pretty much any terms they want.
I'm not sure you can do a penalty free withdrawal of funds converted in the past five years. The point is just that even if you don't need or want to use retirement savings to pay for school, that year is still a great year to be recognizing at least some IRA related income (either a withdrawal or a conversion). FWIW once you recognize conversion or withdrawal income and take a from-AGI business deduction on about $40k of income and tuition, you're now in AMT territory. You can't get any further tax benefit from paying tuition, and further income that you recognize is taxed at 26%.
What would a recommendation be for if all MBA costs can be paid for out of personal savings? I would not mind looking at loans just so I don't zero out my entire savings but at 5-6% that does not make much sense.
If you plan on earning more than $75,000/year, that interest also isn't tax-deductible. So you'd have to earn 8-9% on taxable interest-bearing investments or 7-8% LTCG in the stock market to start thinking about justifying it.
My view is that B-school is probably going to be a little more expensive than many people think it will be. IE you're pricing in a tuition increase and one or two class trips, right? Moving or storing your furniture? And you will also want to have some emergency savings upon graduation.
I would give some thought to saving just a little bit more. A nearly guaranteed 9% pre-tax-equivalent return is hard to turn down. But yes, if I were facing this, I'd prefer to graduate with some money (EG $10-20K) in savings even if it meant paying $50 or $100/month in student loan interest for a short while.
TIP: One of my biggest regrets in grad school was paying to move and store my furniture rather than just selling it. However, it's hard to sell a sofa from an 11th Ave 5th floor walk-up in mid-town.
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