Grad School - How did you pay for it?
If you guys went to an elite grad school, how did you pay for it? Obviously IB pays well, but after NYC rent and taxes, one isn't left with THAT much money, especially not enough money to pay tuition for a top business school.
If you went, was it worth it as well?
Post-9/11 GI Bill covered the whole ride.
However, whether you go into IB or not an MBA from an elite school opens doors for you that make the initial investment seem minor.
I recommend saving for grad school in your 401k.
If you are in the 28% tax bracket, tacking on NYC taxes makes for a 40% marginal tax rate. 33% makes it 45%.
One way of paying for an MBA is to save up $160K after tax, requiring you to save about $270K of your pre-tax income.
Another way of paying for an MBA is to save up about $160K pre-tax- or some portion of that- and withdraw it to pay for school. You can pull money out to pay for tuition and estimated expenses penalty-free in your low-tax years, and you may even qualify for a business expense deduction, allowing you to deduct the full cost of grad school. Otherwise, you get a $2000 tax credit via the lifetime learning credit. But you enjoy neither of these benefits if you don't have income in the year you receive them.
The most cost-effective way to pay for an MBA is via a 401k, IMHO. If you plan to go back to grad school, you should be maxing out your 401k and pre-tax savings.
Can you really pay for Bschool with Pre tax 401k dollars? I'm about to start contributing 50% of my paycheck to my 401k in that case.
You can pull money out of a 401k penalty-free to pay for a 401k. But that money is taxed in the year it is withdrawn unless you qualify for a business expense deduction. The business tax deduction gets tricky:
-The MBA needs to enhance existing job skills. -The MBA can't qualify you for a new job. -The IRS will fight you in tax court if you take anything more than a 1 year "temporary absence" from industry to pursue an MBA full-time.
BUT, you do get to pull your money out in a year where you get very little income.
EXAMPLE:
After working three years in finance in NYC, you save $51K of your own money in a 401k, in addition to employer matches.
Federal tax avoided: 28% on $51k=$14,300 State tax avoided: 7% on $51K= $3,500 City tax avoided: 4% on $51K= $2000. Total tax avoided for three years= $19,800
You decide to pursue an MBA at Chicago Booth, which will take you two years. In January, to pay for your second semester, you convert your 401k to a pre-tax IRA and withdraw $51,000 to pay for school.
At year end, you have an additional $9,000 from summer income, for a total of $60K in income.
Federal income tax, treating summer income as earned first: $8800 State of Illinois income tax (retirement income, including all IRA withdrawals is exempt): $0
Tax on $51K earned while an analyst but taxed while a student: $8800 Less $2000 Lifetime Learning Credit: -$2000 Net tax on $51K withdrawal for tuition payment: $6800
Tax avoided: $13,000.
Net discount courtesy of Uncle Sam from 401k savings: 26%.
For a part-time MBA, the rules get even better. If you study while you work, it's fully deductable after a 2% AGI floor.
Yes it's worth it from that perspective.
Higher cash flows post-MBA will give you a positive NPV after just a few years compared to your pre-MBA salary (assuming you don't already make 6 figures). Most people are able to pay down their debt in less than five years. If you plan on getting an MBA at some point, it's probably cheaper to do it now given the jump in salary.
Alright thanks guys. I know that most people go into IB for two years and then consider grad school, but at that time with only two years of salary, I'm guessing I'd have to take a pretty big loan right? Also, when most bankers go to grad school they don't work at the same time, right, they go to school full time?
Thanks for the clarification
parents brah
Both my wife and I have advanced degree (MBA, Doctorate). We both have loans -- significant loans. Luckily, my wife didn't get a doctorate in something silly and will actually make good money. Anyway, with reasonable effort (not living in a box and not living like kings), we will have the loans paid off in 5-8 years. No brainer in my opinion.
In practice, I may choose to invest my money as opposed to pay off the loans if I can get interest/tax advantages that shift the scales.
Interesting, thanks a lot Illini. I'm kicking myself for putting more money into a Roth IRA than my 401k now.
I took a loan.
Very few people go 2 Years Banking -> BSchool. If they go the direct route from banking to bschool, they'll usually do 3 years as an analyst.
Otherwise, the more "traditional" route is 2 Years Banking -> 2 Years PE -> BSchool. Factoring that in, those 4 years sufficiently yield the $200k after-tax required. Only problem is the all-in cost of BSchool ends up being near $1mm (including opp cost). The post MBA job needs to justify that cost (break into banking, income is a multiple of pre-MBA, etc.) or you need to be on a career path where a MBA is required (i.e., PE)
Foregone income: $200K/year x 2: $400K Less federal taxes on that income: -$100K Less NYC state and local taxes -$40K Hyde Park (Booth) rent discount over NYC: -$25K
Hyde Park cost of living discount: -$10k
IlliniProgrammer's opportunity cost: $225K
Add tuition, but not cost of living (already factored in from lost income above): $100K.
Total cost: ~ $325K after-tax. (appx. $475K pre-tax on an average rate basis; $550K on a marginal rate basis)
This is making the generous assumption that you have a $200K/year job. Most MBA students come in with less income, significantly reducing the opportunity cost.
Cost will be slightly higher for higher-COL MBA programs; slightly lower for Evanston (Northwestern), Hanover NH (Dartmouth), and Ithaca (Cornell).
I do not recommend going into much debt for an MBA program. HBS may beat NYU, but it's better to go to NYU for free than graduate HBS $100K in debt in a tough job market IMHO. And if you want to do an MBA, you need to carve out every penny you can while working prior to school.
As someone going through the budgeting process now, I agree with IP - not sure how you figure $1mm all in. You can check the average entering salary at the M-7, it typically ranges from $65 - $100k. Unless you're truly an outlier in terms of pre-mba comp, $1mm is extremely high
Let me revise my original statement then. I definitely agree those are not AVERAGE numbers. But given the demographic of individuals (Banking -> PE -> Bschool), $1mm is not "extremely high." My perspective is based on individuals that are going from BB's to megafunds & some elite MMs shops. This is not even factoring friends who are going to HFs because they have no interest in bschool!
At the end of the day, we can argue about whether it's $500k or $1mm, but the point of my post was merely to bring up the alternatives to bschool and the point that it can end up being even more expensive than the sticker tuition/living cost. (Let me be very clear: completely agree that the average is nowhere near $1mm)
But if you must ask, my loosely thrown around "being near $1mm" was based on a back of the envelope calc (granted it's pre vs. post tax dollars): School = $90-100k/year ($180-$200) Foregone Income = $350k/year ($700)
Actual Opp Cost Per Year : Pre-Tax Income: $350k - Taxes @ 40%: ($140k) - Cost of Living: ($60k) = Earnings to Savings: $150k
Would Have Saved: $150k Savings Used (B-School Tuition + Living): $100k Annual Savings Lost: $250k
Total Cost: ~$500k After-Tax (~$800k Pre-Tax)
I took out loans but even fully levered it still makes sense to do a top tier program. I asked myself this simple question is:
Marginal Increase in Earning power + Knowledge + Friendships + Life Experiences for the rest of my life >>> Yearly loan payments of 15.6k (max out at 150k loan balance = 1,300k a month * 12 months * 20 years)
In my opinion, yes, I'm 100% sure its worth it since I'm planning on making some serious money. Otherwise- going into debt at MBA to run a non-profit makes no sense to me.
Alright thanks guys! So I guess the typical career path is 2 years IB, 2 years PE, then grad school (provided that one is pretty good)?
No. The typical career path is what makes you happy and what "fulfills your duty as a human being."
There are a lot of hedge fund owners and successful folks who never went to b-school.
B-school is one option among many. It isn't even the only grad school option.
Alright thanks I guess thats pretty true
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