Tuesday, April 30, 2013

Holy avocado student debt

I'm writing this on a Tuesday evening, having just realised that I took my last class in my graduate program today. But now is not the time to reminisce - that's in a few weeks.

Instead, I'm going to talk about the heart attack I had earlier this week.

Since I'm close to graduation, the school sent me a reminder that I had to undergo Federal Student Loan Exit counselling. Oh, whatever, thinks I. I started doing it on Sunday.

Even though I had paid for one semester out of pocket and received two scholarships (of small amounts, but better than a kick in the rear), I'm looking at a debt burden of about $117K!

I personally hate debt. Some debt is good - mortgage debt, for example, because I get tax deductions on the interest payments. Technically student debt also gets some interest deducted, but I believe it's limited to $1500 a year. I had read a blog a while ago about a Harvard MBA who had paid off his $100K debt in 9 months - but he cashed out his savings, and didn't have anyone to rely on him. Unfortunately, when I graduate, I'm going to have to help maintain two households (my partner is enrolled at CMU also, but I'm probably going to be in California).

Immediately, I broke open a spreadsheet and started plugging in numbers about how much interest I'll end up paying in total if I just pay minimum, if I paid off early, etc. I also calculated what my monthly income would potentially be if I was on a $115K salary in California (holy 38% tax rate!) and what I could afford to dedicate to paying off loans, taking into account the ridiculous cost of living in the Bay Area.

Needless to say, it almost behooves me to draw up another blog to discuss my progress on paying that down, because it doesn't look promising.

There is a lot of chatter around in the media about the student loan bubble. Tepper increases their student fees by 3% or so each year, which is rather ridiculous. Someone told me that a lot of our fees go to pay for the PhD program, since it's one of the largest in the nation. I've already complained a lot about how I think Tepper is too expensive, so I won't jump back on that horse. Students aren't able to benefit from the record low interest rates - 6.8% flat is the government rate, and I believe 5% is the lowest private loan that anyone I've talked to has been able to get, and that was a variable rate loan pegged to the LIBOR. One of the scenarios I looked at for myself, I think was to pay back in 25 years, I ended up paying 150% of the loan in interest!

I did a calculation a while ago and came to the conclusion that the ROI timeframe for going to B-school was about 4 years. I neglected to take into account this crippling debt burden. If I was going to live in a reasonable city - let's say Pittsburgh - on that income, I would be able to pay it off rather quickly. Bay Area... not so much. But it's very difficult to find a job in the video game industry that isn't in California. The Tech Startup Boom is making things difficult for those who aren't making millions in stock options :).

The last comment that I'm going to make is going to resemble something thankful. I lived quite frugally over these last couple of years. I didn't go on any international trips, I kept my socializing and travel to a minimum, I lived in a cheaper part of town. A good number of my classmates went on every trip, went out every weekend, and engaged in other activities that would've cost a pretty penny. I can only imagine what their debt burden is. If they took out what Tepper had recommended each year, that's at least $140K. That recommendation didn't take into account all the trips and such, so there is a possibility that some students are looking at $150K or more.

Do I have regrets? A couple. But I think about it - that $3K trip to Peru for a week and a half ends up being a $7.5K trip if interest is factored in (at least). And all for what? Some memories and a couple of photos? Don't get me wrong, I'm all for travelling and experiences and such... but is it really worth having to keep paying off my student debt when I'm 53? It is too much - I'd rather do my travelling spending cash rather than credit.

Perhaps I'm just too boring, or didn't get to fully experience b-school. B-school is just 2 years of your life - that debt is going to linger for much much longer, and I'd rather not be in a situation where it could bite me in the butt.

Besides, I spent 3.5 weeks in Australia with my family and my partner and snorkelled the Great Barrier Reef. For everyone else, THAT would be the holiday of a lifetime.


3 comments:

  1. You have to be careful in choosing your debts. Make sure it's worthy, like student and home loans. But whether you are in debt or not, we must not wait till we go bankrupt before we start saving. If you want to reward yourself by traveling or shopping, better do it by cash and not jeopardize your credit.
    [Allan Morais @PaddonYorke.com ]

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  2. I went through a similar mind set a week before I graduated with my masters. I spent hours in front of calculations and thought of different possibilities. I have trouble dealing with the burden and stress that the debt brings a long so I ended up setting up a small payment plan. I would pay monthly toward my debts and anytime I got a large sum of money I would put it down on the principle. For instance, I realized that you could sell your structured settlement so I out that money right down on my debt. It takes a lot f planning and obedience but eventually it begins to become more realistic. Good luck to you in the future!

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  3. I guess, Allan's right. Before you jump to making debt, ask yourself first if there is a need for it. Sometimes, we are often lured by the leisure that we could get over something, like traveling. As much as possible, try to avoid it. Learn how to put your priorities into places so that you won't get lost. You must also learn how to save up some money so that you could have some in the times that you'd need it.

    #Jaden@TorontoBankruptcyAdvice.com

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