How Deep In Debt Should You Go?

College students are graduating with a lot of debt these days.  Debt has to be paid back.  It never feels good to be in debt.  I was talking to an old friend, and he mentioned a rule of thumb for calculating how much debt you should assume.

When I bought my first seat at CME, I paid $580k for it.  I put half down in cash, and half was a 5 yr loan at a point over the prime rate.  However, it was reasonable to assume that as a local, I could make a gross salary of at least the loan amount, and maybe even the cost of the seat.  Getting double is ideal.  Remember, you have to pay taxes and you have business expenses and living expenses.  For me, it was the best investment of my life.

What if we transfer that rule of thumb to other things?

For example, the cost to go to a top flight MBA school has skyrocketed.  At Chicago Booth, the all in cost is just over $100k per year.  The average salary of a graduate is right around $120K per year.  The numbers barely work out.  I went to Chicago Booth, but I did it much later in life and for many different reasons than someone who is in their 20s.

If you go to Chicago Law, the all in cost for three years will be $270k.  As a graduate, you can expect to make $127k-160k per year depending on a lot of factors. The degree barely pays for itself.

How about an undergrad degree?  If you go to a private, or a very top flight institution, the all in costs of attending are right around $60k per year or more.  Most college grads do not make $60k per year in their first job.  That makes the cost of the degree negative.  Paying off the loans will be excruciating.   Being deep in debt will limit choice, mobility and cause a lot of emotional stress you don’t need in your 20s.

Of course, these are quick internet search calculations and don’t even begin to contemplate things like scholarships, aid or anything else that might defray top line costs.

College costs are not increasing simply because of salaries, or subsidies.  Those two things are helping to increase costs.  Clearly, there is worldwide demand for US colleges that didn’t exist before which is putting upward pressure on costs.  At the same time, a slow growth economy and large population seeking work puts downward pressure on wages.

I do think it’s worth it to get an undergraduate degree.  But, make sure you study things that will give you a skill and make you employable.  Should you get a graduate degree?  It all depends.  If you absolutely want to be a lawyer, you have to go through law school.  But, if you want to be in general business, it’s not necessary to get an MBA.

Just something I have been contemplating recently that I thought I would share with you.  In law, is there that big of a difference between Iowa at $24K per year in state, and Yale at $58K?  More than double the cost but they are both top 20 law schools.  In graduate business, Indiana, UNC, and Texas look pretty good when compared to others.

 

 

 

  • Chase Smith

    Mr. Carter,

    This is a great piece and an issue that I feel pretty passionate about. I went to the Kelley School of Business, at Indiana University, and in my first job I’m making above the national average for my major (finance) and have already paid off my $35k in debt. In addition to all the other reasons you mentioned, i think another important one is that in going to a business school you’re getting 1. an education but also 2. access to alumni network. Indiana has one of the largest alumni networks in the country, highly concentrated in NY, SF, and Chicago. So, although you lose out on the “Harvard” or “Yale” pedigree, you do pick up other benefits.

    Chase Smith

    • I didn’t want to get into the point on networks because it seems so subjective. Everyone touts their network. To be honest, the best and thickest network I have seen is the Notre Dame network.

      I’d like to point out that alums from Harvard or Yale fail just as much as they do from other schools! : )

      Kelley has done a great job, and continues to do a great job. Indiana is a great school along with the rest of the Big 10. I think they are all totally underrated. The quality of their students is as good as anywhere.

      Which school has more Fortune 500 CFOs than anywhere else? Illinois.
      Which school except 1 (Harvard) has more Fortune 500 CEOs than anywhere else? Wisconsin.

      Curious, What you do personally to try and build the Indiana network? Would be great to replicate at other schools, including my other alma mater Chicago Booth.