Case Study: 21 yo F with eternal student loans

[wmd8t]

[Edit]

Thank you guys so much for your input and advice! :) I appreciate it

Hi all!

Life Situation: I'm a recent grad and have began working in a major city in MA. I have about 70K of student debt, and am looking for financial advice. The catch: I have gained admissions to a(n expensive) graduate program that I am incredibly passionate about (can defer admissions up to 5 years from now). While I know higher education isn't always necessary, this is something that I'd like to prioritize in my life. As such, I'm wondering if I should completely pay off my undergrad loans prior to enrolling and potentially taking on additional loans (or potentially winning scholarships).

Any advice or insights in general on my spending are also welcome :)

Salary: I make $80,000 annually, which after MA taxes and a 3% 401k contribution comes out to $4,800 per month. I remained on my parents health insurance for now to save money.

Current Monthly Expenses
Rent: $1100 (Live with a roommate slightly outside of a very expensive city. Planning to move out at the end of the year to find a place with more roommates and spend around $900 per month)
WiFi and Electricity: $30
Groceries: $50 (Save money by switching to primarily vegetarian diet and using an incredibly cheap farmers market)
Dining out/Drinks: $60 (I succumb to social pressures and feel like I can't say no without coming across cheap)
Personal Care: $60 (Shampoo, haircuts, occasional makeup/hair products)
Clothes: $50 (Still building out a professional wardrobe because I just started work)
Transportation: $30 I currently bike everywhere, but anticipate the need for a commuter pass during the snow-filled winter months ($100 pass x 4 months per year /12 months total)
Misc: $100 (Flights home, Ubers)

Loan Payments and Savings
Base Student Loan Payments: $800
Roth IRA Contributions (Betterment): $500
Investing (Betterment General Portfolio): $500
Savings (Betterment High Yield Savings): $500

Undergraduate Student Loans
$71,000 at an average of 4.35% interest. Refinanced once. At this rate I'm positioned to pay my loans off in 5-7 years

This still leaves me with a net income of about $1000 per month. I've needed this over the last few months for things like move-in, furnishing new apartment, buying a bike, security deposit, but I expect that to even out beginning next month. '

I know that I am fairly good at frugal spending and as such have a lot of money to put towards saving, investing, or loans. I'm lucky to have discovered FI at a younger age and would still like to achieve FI even if I do choose to go to grad school (Potentially 100K more in loans). I was hoping for advice on a strategy for loans/savings/investments.

Additionally I saw that First Republic Bank has very low student loan interest rates (2.2%) if you open a checking account and maintain a balance of 10% of your loan for 5 years. I'm currently considering shifting investing and Roth IRA money into my savings for a few months so that I can save $7,000 and refinance to that. Thoughts on this?

[marty998]

You haven't mentioned what field you are in but I would advise to opt against the graduate program at your age, unless you're in medicine / health or science. These early years in your career are so important to gaining experience and building networks. You simply can't get that in an ivory tower.

Down the track you may be able to convince an employer to part subsidise the cost of your graduate program. Thats quite common here in Aus but maybe not in the US?

[ysette9]

I agree that you should look into having the employer pay for your grad school. Plenty of big employers will pay for or assist grad studies if they are adjacent to your current position. I presume that what you want to study will help your career prospects? Otherwise it would be financial suicide, or closer to an expensive hobby than an investment in your future.

I’m in favor of you putting as much as you can towards the loans, especially if you think you may be taking in more in the future.

Otherwise you are doing well on being frugal. I’d move away from betterment to save on the fees, but that is an optimisation you can do later if you prefer. Saving/investing is a hood habit and you are developing that muscle.

[Steeze]

Congrats on the job/salary & finding the FI community.

My 2 cents - I paid my 100k SL off in 3 years after getting my first professional job. I lump sum paid off individual loans (had about a dozen) as soon as I had the cash piled up. Bonus, tax returns, and savings went to the loans. Only investing I did was 401k match.

Looking back I would have came out ahead of I invested that money instead, but I don’t regret paying them off early. Being that far in debt made me feel trapped. Being debt free is an amazing feeling and makes life a lot easier. I would be wealthier if I maxed out my 401k that whole time instead though.

I would also caution against graduate school unless you are either out of debt, your employer is paying for you to go, or you are going to be a surgeon. No one needs to be 170k In debt for school, that is modern slavery. I’ve seen it ruin people.

Crush it at work, get promoted, get that 100k+ salary rolling in and pay those loans off when you have the cash to lump sum pay the whole thing (or don’t). If you still are considering grad school at that point I would say go for it.

Your investment and savings seem on point. Throw that extra $1000 into the high yeild savings if you want to pay your loans early. If the debt doesn’t bother you, consider skipping the taxable investments altogether and maxing out your 401k instead. The sooner you get used to maxing the 401k and IRA every year the better.

[lutorm]

I agree with previous comments -- you didn't specify whether your graduate degree would be financially advantageous. I think that makes all the difference. I guess that since you mentioned you're passionate about it but not anything about career prospects, it's not?

I have a PhD in astrophysics and financed it with TA-ships and graduate research assistant positions. A degree is physics/astronomy is decent, income-potential wise, but if I had had to take out $100k+ in loans to do it, it wouldn't be worth it. You already get behind on lifetime income just from not having a real job while you do your PhD, and then salaries in academia are a fraction of what you get outside of it.

Taking out loans for expensive graduate degrees in humanities or arts that are virtually flushing money down the drain is insane. Don't fall for the "you have to be passionate about it" angle, this is what people tell you to convince you to make a decision counter to your self-interest. Once you realize that your career prospects are an adjunct faculty position without benefits, the passion will quickly wear off.

[marty998]

Don't fall for the "you have to be passionate about it" angle, this is what people tell you to convince you to make a decision counter to your self-interest.

I was too polite to say this. Didn't want to ruin the hopes and dreams of a bright eyed youngster who feels the world is at their feet :)

[brunetteUK]

Hi @wmd8t !

You are doing amazing on your income and expenses, well done!
You seem to be naturally inclined to be responsible with money so I will tell you something I want you to hear and accept:
"You are good with money and you always will be, do not make being good with money be a top priority or a measure of your success, you already got that skill, just keep doing it" What I'm trying to say is: don't over focus on something you are already good at, enjoooooooy the peace of mind of knowing you are good with money, rest assured that it is in your nature and go eat cookies instead of checking your transactions daily (I speak from experience)

I agree with @Steeze , you might want to do less investing so you can pay off the debt quicker. Even if it's more in your head than the pure math of what's best financially.
One thing I tell everyone when they start investing is that you probably don't know how you will react when the market goes down. I think it's very much worth investing $100 a month so when you check your account and the value just went down 20% you will know how that feels. And when you check a month later, it is still down, further down. And you are thinking: "but, but, that's myyyyy money, I worked for it, and now is melting in the sun!!" Learn that when you have $1k invested so you will know your attitude to risk when you have $100k.

Graduate Program! It is either option 1 or 2:
1) an investment that has a clear return on investment. I did my CPA (accountancy qualification) over 3 years, spend X amount of money. My net increase in income was realised in the first year/18 months of finishing it. I can quit my job right not and that investment has already paid off. My university degree, on the other hand, was typical of spending three years in uni so I could postpone feeling lost for another three years, zero financial benefit.

2) a hobby. You do it because you like it and it is not a requirement for it to be a financial success. Then it's a matter of being responsible regarding your expenses. My brother earns $80k, his hobby is mountain biking so if he spend $5k a year on it, it is still reasonable. I'll assume you don't have family money pouring down, so consider whether this program  is a responsible expense. Also, you got a few more years to think about it, research it, talk to other people who have completed it. (Hot tip, if most people who have completed it used to take taxis to the school, then it's not for the average people).

Now, I'll give you some unsolicited advice since you are 21 and seems lovely :)
You will sort out the mechanicals, the details of your life. You seem engaged and resposible so even if you life choices go this way or that way, you will use your resources and you will have a job, have a house, have skills and so on.
Spend some time today thinking more broadly about who you are, what kind of person you want to be beyond your work and career. Think of your spirituality, your emotions, your mental health, your relationship with your parents, how comfortable you are with yourself. I'm not going to be a hypocrite, I have been enjoying the service of top grade mental health professionals for 5 years because I've worked for successful companies that provided me with very good health insurance.

I quite like what Penelope Trunk writes in her blog (no need to take everything at face value). I also recommend thinking and writing your missing statement, you can read chapter 2 of the book 7 Habits of Highly Effective People.

[marble_faun]

About grad school: PLEASE avoid taking out so much in loans, unless there is an overwhelming amount of evidence that this degree will catapult you to a much higher income level.  (I have a sibling whose financial life was destroyed by $100K in loans, for a masters degree that seemed "practical" on the surface but ended up being so not worth it. Don't be my sibling!!)

There are ways to get your masters paid for.  You could work for a university and do a free degree part-time. You have to hunt for them, but programs in various fields offer fellowships, assistantships, and tuition waivers.

A lot of people fall for shiny notions of prestige, or the nostalgic desire to return to an academic environment after the shock of leaving college, and they will pay anything.  Avoid this trap!  Save yourself!

I would echo others in suggesting that you work for a few more years before going back to school.  Try to see how far you can rise without the degree.  Also, you will probably get more out of the additional education if you have professional experience behind it. And you'll have more credibility with employers afterward, which will differentiate you from the other fresh-faced grads.

[mistymoney]

what do you anticipate the total cost of the program to be? Do you have to quit your day job? Is there a part time option/flexibility with work?

Or will you be moving to this school?

How realistic is scholarship money? Could you get tuition waiver via TA or RA work? Nail down all these possibilities, get a sense of what costs you will incur.

What salary would you expect after graduating this program? what balance of total student loans would you walk into?

Are any of your current student loans subsidized? You may have lost that in the refinance - but subsidized loans will stop accruing interest when you are back in school.

[Much Fishing to Do]

What a great salary and low expenses (for a big MA city) for a 21 yo! 

Being in such a great financial/professional position wrt your age, I wouldn't mess with it while still in so much debt, but you could obviously knock all that debt out in just a couple/few years (not that you have to pay off that loan if you can get the interest rate way down, but be in a position where you could pay off that loan).  I.E.  I'd ASAP get my NW back to zero, in those couple/few years you'll likely learn if that grad degree is really necessary/worth it/worth more than the experience you're getting/is still something you are passionate about. 

I guess I say this mainly bc I can't see how there is anything lost by this route, I got a graduate degree and when I got out my peers that already had a couple years real professional experience under their belts  (even when only tangentially related) seemed to get the first/best jobs upon graduation by far.

[MoneyizHere]

I'd say you're in a good starting position.  Oh if I only knew back then what I knew now...

1.  I would look to refinance your existing loans with a family member if possible first - otherwise the Republic bank deal seems awesome - and definitely something you should look to do.  2.2% is pretty good rate and you could cast that out as long as you can - while still meeting your goals of increasing your own wealth through.  I always like financing with a family member since they may have cash just lying around in a yuck savings account for themselves- but could earn some additional interest if you took a note with them.  A bit more complex - but I find that to be within my own family values/upbringing. 
2.  Being single and making $80k - you're paying alot in Federal taxes/MA taxes - so I'd personally up my 401k contribution to reduce that burden and not bother with the Betterment after-tax investing.  *and since you're so financially aware - you'll have years of early retirement ahead to decide your own tax bracket in ROTH conversions.  So I'd focus on traditional instead of ROTH for now.  Doing all investing in 401k and t-ira is the way to go for those who are frugal minded and expect to FIRE prior to working 30+ years.  15 -20 years working is realistic at your income level. 
3.   Definitely pay off your current student loans prior to taking on another loan with graduate school (since you could defer the 5 years).  Because by then - after possible two promotions - you'll weigh the cost of - is this extra expense of graduate school really going to increase your net worth position?  And is the learning/training really going to fulfill your goals?  At that point - you could decide if you should continue in graduate school.  I had similar situation - thought I needed to go to graduate school - well after a few years- I realised that it was not really worth it.

great start OP...really good start.  Keep your expenses to the current level and in 15-20 years - enjoy the ER and the retirement strategies available in LIFE501 graduate level course. 

[wmd8t]

I agree with previous comments -- you didn't specify whether your graduate degree would be financially advantageous. I think that makes all the difference. I guess that since you mentioned you're passionate about it but not anything about career prospects, it's not?

I have a PhD in astrophysics and financed it with TA-ships and graduate research assistant positions. A degree is physics/astronomy is decent, income-potential wise, but if I had had to take out $100k+ in loans to do it, it wouldn't be worth it. You already get behind on lifetime income just from not having a real job while you do your PhD, and then salaries in academia are a fraction of what you get outside of it.

Taking out loans for expensive graduate degrees in humanities or arts that are virtually flushing money down the drain is insane. Don't fall for the "you have to be passionate about it" angle, this is what people tell you to convince you to make a decision counter to your self-interest. Once you realize that your career prospects are an adjunct faculty position without benefits, the passion will quickly wear off.

The degree is an MBA from a reputable school! People tend to greatly increase their salary after completing this degree and pay their loans off with ease. In my case, I'd potentially be using it to transition into (a specific niche of) the social impact field so might not necessarily have the same financials as most. I expect to have some fellowships and will take on a TA position to cover as much as I can 

[Steeze]

For MBA, I would suggest 3-5 years of professional experience with min. 2 years of supervisory/management role. The degree should be a requirement for you to advance in your career.

[mistymoney]

I agree with previous comments -- you didn't specify whether your graduate degree would be financially advantageous. I think that makes all the difference. I guess that since you mentioned you're passionate about it but not anything about career prospects, it's not?

I have a PhD in astrophysics and financed it with TA-ships and graduate research assistant positions. A degree is physics/astronomy is decent, income-potential wise, but if I had had to take out $100k+ in loans to do it, it wouldn't be worth it. You already get behind on lifetime income just from not having a real job while you do your PhD, and then salaries in academia are a fraction of what you get outside of it.

Taking out loans for expensive graduate degrees in humanities or arts that are virtually flushing money down the drain is insane. Don't fall for the "you have to be passionate about it" angle, this is what people tell you to convince you to make a decision counter to your self-interest. Once you realize that your career prospects are an adjunct faculty position without benefits, the passion will quickly wear off.

The degree is an MBA from a reputable school! People tend to greatly increase their salary after completing this degree and pay their loans off with ease. In my case, I'd potentially be using it to transition into (a specific niche of) the social impact field so might not necessarily have the same financials as most. I expect to have some fellowships and will take on a TA position to cover as much as I can

I would do a little research, maybe contact school or professors, and see if as other suggest, a few years of employment tends to greatly enrich the education - and see if they can pinpoint a sweet spot for you (2, 3, 5) but within your acceptance window. I'm not in business but I did find that my experience did enhance grad school quite a bit.

If working a little more would have that effect, then it seems easy to put together a plan to pay off the undergrad loans before matriculating. Try to also max/as much as you can to retirement accounts, then at least you'd have a start there and it would grow while you are in school, even if you can't contribute during those years.

If you got good feedback that going sooner is better overall career-wise, your math and planing computations are more complex.

[marty998]

I'm a little bit surprised. Most MBA programs have 5+ years of management experience as a pre-requisite before entering them.

I reckon the the college is a little too happy/eager to take your money without questioning whether it is suitable for you at this stage of your career.

[PacificaFog]

Agree with the advice above, especially if considering an MBA degree.  I had a family member who went straight from college into a very well respected MBA program who had an extremely difficult time finding work when he graduated.  He was too educated for entry level roles and didn’t have enough work experience for management roles.  This is a real risk.

[ATR]

PLEASE beware of the fallacy that "people tend to greatly increase their salary after completing this degree." Nothing will advance your career (both in $$$ and in position) more than experience. I have MANY friends who made this same mistake and went for MBAs straight from undergrad. The resulting increases in their starting salaries - exactly zero. As someone else mentioned - you will be over-educated, under-qualified, and likely in more debt.

[thesis]

I have a friend who was going into a grad/phd program and estimated it would cost her $200k. "But it's ok, I'm frugal and I'll have that paid off in no time." It took me 3 years on a software developer's salary and favorable living circumstances and $0 debt to save $100k, so I'm highly skeptical.

You're looking at half that amount, but even that can still be a lead weight. If you worked hard and invested that money instead, you could just sit on it and watch it grow over the next decade and not pay any attention and you'd probably more than double it.

[mistymoney]

PLEASE beware of the fallacy that "people tend to greatly increase their salary after completing this degree." Nothing will advance your career (both in $$$ and in position) more than experience. I have MANY friends who made this same mistake and went for MBAs straight from undergrad. The resulting increases in their starting salaries - exactly zero. As someone else mentioned - you will be over-educated, under-qualified, and likely in more debt.

That is not universally true. I work in an industry where master's degrees are commonly preferred or required and the starting salaries for similar jobs favor master's - with quicker promotions.

So for a recent hiring - bachelor's required, master's preferred position - someone with a highly applicable master's would have a leg up over someone without. They would also be more likely to get a promotion and be promoted sooner if a suitable position opened up. Starting salary would typically be about 5-8k more than someone with a bachelor's degree - because they would bring more value into the position.

Again - highly applicable master's, not just any. And - what school it came from are relatively important in these consideration. Generally any school ranked in the top 200 of the US news and world report is good. I have worked with a couple of people over 2 institutions with degrees from the top 10 ranked schools, and I didn't see any difference in performance over those who went to top 200.

Performance of those from outside the top 200 has been pretty variable, so I do research lesser-well-known schools to make sure that that are rigorous enough. UofP graduates for example don't even get interviews. Their degrees are worthless and their judgement is questionable.

[mistymoney]

I have a friend who was going into a grad/phd program and estimated it would cost her $200k. "But it's ok, I'm frugal and I'll have that paid off in no time." It took me 3 years on a software developer's salary and favorable living circumstances and $0 debt to save $100k, so I'm highly skeptical.

You're looking at half that amount, but even that can still be a lead weight. If you worked hard and invested that money instead, you could just sit on it and watch it grow over the next decade and not pay any attention and you'd probably more than double it.

When did that happen? Any updates?? Did she go, has she graduated, what kind of job?