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Student Loans

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MBAOh man, I was almost giddy when I read this this afternoon.

I’ve been saying this exact same thing about MBAs and folks considering going to “business school” or even “back to school” for nearly a decade.

The truth is that the relevance of the technical training allegedly offered by the MBA was always overblown.

The empirical evidence on the contribution of the MBA to individual career performance … doesn’t exist. In fact, if the relevance of an M.D. to the performance of doctors were even half as unsubstantiated, we’d probably be fantasizing about tossing a few physicians in jail, too.

They don’t even mention what a rip-off it is too…

My most recent “rant” along these lines was in a comment on Trevor’s Financial Nut blog from a few months ago where I laid it out pretty bluntly:

This is a touchy subject for a lot of folks…

For me, I am *so* thankful that I never had to resort to student loans… I certainly wouldn’t find myself in the same situation that I am now — and it’s been over 10 years since I’ve been out of school. Student loans would have crippled me financially.

That said, going into debt for a degree isn’t a bad idea but it’s not a great idea either.

Going into debt for grad school or an MBA, on the other hand, is stupid. VERY stupid.

Here’s why — there is NO guaranteed return on that investment. None.

Anyone bantering around the idea of “going back to school” years after they’ve already graduated is kidding themselves, really, let’s be honest.

They’re not going to be handed a better job or a higher paying job just because they have another degree. It doesn’t work like that…

It’s almost as if people in their 20’s are under the impression that an MBA is like a ticket to a six figure salary and a signing bonus… Sure, it may work for some, but most of them will find themselves working alongside schleps with BA’s in Art History — except they’ll also have a 6-figure student loan balance that they’ll spend the rest of their lives paying down…

Worth it?

Not to me.

Anyway, not that stuff on CNBC or Slate.com are worth paper they’re not even printed on anymore, it was refreshing to finally see something in such agreement with my perspective of things.

I’m gonna quote the whole thing since I’ve found that CNBC likes to update (and remove) content on a pretty regular basis:

RIP, MBA
The economic crisis has exposed the myth of business-school expertise.
by Matthew Stewart

Put your ear to the ground near any business school campus, and you will hear the sound of another bubble about to pop. The MBA will soon be joining equities and house titles in the museum of formerly overvalued pieces of paper.

The problem in the short term begins, like so many other fine things these days, in the financial sector. Over the past two decades, about one-third of graduates from top business schools took jobs in finance. But banking will never be what it once was (we can only hope), and consulting—the other major consumer of MBAs—is reeling, too. Couple declining demand with the fact that at the onset of a recession, the supply of students actually rises as the prospectively unemployed look for ways to fill in gaps in their CVs, and “shorting” the MBA looks like a compelling near-term trading strategy.

The really grim news for the MBA, however, is about more than short-term trends. Isn’t it just a little suspicious, after all, that the sector that showed the greatest appetite for MBAs was the most grotesquely mismanaged? In fact, the economic crisis has exposed long-standing flaws not just in the modern approach to business education but in the very idea of business education.

The truth is that the relevance of the technical training allegedly offered by the MBA was always overblown. The idea that there is some body of knowledge pertaining to business management that can be packaged up and distributed to the business universe in two-year course-lets—well, it sounded good about a century ago, when it was first conceived. Maybe it still had merit when the schools were turning out only a few thousand graduates per year. But it certainly stopped making sense well before the schools achieved their current level of production of a whopping 140,000 or so graduates per year. The empirical evidence on the contribution of the MBA to individual career performance seems to bear this out—mainly because it doesn’t exist. In fact, if the relevance of an M.D. to the performance of doctors were even half as unsubstantiated, we’d probably be fantasizing about tossing a few physicians in jail, too.

The other truth helpfully revealed in the throes of the crisis is that ethics and integrity and social responsibility aren’t just optional extras for good business management—unless by “management,” you mean “looting.” Managers don’t need to be trained; they need to be educated—in the sense of “civilized.” Unfortunately, a business degree isn’t just irrelevant to that purpose; it’s positively detrimental.

Now, to be fair, people don’t behave like jerks just because they spend two years in business school. After all, as many of my business school friends have pointed out, most of the first year goes into heavy partying, and the second year is really a marathon job fair. No, for the most part, people behave like jerks because nobody stops them from doing so. The charmers at AIG walked away with multimillion-dollar second homes as a reward for exposing their institution and the entire financial system to outrageous risks because it was (so far as we know) a perfectly legal way to make money. The whizzes at Goldman Sachs hedged their supersize profits with underpriced, implicitly publicly backed insurance from AIG for the same reason.

If we ask why no one stopped these people, however, we come right back to business school. It was the market fundamentalism that dominates business school thinking that assured us that markets are self-regulating. It was the management myth—the idea that there is some specialized, teachable body of expertise that constitutes management—that confirmed the strange notion that these people were capable of regulating themselves. And it was the shareholder-value model from Business 101 that said all you need to do is load up managers with tons of stock options and they’ll be sure to do the right thing. These aren’t just ideas that happen to be taught at business school; these are the ideas that provide the rationale for the existence of the schools. The only semblance of a theory behind modern business education is that it purportedly produces “experts” in shareholder-value maximization who are capable of forming an ideal, self-regulating market.

It’s a neat theory, of course, and pretty radical, too. But not since the fall of the Soviet Union has a system of belief woken up with so many parking tickets on its windshield.

The reality is that business school is now chiefly a community of intention. It brings together people who share certain career aspirations—for the most part, to make big bucks—and occupies their time teaching them a few technical things that they don’t need to know, along with a code of conduct that says, in essence, whatever is legal is ethical; and if it makes money, it’s a positive duty. It’s now clear that we would have all been much better off if, instead of cloistering these people on fancy campuses with world-class golf courses, we’d have sent them off to do two years of national service.

For the benefit of beleaguered business school academics, it’s worth pointing out that a world with fewer MBAs is not necessarily a world without business studies. On the contrary, once researchers dispense with the idea that they have to package their material for the purported benefit of junior managers everywhere, they could actually study business. Maybe they could even learn to criticize it. Maybe they and their students could even learn to report on it, the way that journalists used to do.

In the meantime, since the national-service idea probably isn’t going to gain much traction, I suggest that it’s time to go long on the humanities. Now that we’ve tried business with savages, perhaps it’s time to give the educated a shot.

Overvalued pieces of paper… Ha! I love it…

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Student Loan DebtAlong the lines of my post from Friday regarding student loans and how I consider them to be a raw deal, I read this article by Janet Kidd Stewart in the newspaper this morning:

Carrying a lot of financial baggage as she starts her adult financial life, Ashley Cheeks needs some help with the heavy lifting.

The 23-year-old is within months of earning her bachelor’s degree and is interviewing for full-time positions as a community service officer for local governments.

Once she graduates, though, she’ll owe a whopping $71,677 in student loans on top of nearly $30,000 in car and other loans. All this on a part-time salary that equates to a gross $20,288 a year.

Like a lot of young people with hopes and dreams for the future, Cheeks believed she would need a college education to secure her financial footing as an adult, and she was on her own to pay for it.

She chose a private university in suburban Chicago, and during her first year she qualified for several grants that kept costs down. But while working full time during her sophomore year, her grades slipped, she lost the grants and she has been taking out education loans to cover tuition since. All the while she has worked full time or part time in municipal jobs.

Cheeks has made some rookie mistakes early on in her adult life, said Mari Adam, president of Adam Financial Associates Inc. in Boca Raton, Fla., but her situation is not hopeless.

“If you were going to do it all over, I’d say go to the community college,” Adam said. “But it’s a done deal now, so you have to look forward. It’s going to be tough, but you can get yourself out of these credit problems and keep it under control.”

Thinking about the pile of debt, and knowing she has just $120 cash in the bank, has been a stressful situation for Cheeks, prompting her to write to Money Makeover for help.

“I’ll be honest. It really hurts,” Cheeks said when asked how the debt load makes her feel about where she is in life. “There’s so much I want to do in life, and this debt hurts.” Adding a $23,000 car loan several months ago to purchase a slightly used 2007 Chevy Malibu hasn’t helped much. The car replaced a 17-year-old Chevy that was costing more than its worth in repairs, but it has still been a burden to make the payments.

Since she made that purchase, her full-time hours were cut back to part-time in a cost-saving move by her employer. Working 31 hours now, her car expenses eat up almost 60 percent of net pay, Adam pointed out.

Making matters worse: She has two unpaid medical bills totaling $5,200 that are now in collection, which made her credit score plummet. That resulted in an interest rate for the car loan of a stunning 18.7 percent. Her education loans carry rates of 10.25 percent and 7.22 percent.

She’s also carrying $1,416 in credit card debt.

“You’ve got to repair your credit because everything you do is being impacted by this, including your car and renter’s insurance rates and your chances for homeownership,” Adam said.

Fortunately, Cheeks has been sharing a lot of living expenses with a roommate, which is the only reason she has squeaked by the past few months without boosting her credit card debt, the planner said.

Some other things are looking up, too.

Since beginning the Money Makeover process, Cheeks accelerated her interviews for full-time work and is close to accepting a position as a community service officer that would pay about $37,000 a year and offer full health and retirement benefits.

Although she believes she’ll advance more quickly as a college graduate, the degree is not required for the entry-level position. So Adam suggested that she stretch out those last few classes as long as possible to put off the date when she must start to repay the college loans.

“This is really sizable student debt,” Adam said. “Even when you’re making more money, a lot of it is going to be absorbed in paying this off, and it’s going to delay your savings plan. Normally after graduation, you’d start saving in a retirement plan and for a home, but I’m not sure you’re going to be able to do much of either of those for quite a while.” Instead, she needs to immediately attack the medical and credit card bills, then select a payback plan for when the education loan payback kicks in, Adam said. Most likely, she should shoot for graduated payments of between $200 and $400 a month, Adam said, depending on her actual income when she starts work.

The lion’s share of the medical bills stems from a car accident Cheeks had a couple of years ago. She did not file an insurance claim with her university because she says she was told it wasn’t covered under her school policy.

Adam urged her to file a claim and do some more investigation to determine whether her school insurance should have covered the accident.

Failing that, Adam said, Cheeks should approach the company handling the medical claims and ask to work out a payment plan based on her income.

Meanwhile, she should take her $600 income tax rebate this year and use it to pay off one of her credit card bills of $416. The remainder should be used to start an emergency savings fund, Adam said, because she will need to pay living expenses entirely on a cash basis while she repairs her credit.

To avoid another unpleasant dip into credit, Adam suggested setting up a cash flow budget so she can begin to track expenses. Although her finances are fairly simple now, they will get much more complex as she tackles the debt, and it’s vital that she stays on top of her expenses.

Retirement savings? Still a pipe dream, Adam said.

“Taking a job with a pension is really important because I’m not sure you’re going to be able to do much in the way of saving for a while,” the planner said. “If they’re contributing for you, you won’t be losing five to 10 years while you fix your credit. Even if you can’t save for retirement, they will be.”

Cheeks believes she has been paying into a retirement plan at her current part-time job, but she said she is having difficultly getting statements and that employees have filed inquiries about the plan.

At a minimum, Adam said, she should request in writing to the plan that no more funds be withdrawn from her paycheck for retirement.

“This is all going to be tough, but you can get yourself out of this credit problem and keep it under control,” Adam said. “This new job can change everything for you. I think you have an exciting future.”

The funniest part to me is the mention of a Chevy Malibu… (You really need to read Friday’s post if you don’t get it…)

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My education cost as much as this Chevy MalibuWhile looking at the stats for PantsInACan.com, I noticed a new blog out there that has me listed in their blogroll. They’re shaping up to be my top referrer this month. I’d never heard of the site, but I’ve been checking it out for the last few weeks.

I’m guessing that we’re roughly the same age; I may be a couple years older. I’m also guessing that we make pretty close to the same amount of money, perhaps I make a little more having been in the workforce a bit longer. We both own comparably priced homes. We both invest aggressively.

Basically, there are a lot of similarities to draw from.

One thing is *very* different though. My total non-mortgage debt is under $10k. Their non-mortgage debt exceeds $200k.

The culprit?

Student loans.

I can’t fathom carrying $200k in debt for something that I can’t even put my hands on. I’m admittedly, very materialistic — hence the BMW and the airplane in my garage.

I’m not real well versed in student loan rates, I’m pretty sure they’re super low, but even still, at just 1 percent, $200k is growing at a rate of $5.50 per day. That works out to over $2000 per year?! And that’s just to keep it level.

Ouch.

That said, I obviously never had student loans. I went to school in Canada where most of your education is paid for through your taxes. Fortunately, my parents also covered my education 100%.

I don’t know the exact numbers my parents paid for me, but the using the 2007-08 school year tuition rates, my time in University cost a grand total of $13526.86. Toss in another $7k or so for food and housing.

Total education cost, for simplicity sake, was around $20000. (Remember though, this number is skewed — I’m sure tuition was significantly lower in the mid 1990’s when I went to school).

My sister, on the other hand, did have student loans as she went to school in the States. Her tuition for just one year, based on 2007-08 numbers, comes right up to the $20k my entire education cost. Multiply by 4, and we’re talking some pretty serious money — more than any average household could ever afford.

For perspective, my education cost the same as a Chevy Malibu. My sister’s education cost the same as a Porsche. My new top referrer’s education cost, well, Ferrari money. More than my house… Actually, more than my house, my BMW, and my plane COMBINED!

So what did we all get out of the deal?

Well, while I don’t know the specifics of my sister’s financial standing, I’m pretty certain that I’m carrying a lot less debt than she is. I know for a fact that I’m carrying a lot less debt than my top referrer.

I’m also pretty certain that neither of them make substantially more money than me, certainly not enough more to justify the disparity in the costs of their education when compared to mine.

As far as I can tell, the only thing they got out of the deal was debt.

That’s a pretty raw deal.

I wonder sometimes if they see it that way… or if it’s a deal they’d make again.

Can You Dig It?

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