publicaffairsny Posted September 2, 2014 Share Posted September 2, 2014 What do you think is a reasonable amount of student loan debt to carry at onset for someone entering a decent econ or public policy program? Quote Link to comment Share on other sites More sharing options...
tm_member Posted September 2, 2014 Share Posted September 2, 2014 This thread is slightly off-topic but I think it is important to discuss the financial risks and rewards for graduate school every so often. The answer to this question obviously depends on the individual and any debt that pays back more than it costs is "worth" it, but that payback is dependent on your discount rate, interest rates, income and budget constraint, existing savings, family obligations, existing non-secured debt, and other factors. Quote Link to comment Share on other sites More sharing options...
publicaffairsny Posted September 2, 2014 Author Share Posted September 2, 2014 Lets do a hypothetical. Age 30 with no student loan or unsecured debt and no family or other commitments and 50,000 of savings is faced with a tuition/ living bill of 60,000 for a masters. I believe you can take out the full expense of a graduate degree in federal loans. What would a student in this situation do, if his goal is to move on to a phd? Should he spend down his savings and take out a minimal loan, take out the full value of the tution, or does the answer lie somewhere in between? How much would be too much debt to take on in this situation? Quote Link to comment Share on other sites More sharing options...
tm_member Posted September 2, 2014 Share Posted September 2, 2014 The optimal answer depends on discount rates and the return on investment the savings are earning. If you can borrow for a lower rate than the savings are earning (you may want to include a psychic return due to the safety net they provide) then it makes sense to borrow. However, I believe graduate loans are all at ~7% interest so if you have the savings to cover it, it seems foolhardy to borrow as very few make >7% annually on their savings. Of course, if you have $50,000 in savings, you should seriously seriously seriously consider a Master's abroad. $50k will get you through a top two year MA Econ in Europe with change to spare. Quote Link to comment Share on other sites More sharing options...
publicaffairsny Posted September 2, 2014 Author Share Posted September 2, 2014 So for the same person, how would you assess the impact of the following debt loads. 10,000, 30,000, 50,000 on future financial stability, assuming they graduate with a phd? Quote Link to comment Share on other sites More sharing options...
tm_member Posted September 2, 2014 Share Posted September 2, 2014 So for the same person, how would you assess the impact of the following debt loads. 10,000, 30,000, 50,000 on future financial stability, assuming they graduate with a phd? Compared to the lifetime earnings differential all three are little more than rounding errors. Quote Link to comment Share on other sites More sharing options...
tm_member Posted September 2, 2014 Share Posted September 2, 2014 To elaborate, the repayment per month (assuming repayment over twenty years) on each of those would be around $70, $200, and $400. Starting salaries for Econ PhDs run at around $7-8k per month on the low end. With tenure, you can think salaries of $14k per month or more. A repayment of $400 per month will not make a huge dent in your lifestyle. While taxes will take a bite out of those earnings, the interest on student loan repayments make for a really nice tax deduction when you are getting relief at a high rate. Quote Link to comment Share on other sites More sharing options...
YaSvoboden Posted September 2, 2014 Share Posted September 2, 2014 FinAid | Calculators | Loan Calculator gives you monthly payment amounts. With 50,000 in debt, it will take payments of 575/month to pay off in 10 years. There are 2 ways to look at this that I can think of. Is this "affordable": I don't know what the average econ PhD makes and I am sure this varies with a bunch of factors. But let's say you make 7,000/month after graduating. Yes, you can definitely pay that 575/month, you just might need to get a less expensive car in the mean time. Is it a good investment: Here is where the variation in expected salary comes in. Will getting the master's get you into a school that will get you a job making 7k/year more? Then it is fine to have that much debt. Opportunity cost should probably at least double the difference that you want to make, but that has to be decided by your own outside opportunities, discount factor, etc. There is also the life quality change that could come from going to a much higher ranked institution. Bottom line, I am debt averse, but 50k at the end of a PhD program is reasonable. Even double that would still leave for a decent lifestyle afterward. It may constrain opportunities to do things that make less money, but there are lots of personal factors that come into play. Quote Link to comment Share on other sites More sharing options...
econphd14 Posted September 2, 2014 Share Posted September 2, 2014 (edited) Also, you should be aware of the risk that you change your mind about the phd or otherwise drop out. Even then, a high quality masters should easily pay for itself and is a fairly low risk investment. Edited September 7, 2014 by econphd14 Quote Link to comment Share on other sites More sharing options...
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