Pre-Signing Considerations

So it looks like I've traded in my old-school megaphone for a microphone attached to some monster amps and six-foot tall speakers that I'd expect to find at a musical festival like Austin City Limits. What was once a fireside chat about my own personal journey to pay down my debt now has much greater reach than ever before and is evolving into something...different.

And here I was thinking I was completely done with the blogosphere when I posted the video back in April. Each post takes anywhere from one to three hours to type, and I was looking forward to getting some free-time back in my schedule. Then, some remarks I read online last week forced me to define the target audience for my blog, so I had to write the Poster Child post. Then I thought I could finally wash my hands of this blog.

But my conscience won’t let me. I’ve received so many questions asking for advice that I haven’t had time to respond to a single one. I’m still trying to build my career (putting in ~50 hours a week), and hit the gym every day, and maintain my friendships, so I just haven’t had time to respond with some thoughtful, personal advice. I file all of the questions away in a folder in my Outlook with every intention of getting to them when I finally have some free-time, but that hasn’t happened yet. Well, I can't put it off any longer—there’s this one comment that somebody made on my blog, a comment that my conscience won't let me force out of my head:

 I’m still hoping you might share what you would tell yourself, if you could write a letter to your 22 year old self, prior to accepting the student loan money. I believe education is a great investment, but could you have done your Harvard MBA on fewer loan dollars, or with a part time job, or spending less on your ‘wants’ ?

I see all the cars in the university parking lots and can’t help wonder if student loans have propped up the American auto industry, and then seeing the full bars and cafes, the entertainment business as well.

Please, give a shout out to all those students about to sign the loan documents.

It appears that there’s unfinished business. After reading the comments on the blog and the emails in my inbox, it almost feels like I have a responsibility to help people. So many readers have asked me for my spreadsheet (which I’m happy to provide, btw—just email me), but beyond that, people have written to me saying that they don’t “trust” financial advisors to steer them in the right direction, and they think I can do a better job of it.

So, yes, this blog is evolving into something different. I don't know exactly what I mean by different, but this blog shouldn't be about me anymore. I’ve been in the trenches, I’ve done my time, and I wrote an admittedly self-centered story about the entire experience. Now it's time to look outward and try to help others. That feels like the natural evolution of what I'm doing here, and it's something my conscience and I want to do, anyway, so let's do it.

Here's the deal, though, folks: I'm no expert. I'm not a licensed financial adviser, and a lot of what I did was psychological, anyway--nothing financially fancy, I just tricked my mind into not buying useless stuff, convinced myself I was better off selling some stuff rather than owning it, and searched for fulfillment in different experiences rather than the same old expensive ones. But just like I'm not a professional financial guru, I'm not a trained psychologist, either. So read my advice, but keep in mind that you might be getting what you pay for!

That said, while my credibility is not to be found in the certifications and diplomas in personal finance and psychology that do not hang from my wall, the credibility comes from the fact that I made some really, really foolish financial decisions in my life, I got wrapped up in a certain lifestyle, I saw the error of my ways, I repented, I reacted, I sought and found renewal, and I survived to share the story. And now I'm building up my wealth instead of paying down my debt (and it feels a HELL of a lot better).

So, with that said, let me answer that question that has sparked the evolution of this blog. What would I tell the 22-year-old me who signed up for $101k of student loans?

Well, I was actually 23 when I was accepted into HBS and 24 when I got the loans, but that’s beside the point. And in fact, I actually want to back up further, to when I was 17 and applying to undergrad. Now, my parents had committed to paying for undergrad. In fact, I literally remember asking my dad when I was like seven or eight if he would foot the bill to Yale. Somehow, at that young and impressionable age, I knew that Ivy schools were a big deal. And I remember asking him if he’d pay for it even if it cost $100k. Don’t ask me how the hell I remember this, and feel free to call BS, but I swear (!), I swear this conversation went down. And good old Dad laughed at me and said yep, he’d foot the bill.

Well, I went to Michigan where I was charged in-state tuition, something like $9k/year, so Dad got lucky.

Anyway, the fact of the matter is that I knew my dad would pay for undergrad, but I was still extremely careful about my post-undergrad prospects. I had a dream to fly planes. I wanted to fly 747s internationally. I thought that that would be the coolest job ever. The prestige, the adrenaline—it seemed like a dream job. Growing up, I didn’t go on many trips involving planes, but the best part of those rare trips was never the destination—the best parts occurred at the beginning and end of the trips, on the plane. The exhilaration of being pinned to the back of my seat by the raw acceleration during take-off, the sight of the miniature houses and cars below as we climbed into the sky, and the scary-but-awesome landings—those are the parts of the trip that I got excited about.

Making a career out of it seemed like a foregone conclusion. For one of my birthdays, my parents paid for me to go up in a four-passenger plane with an instructor just so I could be sure that that’s what I really wanted. When we were airborne and cruising, the instructor let me take the stick and I did some simple maneuvers. My heart rate was probably at around 200 BPM, my palms were sweaty, and I loved it.

Then I talked to my uncle who works ina aeorspace and he put me in touch with commercial pilots to talk career prospects. And what I found out was far from reassuring. The path to being a highly paid intercontinental pilot isn't as straightforward as I had hoped. Many times, people who get their degree in aviation as part of a college program will get their private pilot’s license, but then they have to buy seat time on an airplane to accumulate thousands of hours before an airline will even consider hiring them. They serve as flight instructors on the side to earn that flying time, and the money is simply not there. I’m recalling $20k/year being the number that some of the people I talked to threw around.

The alternative to this low-dollar alternative is to join the Air Force and put in hours on the cargo planes and get paid to get those hours. So I went that route. I went to a public school, the University of Michigan, and I did Air Force ROTC during my freshman year. But what I found is that while my eyesight was good enough for a commercial airline, it wasn’t good enough for ROTC, and they wouldn’t consider me as a pilot.  After several meetings with my counselor and her superior and a second eye examination, they just couldn’t clear me to take a pilot path.

At that point I had two options: I could either go to a school that specializes in aviation and then go through the private path, or I could give up the dream.

I gave up the dream.

Even at age 17, I knew that I wanted a certain income. In my case, it wasn’t a certain income to pay off my student loans, since I didn’t have any. In my case, I sought financial stability. I knew I didn’t want to be poor. So I looked around at what program could provide me with financial stability after graduating, and it was a toss-up between the engineering school and the business school. Both listed $50k+ beginning salaries for most undergrads. I tried an Engineering class and decided it wasn’t for me, so I applied to the business school and got in for my junior and senior year. I graduated and got a job as a factory supervisor where I made over $50k/year plus bonus.

Was I high up in the clouds, flying planes? No. I was working in a factory on the night shift from 4 PM to 3 AM Monday through Friday, sometimes even through Sunday. I was donning steel-toed boots every day and leading a team of 30+ material handlers in a desktop computer manufacturing plant. My “cockpit” was a factory and my “passengers” were my direct reports. Adrenaline and excitement were in short supply, but money wasn’t.

I haven’t thought about the decision I made 12 years ago until this past week, since I’ve been confronted with the problem of students graduating with high loans and limited job prospects.

I try to live my life without regrets, but I’ll be honest—a part of me does regret the decision I made. Flying planes really would be cooler than what I do these days. But would I be making as much money? On the other hand, should financial stability ever trump somebody’s dream?

I think it comes down to one’s personal values.

So let me answer the original question. If I’m 17 and I’m thinking about taking out loans to go to school, what should I evaluate?

First off, it’s extremely easy to get a loan to attend college these days—that’s probably why the cost of college is going up so steeply; the banks are giving away the money, so the elasticity of demand for a college education is extremely low because everybody can find the money (typically borrowed) to pay for it.

So, the question is, what does one do with that easy-to-get loan? If their dream aligns with a career that our country desperately needs (e.g. engineering, nursing, etc.) and the expected salary is in profile with the loan, then go for it. I’m not going to explicitly define what I mean by “in profile” here—it’s basically a euphemism for “don’t get so laden with debt that you can’t dig out of it.” Find out what the monthly payments on your debt are, calculate what your living expenses will be, find out what your expected salary will likely be, then determine how quickly you can pay that debt off when you graduate.

Now, if the prospective student’s dream is something that's not necessarily in high demand and has dubious salary expectations, like the oft-cited English major, then reconsider. I’m not saying don’t study English, I’m not saying value money and income ahead of your passion—I’m not saying do what I did. By all means, pursue your passion. Or you could end up like me.

But maybe avoid studying English at the priciest institutions. Or minor in it and major in something that’s in high-demand. Try starting out at community college and earn some cheap credits, then upgrade to something higher-end.

Yes, you can almost definitely get $100k from the bank to pay for an English degree. But I don’t think you should ask for that much.

(It seems silly to me, actually, that banks don’t require that the student declare their major when applying for a student loan. “Here, Johnny! Here’s $100k to go study underwater basket weaving at UBWS (Underwater Basket Weaving School). I know there are many Fortune 50 companies out there who will be happy to pay you at least $250k when you graduate for your unique skills, and you’ll get a signing bonus and relocation, too. So live it up! The interest rate on your 30-year loans is only 25%, so repay at your convenience.”)

And of course you should be living frugally if you have a loan. Like I said in a prior post, a new car and daily Starbucks are not to be staples of your lifestyle.

Beyond college, there are always trade schools to consider. Or, Peter Theil will pay you to drop out of school and start your own business.

So what would I tell the old me? I was fairly risk-averse back then and I wanted financial stability, and I put those values ahead of my dream to fly planes. Looking back, yeah, I probably should have flown planes. But hindsight is always 20/20.

So if you’re graduating high school, have an honest talk with yourself about your values—what are you passionate about? What gets you excited? And what kind of money are you likely to make if you follow your dreams? Is it enough to pay back your loans with? Can you survive on it? Are you willing to make the sacrifices to live a frugal lifestyle if you’re unable to land a high-income job?

Let’s fast forward and answer the original original question. I’m 24, I’ve been accepted to HBS. What do I do? I do exactly what I did. Average starting salary out of HBS for the class of 2007 was, what, somewhere in the neighborhood of the low six figures, high fives? I would sign. I’d do it all over again. And no, I wouldn’t work a part-time job, no, I wouldn’t spend less money on my wants, and no, I wouldn’t ask for a smaller loan. I’d do it all over again. I wouldn’t skimp on the experience. I wouldn’t go to Europe every weekend, but I’d go on certain trips, and I’d take advantage of certain things, and I’d try to surround myself with my peers instead of going off and working a part-time job. Those two years are critical years for immersion in the MBA program, and trying to aggressively nickel-and-dime it simply isn’t necessary when the starting salary has six figures in it. 

What I would do differently is alter my post-grad lifestyle dramatically. I wrote about that here.

Taking out $100k to go to a third or even a second-tier business school should give the borrower pause. The employment prospects are more of a gamble in this situation—yes, of course it’s possible to land a high-paying job without graduating from the top five or ten programs or whatever, but it’s not as likely, and for that reason, those schools can’t boast of an average starting salary of six figures, so the loan request should be tempered accordingly. A part-time job might be a good consideration, too.