Yesterday’s tweet went like this, ”
He said he borrowed $200K @ 6.5% to pay for his MBA, and I then realized he knew nothing about business. #exhibit1 Yes, he is unemployed.
— Coppell Piano Shop (@Piano_Shop) July 4, 2013
The monthly payment on that loan will be $1264.14 for 30 years. One aspect of business addresses investing. The object of investing is to make money. We invest money in order to acquire a profit. We calculate the probable risk; the future value of money, and other factors until we derive a probable outcome. Is it wise to pay $200,000 of borrowed funds to acquire a Master’s degree in business?
Hell no! In fact, it is a monstrously terrible business decision. An investment that encumbers you with a monthly liability of $1,200 for 30 years is moronic, not the kind of decision you would expect from someone who had a Master’s in Business Administration.
Unless the MBA alone enables you to make $2400 per month more than you could earn without the MBA – for 360 consecutive months.
What are the chances that will happen?
Why $2,400? An example will explain. Let us go to the bank and get a loan for $200,000. We have two options. 1. Invest in our education. 2. Invest in a 30 year bond that will pay 5% a year for 30 years.
Option 1 leaves us in debt with only a shallow promise of a future earning that meets or exceeds the monthly liability.
Option 2 puts our money to work immediately. At the end of the investment period, the $200,000 grows to become $864,388.48.
That means that your MBA degree actually costs you the opportunity to make $864,388.48.
In order for your investment in an MBA to be a profitable decision, you would have to earn more than $864,388.48 over the next 30 years. That comes to $2401.00 a month.
In Option 1 you vacated the opportunity to make $2,400 a month. In both options you incurred a liability of $1,200 a month. In Option 1 you are hoping that an investment in education will earn more than what you could earn in a savings account.
Last year I created a spreadsheet of a teacher’s salary with a Bachelors and with a Masters. Using three estimates of the cost for a Master’s in Education (low, median and high) it would take between 15 and 18 years to break even on that investment. If you add the opportunity loss of just investing the cost of the Masters degree in a simple savings account, you never recover your investment.
When we invest in something that does not make money, we call that a bad investment.
You would expect that someone who earned a degree in Business to know better. In this particular case (which does not apply in all cases), the MBA graduate is sitting at home currently unemployed. He doesn’t know what he wants to do.
This explanation serves as a preface to an explanation of how American students have been duped into investing in an education. I am not going to expand on that topic. I just wanted to explain the tweet.
But if you are inclined to continue thinking about this, let me prompt you to think of it in terms of supply and demand. There is a high demand for advanced degrees. Colleges raise their prices, as they should. There is low demand for workers with advanced degrees. Wage opportunity decreases. As demand for the supply of advanced degrees increases, as jobs and wages decrease, the risk of recovering your investment increases.
Granted, this will be confusing for some people – who it is my guess that they are not familiar with business. But I think we may all agree that someone who aspires to invest $200,000 in a Masters of Business Administration would have a CLEAR AND CERTAIN idea of what he wants to do, where he wants to do it, and how much money he is likely to earn.