Recently, I got into an argument with some people on Twitter about college debt. Some of them argued that College debt is unfair or that it would be impossible for them to pay it back. While the concept of “fairness” is subjective (and I will not comment on wether I think that it’s fair), it certainly is “payable” for some career choices.
As I have mentioned in my post about Majors, it’s important to chose what you will do before going to college and calculate how much money you will make in your chosen field, if you plan on going into debt. So, in this post, I will outline the calculations for the “worst case scenario” in terms of debt and talk about what your life will be like in those different careers.
To illustrate the college debt situation, we will imagine a student named John. John has just graduated from high school and got accepted by Brown University. However, he has no idea what he want’s to do after he finishes college and after celebrating his achievement of getting into Ivy League for a good week or two, he starts thinking about what he wants to major in/who he wants to be after he graduates from college.
He thought about 6 careers that he likes: Software Engineere for a large tech firm or a startup (Silicon Valley), Investment Banker (Wall Street), Doctor, Lawyer, Teacher, or Social Worker.
- John is too lazy to apply for scholarships (Or he did apply but didn’t get them). He is also not getting any part time jobs during his time at Brown. He will finance 100% of his tuition + living expenses through debt. He will get internships in the careers, in which it makes sense for him to get them, though.
- John’s tuition costs him $69,086 a year. His tuition stays stable over his time at Brown. (I know this is unrealistic but I don’t have a crystal bowl + we are already creating a “nightmare scenario” as is.)
- John was incredibly unlucky and got the loans from a bank that gave him 7% interest rate (although the current average interest rate for private loans is only 2%. Again, we are exaggerating things and creating a “nightmare scenario from hell” for John.)
- The six careers will remain unchanged over the next 10-20 years. I know, this assumption is a bit unrealistic but I am not a fortune teller. Predicting what will happen 20 years from now is close to impossible. 20 years ago, we couldn’t imagine having Instagram and only 3 years ago, we would have laughed if somebody told us that Trump would become president. Therefore, I am not assuming/predicting any huge changes in the job market.
- John really loves paying off his debts. He will spend 50% of his net salary paying them off. The debt comes before taxes for John and he will count tax as part of his living expenses. (If we don’t make this assumption, John will be paying off his debt forever for some of the jobs/careers in this list.)
- John started college at age 18.
- After John pays off his debt, he will save 50% of his salary and get 7% return on his savings. (I will discuss how much John will make by the age of 40 in a later post, since John’s debt is already a large enough topic).
- John will be good at his career but not super good. He will get promoted regularly and have a salary towards the higher end of the spectrum for some of his careers. But he will not become a billionaire hedge fund manager or start the next Google in College.
- The government will not pay for John’s student loans. He will not get an inheritance from his aunt. He will have to pay 100% of them back on his own.
- John will not start a side business or do anything else additional to his career/job.
Silicon Valley: Nerds Now Rule The World
John decided that he wants to be the next Steve Jobs or Mark Zuckenberg. In his third year, John got an internship at Google and made 20k. Then, he went to work for an elite tech company, making a 200k starting salary. He then transitioned into a management role and his salary continued to increase until $2 million.
John ended up paying off his debt in 3 years. He will pay off his debt at age 24. Even if we change the assumptions with the debt around and increase it by 10-20%, John will still pay off his debt in 3 years. Even if we assume a slightly lower salary increase and that he doesn’t go into a management role, he will still pay them off in 3 years. For those 3 years and beyond, John’s life was pretty comfortable because he could live off of +100k a year and pay the other +100k out as debt. In fact, he could probably afford to pay out more than 50% of his salary and clear his debt out even faster or increase his savings even more in some years, if he wanted to.
Variations: Some talented programmers in my University start working in their senior year of college and end up dropping out. In this case, John will pay off his debt even faster (2-3 years and be debt free at age 22-23) because 1.) he will start earning 200k a year earlier and 2.) he will not take on additional debt for 4th year of College (because he dropped out).
He might also get very lucky and start the next Google or Facebook or Apple. In which case, he can pay off his debt with one paycheck. Or he can start working for a startup that makes it big and have a large share of equity ownership in it. (In which case, again, he will pay of his debt in one paycheck.) John might also work for a startup that will end up paying him badly but giving him equity and end up failing, in which case it will take much longer for John to pay off his debt. (Therefore, John should be careful to avoid this scenario.)
John can also choose his company less carefully and make 180k-190k starting salary. In which case, you guessed it, he will still pay his debt off in 3 years. Maybe, he parties too hard during one of the years and pays it back in 4.
Bottom Line: John will be fine. He will pay off his debt fast if he goes into technology/ software engineering and is smart about it. In the best case scenario (about less than 1% chance), he can pay them off with one paycheck. More realistically, if he is good at it and has smooth career transitions, he will pay them back in 3 (age 24) years. In an absolute worst case scenario, if we follow this assumptions, he will pay them back in 4 years (age 25).
So if you are John, you should start learning how to code. Like right now.
“Damn, It feels Good to be a Banker”
John watched the Wolf of Wall Street too many times and decided that he wants to be the next Gordon Gekko. In his third year of College, he gets really lucky and does an internship at Bank of America, Merrill Lynch and gets paid $20k. After graduating, he goes into investment banking and makes 150k all in compensation his first year. His compensation increases, to 175k his second year and 200k his third year. In his 4th year, John moves up to become an associate and his salary decreased to 135k because he switched firms or because he had a bad year or because something bad happened to the economy. The point is: John had one bad year and made 135k. Than, his all in compensation continues to increase, he smoothly makes career transitions, and eventually ends up making $1 million a year.
John pays off his debt at age 26 (5 years). Even if we assume a 100k compensation for his first year and 150k for his second year, he will still pay off his debt by the age of 26. If we remove the bad year and assume that his compensation remains flat at 200k (or that he switches to doing private equity/hedge funds with the starting compensation of 200-300k), he will pay his debt in 3-4 years (age 24-25). If John decides to take a year off from paying his debt and do models and bottles instead, he will pay his debt back at the age of 27 (6 years). His life will be less comfortable than that of a software engineer but it will be manageable (although his friends will make fun of him for not being a baller). If teachers can live off of a 50k salary, John can certainly manage at 75k. It will also be really bad for his 1st year and than get better from there.
Variations: the compensation is going to be more varied at the MD/VP level than it is for analysts/associates. There is some variation due to the economy, the performance of the bank, the performance of the group, and individual’s performance. However, even if we assume 3 bad years instead of 1, John will pay his debt on time (age 26, 5 years). If he makes the switch to Hedge Fund/private equity or doesn’t have the bad year, the numbers will be closer to the Software Engineer example (3-4 years).
Bottom line: In the absolute worst case scenario: 6 years. In the best case scenario: 3-4 years. Most likely: 5 years. John will not do a lot of models and bottles his first year but his life will get better. He will probably not save 50% of his salary after paying off his debt, though (which is fine because John should live a little).
Even though John will get out of debt in his 20’s, it’s better to try to not be like John and not to take on this much debt. If John had less debt, he would have more money for bottles and models during his early 20’s. With this said, taking the Wall Street path (if you are in John’s situation) is not a bad idea. It’s worse than the tech path but better than the other 4 options.
The Classics: Lawyers and Doctors
Lawyers and Doctors are classic job/career choices. Therefore, I have to include both of them.
Let’s start with doctors.
John decided that he wants to become a doctor and help save lives (or his mom told him that he will be rich and he is in it for the money). After accumulating debt for 4 years in undergraduate, John decided to go to Harvard for med school, where he continued accumulating debt for another 4 years (assuming tuition rate of $78975, interest rate: 7%, he is financing 100% of it through debt.)
After finishing med school, John earned 51k a year in residency. We assume he only spends 3 years in residency. Afterwards, John starts earning 400k. His salary increases 10% a year until it reaches 857k.
As a doctor, John will pay off his debt at the age of 33 (in 8 years after med school or 12 years after undergraduate). His time at residency will suck really bad. Currently, living off of 25k in the US is incredibly difficult, if not impossible. John will absolutely hate his life. To make matters worse, the 25k that he will contribute to paying off his debt will not even completely cover the interest rate. Despite his contributions, his debt will continue to increase for this 3 years.
After he starts working as a doctor, John will probably have a huge party because he will have 200k to spend on himself and 200k to pay back for the loans. John will be incredibly well off while he pays back for his student loans. If I change up the assumptions and imagine that John has 1 bad year and doesn’t get a promotion for a year, he will still end up paying back his debt at the age of 33. If we assume that John will pay back more than 50% of his salary (70% after he starts working as a doctor), he will pay it back at the age of 32.
Variations: I don’t really know a lot about medicine so can’t really say a lot about it. What I do know is that different specialization earn differently so you can earn more/less than this example. From what I can find, the pay doesn’t have a really large range so you have less risk of never paying off this debt. You might also end up spending more time in residency (some doctors spend up to 7 years), in which case I don’t even want to think about how long it will take for you to pay back this loan.
Bottom Line: Having this loans pile up for over 8 years is a really long time. It doesn’t seem like the job of a doctor will allow for John to pay back his student loans quickly. However, John will be able to have a comfortable life while he pays them back after he finishes residency (assuming 3 years in residency.) Over all, if I were John, I would not go for the doctor path. (If you plan on becoming a doctor, I would recommend doing anything possible to avoid turning into a John).
Now, on to the Lawyer path.
As a Lawyer, John will spend 4 years in undergraduate and 3 more years at Law School. His college tuition for Law School will be the same as that of a doctor ($78975). He will continue having the 7% interest rate (going with our “worst case scenario” theme).
After finishing law school, John got into an elite law firm and started making 200k a year. He gets promoted quickly and eventually makes partner and starts earning $1 million at the age of 36.
John will pay back his loan at the age of 31 (7 years after law school, 10 years after undergraduate). He will be able to have a pretty comfortable life getting there. This is definitely a better situation than the doctors path.
Variations: John might not make it into an elite law firm, in which case the numbers will be much lower and John’s life will suck.
Bottom line: John will be able to pay back his loans faster than with the doctors option. However, 10 years is still a long time. I can’t really make a judgment on this one because John will have a more or less good life for those 10 years.
Teacher: John Loves Working With Children
John decided that he loves working with children and that he wants to be a teacher. In his Junior year, he did an internship and got paid 6k. Than, he started working as a teacher at a public school in New York. His starting salary was 54k and increased 13% every year until he hit 119k.
John payed back his loan at the age of 31. His life sucked because he only had 27k-53k a year to live off of. In New York, investment bankers complain about not making enough money and they make 150k their first year. John will be able to hardly survive and will probably end up paying less in order to cover his loans in real life.
Variations: John can probably make more money if he becomes a teacher at a private school. In this case, he will be able to pay back his loans faster and his life will suck less. However, it will not be a huge improvement over the example above because teacher salaries don’t wary a lot. He might also not be as lucky and end up only having 40k salary at the end of his career and start out at 20k (this is the minimum in Texas). In this case, his life will suck even more and (again) I don’t even want to think about how long it will take for John to pay off his debt.
Bottom Line: Even though John will pay his loans back at the age of 31, his life will suck. Therefore, if you want to be a teacher, do everything possible to avoid turning into John. Do not finish college over 300k in debt. If you are 300k in debt, don’t become a teacher. Tutor kids after work, if you just can’t live without teaching them.
Social Worker: John Wants To Help People
John wants to help people from underprivileged backgrounds by becoming a social worker ( he had been taught to “want to make this world a better place” at Brown, after all).
After graduating from college, John’s starting salary will be 64k and his salary will slowly increase until he will be making slightly over 80k. Similarly to a teacher, John also did an internship his junior year of college and got paid 6k. (This numbers are exaggerated. His salary is supposed to stop increasing at 69k. However, 10% of social workers do make it up to 80k and so I inflated the numbers to give at least some hope that a social worker will be able to pay back such a loan).
To say that this numbers aren’t pretty, is an understatement. John will pay back his loans at the age of 36 (that’s 15 years!!!). John’s life will also suck, since it is very difficult to have a good life with 36k.
Variations: This numbers had been exaggerated. More realistically, John’s salary will hit the pay ceiling at 69k (if he is lucky). I was also assuming he makes the highest in his pay range so, again, the real numbers will be lower. In this case, he will payback the student loan at 37-38.
However, I had seen some specializations within social work that pay in low 100’s so John might get more lucky and his numbers will look closer to the teacher’s example.
Bottom Line: “Damn. It does not feel good to be a social worker”.
Really. There is no other way to describe John’s situation. Even with inflated numbers, John will be miserable and it will take him the longest amount of time to pay back his student loans out of the 6 careers.
If you really want to be a social worker, avoid getting yourself into so much debt. And if you are in this much debt, do not even think about becoming a social worker. You will spend your life helping families of strangers (or strangers) without being able to help your own (or yourself).
Conclusion: In terms of time it takes to payback the loans, the careers go as follows: 1.) software engineer (silicon valley) 2.) investment banker (Wall Street) 3.) lawyer/teacher (tie) 4.) doctor 5.) social worker. In terms of lifestyle: this one will be subjective so you decide. I already left my comments under each career choice on this topic and can not figure out a way to rank this one.
Ok. So the main point of this really long post wasn’t to make fun of social workers or John for getting himself into debt (Although I do admit it was entertaining to write). Or to make people jealous of programmers and investment bankers.
The main point is: think about how long it will take for you to pay your student loan back before running to the bank and taking it. What we have learned from this analysis is that it is possible to pay the student loan back for some careers, while incredibly difficult for others. This means that you have two options (assuming you are not a masochist and want to have a good life): 1.) take out less student loans with lower interest rates (go to a state school, get scholarships, etc..) and/or 2.) get a higher paying career, which will cover the loans (software engineering, investment banking, etc..).
And before taking the student loans for your degree, run this calculations beforehand and play around with different setups. Obviously, don’t assume the “nightmare from hell” scenario if you are taking out less debt and choose the careers that you are actually interested in. And spend more time researching your potential careers than I have researching those 6 (they were just examples after all).
Remember, a loan is not free money. You will have to pay it back,
Note: I’m sorry about the picturesque/graphs. My laptop doesn’t work so the formatting is off. I will fix it when I get access to my laptop.