Student Loan interest deduction is capped at $2,500 and is not available after your income exceeds $75k. Don’t count on this as a positive aspect of getting a student loan. I haven’t been able to claim this for years and it sucks (I practically cried when I paid mine off it was such a relief). Just another penalty for working your ass off and actually getting somewhere in life…in addition to not being able to deduct IRA contributions, the inability to directly contribute to Roth IRAs, etc… but thats another convo that I won’t get into here.
I agree with MBA as a big investment in yourself. as with all investments there’s never a guarantee it will pay off. you know yourself best, and can control how hard you work.
I see a general consensus in this forum that MBA is best for only networking and campus placements. What about the overall personality development that an MBA helps in improving? I myself is a very reserved character and think that is a big hindrance in being a good leader and thats the reason that I have in mind for doing mba. AM I delusional in thinking that an MBA program can a bring a change in my overall personality?
^ Join a toastmaster. I’m saving you 100K.
Thanks Vilnius. I did not know about those 2 requirements for tax deductibility on student loan interest. I was wondering also if a person had 50k tax deferred in a 401k. then when they go to an mba, roll over to a traditional ira. then use ira to pay for mba tax deferred. No penalty and no tax because it will be a qualified education expense right? Do you have any advice regarding this (hoping you know someone from mba class who did this)? Many thanks.
I don’t know anyone who attempted this, or even if this is feasable. I would consult a tax professional.
^ a quick google search says that you can do that, use IRA money to pay for qualified education expenses, but you do have to pay the income tax on the distribution. It just avoids the 10% early withdrawal penalty.
“You will owe income tax on at least part of the amount withdrawn, but you will not have to pay the 10 percent additional tax on early withdrawals.”
Ok, so I guess you can do it… but whats the point? (Other than not having to take out a student loan for the amount of the distribution?)
You are paying tax on the distribution… so basically you are now using after tax money. This money is no different than if you took it out of a normal brokerage account or savings account. But, you are now eliminating the compounding benefit of deferred taxation in your Tax-Deffered account (this convo. is so f-ing level 3…)
So the real question becomes… which is greater? The amount of interest you will pay on the loan over the anticipated payback of the loan, or the expected benefit of tax deffered compounding on your account? If the interest you will pay is less than the amount gained by compounding tax free, take out a loan and don’t touch your retirement.
Another argument for it is that your income is greatly reduced when you’re in school, so your tax rate is presumably lower than it will be when you take the money out otherwise. I’m starting business school in the fall and think I’m going to do this in 2015 when my only other income will be from my summer internship.
I’m going to throw some math at you:
The FV of 50k, growing at 8% tax deferred for 30 yrs is 503,132.84. (50k * 1.08^30)
Assume 25% tax and you get 377,349.63
A 10 year student Loan of 50k, paying 6.4% interest (I read this rate somewhere recently), compounded monthy has a monthy payment of $565.20: N=120, I/Y = (6.4/12), PV = 50,000, FV = 0
So 565.20 x 120 payments = 67,823.88. Or 17,823.88 in interest.
You are litterally giving up potentially HUNDREDS OF THOUSANDS OF DOLLARS to save $17.823.88
haha. cant believe you turned this to a test question. But that is not apples to apples. #1 of that is FV of 30 vs FV of 10 on the other. #2 of that is before inflation. Inflation would reduce the PV of the returns with the longer time frame vs the short. #3 You could make the same argument on why even go to an MBA and instead invest in the market.
Ultimately though, you are right, it is de minimis. It is prolly more important in obtaining higher salary to justify the expenditures to obtain the mba.
But good point PC Southern. You can save ~15% in taxes by doing that.
Ha, I’m balls deep in Level 3 studying. I was tempted to add in a layer of future gifting and multi-generational tax savings but thought that may go too far…
Yeah, I realized when i was doing it thats its not so cut and dry, but just to give some base computation that compounding is huge and using your future retirement for current consumption is pretty stupid. (wasn’t this also one of those investment tid-bits in the list greeny posted yesterday as well?).
If your work doesn’t pay for it, and you don’t have the cash on hand… Student Loans aren’t the end of the world if you have good reason to believe your income will increase with your new level of Education.
But if you are fresh out of undergrad and jump right into an MBA program to hopefully look better on paper… student loans can put a heavy burden on you as you will most likely still end up with a rather entry level position (and entry level salary) when you graduate as you have no real world experince to bring to the table.
What you should consider is using your period of low income (and low tax rate) to do a traditional IRA to Roth IRA conversion and pay the taxes out of another income source. I think a couple of people around here have mentioned that.