Graduate School - is the leverage worth it?
The economy shed nearly 700,000 jobs in February, according to ADP, and although these numbers aren’t the official tally, it’s hard to read anything positive here. What are the previously employed doing? Jobs, especially in certain sectors, are harder than ever to come by, so a number are turning to graduate school to ride out the storm.
Business Insider questions the wisdom of such career moves. Is it worth all the debt to attend graduate school in a time like this? As our entire economy undergoes a massive deleveraging, are we certain adding more leverage is the right thing to do? John Carney notes that
Many professionals decide that they’d rather wait out the recession ensconced in a school somewhere than take a job they see as beneath them for wages they would have scoffed at during the boom. Our system seems designed to encourage this. Even with our credit markets in turmoil, there are still plenty of student loans to be had and the tax system rewards spending money on education.
Some of this is clearly debatable - a number of tax breaks phase out pretty quickly at certain levels of income, and depending upon the success of Obama’s budget and stimulus bill, the student loan market could dry up pretty quickly.
But Carney references an interesting blog post by Penelope Trunk - Trunk lists eight reasons graduate school in a time like this (or in any time, from her point of view) is simply a bad idea. Her eight reasons are:
- Grad school pointlessly delays adulthood.
- PhD programs are pyramid schemes
- Business school is not going to help 90% of the people who go.
- Law school is a factory for depressives.
- The medical school model assumes that health care spending is not a mess.
- Going to grad school is like going into the military.
- Most jobs are better than they seem: You can learn from any job.
- Graduate school forces you to overinvest: It’s too high risk.
Of these, I think three are roughly accurate (3,4,7,8), a few highly dependent upon the situation and not subject to generalizations (1,2,5), and one certainly false (6).
The comment sections in both of these articles erupted - whether or not the posts were accurate, they elicited strong reactions. It’s instructive to read through them.
The most interesting to me was point #8 - graduate schools force you to overinvest. Just a few years ago, no one questioned the wisdom of taking out hundreds of thousands of dollars of debt to purchase a home: that asset was bound to appreciate, the common wisdom went, so a little leverage simply magnified your results. We all know how that ended. The same wisdom currently applies to graduate school. Students are almost universally saddled with massive amounts of debt, but there is a positive ROI on this leverage so long as your future earnings are subsequently raised.
There are three primary factors to assess in this calculation of ROI: future earnings, the amount of debt needed to attend school (often upwards of $200K), and the opportunity cost of not working full-time. The combination of debt and opportunity cost means the future earnings need to be quite substantial to justify the investment. Historically, earning an advanced degree such as an MBA means raised your expected future earnings substantially, which translated into a positive ROI a few short years out of graduate school.
Let’s take an MBA as our example. With up to 45% of graduates from HBS going into finance - a sector that is on the brink of mass nationalization with executive pay limits now written into law - the estimates we have used to calculate future earnings are now radically uncertain at best.
This point is worth repeating: the most important factor in calculating the financial ROI of an MBA - future earnings - is now an unknown. Is graduate school worth all the leverage in a time like this? It might be time to recognize graduate school for what it is: a gamble.
UPDATE: The NYTimes has an excellent article about graduate school and the tough times Ph.D.’s in humanities are facing in this economy. Says one advisor: “Unless you are independently wealthy or really well connected, don’t apply.”
Nice. Helpful insights. Go Heels!
Gavin
8 Mar 09 at 6:00 pm