Sunday, February 14, 2010

Mo money Mo problems

For a while, I have wanted to write a post about money at Stanford and more generally, at top American business schools because I don't believe that the spending mores of GSB students are unique among business school students.

Two events spurred me to stop delaying:

1) 2nd quarter tuition is due tomorrow. (That's two for two that I have paid on time!)

2) The weekly GSB email of compiled announcements and deadlines informed me today that the Stanford Board approved a 3.5% tuition increase for incoming GSB students. Class of 2012 will be paying $53,118 while members of the class of 2011 (current first years) will still be paying only $51,321 because the school commits to keeping tuition flat during each student's two years of study. (Before I get comments from readers who are outraged that I consider $50K+ a paltry sum, please take a deep breath and realize that "only" is being used facetiously in the previous sentence. Thanks.)

The issue that has been troubling me is the buy-now pay-later spending habits of members of the GSB community. I don't have time tonight to discuss in depth, but I want to begin to write about how we Stanford business school students spend money and what that means about our attitudes towards our job prospects, how that might limit our abilities to take risks, and why everyone else should also be worried.

How we spend money: Recklessly (e.g., mid-week trips to Vegas, regular jaunts to San Francisco and wine country via party bus, numerous official events that cost >$30 per person, international travel every chance we get). How we pay for it: Loans for the vast majority of us. How we treat people who express concern about not being able to keep up: Dismissively and derisively.

How we implicitly view our job prospects: Optimistically. Clearly if we are willing to saddle ourselves with US$200K in debt, we are confident that we will be able to pay roughly $10K per year for the first twenty years of our post-MBA careers. Important to note is that if we decide to stop the principal amortization clock for any reason (e.g., inability to find a job because of prolonged elevated unemployment levels), interest continues to accrue.

How this debt limits our career choices: Safe bets on consulting and banking take the place of start-ups. It's tough to pay down debt when you're getting paid in equity from a start-up or bootstrapping your own venture with credit cards or money from friends and family. The monthly fixed payments from debt skew career choices towards well-worn tracks, while existing debt load makes it difficult to take out a new loan to start a business.

Why everyone should worry: There may be more reasons, but two immediately come to mind:
1) The first stems from the issue I raised above about MBA grads veering away from riskier careers. This is problematic because well-trained managers should be trying to start new businesses to solve the world's problems. Losing a portion of young, energetic, but debt-strapped MBAs does not bode well for the "innovation economy."
2) This endemic attitude is inherently irresponsible and short-sighted, and it is distressing to see the business leaders of the future refusing to make tough choices about how to spend their own money.


Deadhedge said...

This post applies to my MBA program, too and is probably as common as you had suspected. One other aspect is that classmates with this approach often worked in lucrative fields prior their MBA program and have money saved or stock options.

Since I was a social worker, I did not, was more frugal and also was probably more surprised by this than the average MBA.

Original said...

I love this post! It couldn't be truer. MBA students and candidates are generally a very optimistic bunch. Perhaps, you have to be to take such a risk because going to business school is a big risk in of itself. But, a lot of us are overly optimistic about our prospects after business school. You would think the financial meltdown of 2008/2009 and its impact on business school students would have taught us to be more prudent.

Christina said...

This is a great post, thank you for writing about this!

I wonder what schools themselves can do, if anything, to discourage this reckless spending of money... such as offering alternatives to expensive foreign travel over school breaks. It's the same thing here -- Wharton students always seem to be traveling for 2 week stints, leaving me wondering how people pay for it.

DreamChaser said...

very very well said! I love how your post touches on some of less glamorous side of bschool but really important issues. I agree with every single points you made and plan to stay in perspective and spend moderately throughout school. It's a shame that some MBA students would be judgmental towards the more frugal students' decisions. One does not have to party/travel all the time to make the most out of his/her MBA experience.

Anonymous said...

Interesting. The question I have is - where are the loans coming from?!! I'd assume lending institutions typically only lend you the cost of tuition and fees and a "reasonable" living allowance, say $18-20k a year for a single student... What I've observed among top B-schoolers looks like a minimum of a $40k/ year lifestyle, when you factor in cost of room and board along with all the discretionary spending. Are MBA loans from schools and 3rd party lenders THAT generous?

Anonymous said...

Interesting. I'm starting to really wonder about the personality of the average GSB student vs what the type of student the school says it's looking for. You're not the only one who is giving a somewhat less rosy version of the typical GSB student. There are several people who are R1 admits for 2012 posting on various b-school forums who are already showing their dismissive and derisive selves cloaked in anonymity. I really wish GSB would weed those folks out.

Palo Alto for a While said...

I want to address this last comment. Stanford is a wonderful place with a reportedly lower "asshole factor" than other schools of its caliber. Please don't let a couple message board flamers or my sometimes negative posts give you the wrong impression. The VAST majority of individuals are gifted, thoughtful and relatively modest; however the group think and group act that comes from a business school experience sometimes trumps the individual.

chandara said...

This just goes to show that you have your heart (and head) in the right place when it comes to finances. Thank you for continuously giving me (and many of us) a fresh and much more authentic voice regarding the GSB and MBA community. Not all of us were born with a silver spoon even as we are making a huge investment for our futures.

Anonymous said...

HBS is very much the same. Everyone here spends like drunken sailors. The problem is that both classes are filled with the rich and privileged, and it is hard for us average people with debt to party at the same level. The difference I think between HBS and Stanford is that HBS (and virtually all other schools) students are far more risk averse than Stanford. I've never met a Stanford grad who wasn't willing to seriously entertain the idea of doing a startup.

Elizabeth Dark said...

This was going to be the subject of one of my next husband and I really don't understand how people live in luxury apartments, go out to eat every night, take weekend trips once a month AND go on 2 week European vacations every break! Booth is the same...we often feel a little left out because we can't (or won't, I suppose) afford to live this way while he's a student. Don't they tell you that if you "live like a CEO while you're a student, you'll be living like a student while you're a CEO?" And that's when becoming a CEO was more of a possibility...thanks for posting.

Anonymous said...

Agree 100%.
- GSB classmate

N. Nagajyothi said...

I just ran across your blog Paloalto for a while today. Congratulations on joining Stanford GSB. I'm a Stanford GSB aspirant. And so reading about your experiences at GSB has inspired me.

I've been reading lots of MBA blogs recently and have a suggestion for how this blog can reach to many other needful B-school applicants. Beat The GMAT, which is a very active GMAT/MBA site, recently launched a blog directory ( to promote MBA blogs. If you add your blog to their blog directory, a lot more people like me will find your blog!

Please keep posting great stuff!


Shreenath said...

Brilliant post and glad to hear that not everyone has this mythical jar of money for trips and Vegas that seems to be evident in all the top schools =)

James P. said...

Reminds me of a line from "Rise of the footsoldier" =)
Poker Money
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Yogacan said...

Thanks for the post. I've been searching the web to find an answer to my question on whether it is actually possible to start a business after an expensive MBA. Yes, obviously you can opt for one or the other for spending, but assuming I've already had 100-200 K in debt what would my chances of receiving any further loans for a start-up? I guess very little. Thanks for making that clear. I'll probably go for cheaper schools because I don't want to work in consulting or a bank for more than 2 years :)

Palo Alto for a While said...

Hey Yogacan - I don't think you have to skip Stanford all together. If you really want to be an entrepreneur and get in, for god's sake, go to the GSB! Just be mindful about how you spend discretionary money -- e.g., just because the social crew on campus is going to Hawaii for Thanksgiving doesn't mean you have to join them and add $1.5K to your debt. Stay local or go see your family instead. Every trip, meal out, and $60 party ticket counts and can mean the difference between $100K of debt and $200K of debt. Coming out of Stanford GSB, if you want to start a business and the idea has legs, personal grad school debt WILL NOT be a key barrier to refinancing. Sorry if that wasn't clear in original post.

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