Graduate School:
Loan vs. Save
Team 06
Joseph Ling
Majd Abdoul-Hosn
Scenario 1
 Non-school related costs ignored
 Scope: 42 years
 Work and save for Graduate school
 Assumptions:






Work for 2 years at $60,000 per year
4% raise (Prior to grad. school)
Enroll for 2 years
$70,000 per year after Grad. School
6% raise (After grad. school)
Save 10% of salary every year
Scenario 2
 Take out a loan for graduate school

Assumptions:

Loan:
 Amount: $12,000 a year
 Interest:
 4.7% in school
 5.3% during repayment
 Compounded quarterly
 No repayment during school




Enroll for 2 years
$70,000 per year after grad. school
6% raise (After grad. school)
Save 10% of salary every year
Results
 Scenario’s match at 25 years
 Loan scenario will make more after this point
Loan vs Save
Save
Loan
$1,000,000.00
$900,000.00
$800,000.00
$700,000.00
Sa
vi
n
gs
$600,000.00
$500,000.00
$400,000.00
$300,000.00
$200,000.00
$100,000.00
$0.00
0
10
20
Years
30
40
Analysis
 Goal: Maximize Future Worth.
 Future Worth of Loan Scenario:

$1,048,618.28
 Future Worth of Save Scenario:

$963,569.44
 Future Worth of Loan is greater than Future
Worth of Save

Therefore, the Loan Scenario is a better
choice.
m
at
ch
Sensitivity Analysis
Ye
ar
s
to
School Cost vs. Years to match
 Low cost = $12000/yr.
35
Match at 25 years.
 Mid. cost = $23000/yr.
 Match at 30 years.
 High cost = $40000/yr.
 Match at 26 years.

30
25
20
15
10
5
0
$0
$5,000
$10,000
$15,000
$20,000
$25,000
School cost
$30,000
$35,000
$40,000
$45,000
Sensitivity Analysis
School Cost vs. Future Worth
$1,200,000.00
$1,000,000.00
 Future worth of
loan scenario
decreases slower
than future worth
of save scenario.
Future Worth
$800,000.00
$600,000.00
$400,000.00
Save
Loan
$200,000.00
$0.00
$0
$5,000
$10,000
$15,000
$20,000
$25,000
School Cost
$30,000
$35,000
$40,000
$45,000
Sensitivity Analysis
Starting Salary Before Graduate school
vs. Future Worth
$1,000,000.00
 Starting salary
$995,000.00
before graduate
School.
 Effect is minimal.
$990,000.00
Future Worth
$985,000.00
$980,000.00
$975,000.00
$970,000.00
$965,000.00
$960,000.00
$955,000.00
$0.00
$10,000.00
$20,000.00
$30,000.00
$40,000.00
Starting Salary
$50,000.00
$60,000.00
$70,000.00
Sensitivity Analysis
Raise vs. Future Worth
$1,600,000.00
 Raise after graduate
$1,400,000.00
school between 5% and
7%.
 Save scenario splits
farther from loan
scenario as this %
increases.
Savings
$1,200,000.00
$1,000,000.00
$800,000.00
Loan
Save
$600,000.00
$400,000.00
$200,000.00
$0.00
0%
1%
2%
3%
4%
% Raise
5%
6%
7%
8%
Sensitivity Analysis
Years in grad. school vs. Years to match
35
 Effect on Loan
scenario is large.
 Every extra year spent
in school increases
the breakeven point
by 8 to 10 years.
30
Years to match
25
20
15
10
5
0
0
0.5
1
1.5
2
Years in grad. school
2.5
3
3.5
Summary
 Which should you choose?

Loan is more favorable even with:




Lower percent raise.
Higher school cost.
Longer time spent in school
Increased interest rate.
Resources
 For school costs:
 Low cost http://www.csupomona.edu
 Mid cost http://www.ucla.edu
 High cost http://www.columbia.edu
 Salaries:
 http://www.payscale.com
 Literary Resources :
 Cal Poly Pomona University Catalog 2003 –
2005
 Essential of Engineering : Economic Analysis