I went to a private graduate school for architecture, the Illinois Institute of Technology (IIT). A three year program that costs a little over $30,000 a year just in tuition. On top of that you probably need $1,000/month to live plus money for model supplies, architectural travel (a large part of your education I might add), and books.
There are three types of loans available:
Federally Subsidized at 6.8% - you don't start paying interest until six months after you graduate. This caps out at $8,500/year.
Federal Unsubsidized at 6.8% - you start paying interest right away. This caps out at $14,000/year.
Private loans at 8.0% - interest start right away. This is what people use to live on and pay the remaining tuition with.
Note: the Obama Administration as of this school year (Summer 2012) got rid of the Federally subsidized loans in order to help close the budget deficit. Also, along with alimony, students loans are not eligible for dismissal if you file for bankruptcy. Basically, you will have to pay them back.
I got lucky in many ways and I owe about $38,000 because I was able to make many large sum payments thanks to a generous wife among other things. If I pay off my loans over ten years my monthly payment is roughly $440, and I'll end up paying $14,500 in interest on the $38,000 I owe. My current income is about $2,000/month after taxes and my living expenses are roughly half of that, so my effective purchasing power will be reduced by half for the foreseeable future. That is, until I get a raise or my ten years is up. Given the state of architecture right now I'd say it's a coin toss.
About 2/3-3/4 of the people from my class have jobs that pay money; many work for free or do not have jobs. For what it's worth less than half of the undergrads have jobs and most of them are not in architecture. An undergraduate degree in architecture at IIT is five years. Most of these jobs are $12-20/hour. After taxes that's $20,000 - $32,000 per year. The average debt for people who were in the three year program is about $160,000. Math time:
If the Federal loans top out at $22,500/year multiplied by three years that's $67,500. $160,000 (rough average just from talking to classmates) with $67,500 deducted is $92,500 in high interest rate loans.
Over a 10 year pay off period that's:
$777/month for the 6.8% loan - $25,715 in interest over the life of the loan
$1,020/month for the 8.0% loan - $42,175 in interest over the life of the loan
$1,797/month total for 10 years - $67,890 in interest over the life of the loans
Over a 25 year pay off period that's:
$469/month for the 6.8% loan - $73,050 in interest over the life of the loan
$714/month for the 8.0% loan - $121,680 in interest over the life of the loan
$1,183/month total for 25 years - $194,730 in interest over the life of the loans
Source for numbers. It's an amortization calculator. If you don't know what that is go learn. It'll be the most important thing you learn all week.
At an average of about $30,000 (probably high) salary after taxes that means the average person in my (three year, the two years students are far better off) class more or less must choose the 25 year repayment plan. If they bring home $2,500/month and $1,200 is taken out for their loans that leaves them with $1,300 to live off of.
$11,170 is the poverty level for a single person in 2012. They're pulling in $15,600 so technically they're not poor...?
To actually become an Architect one must pass seven tests (with a passing rate of about 60%-80% per test) which cost $225 each plus yearly fees and accumulate 5,600 hours of internship to become an architect. Until then you're an intern with a masters degree (Edit: to those who complain about this title, this is nomenclature from the AIA).
Note: The interest calculation is actually quite a bit simpler as I show it here. The majority of the loans taken out start to accrue interest the moment they're dispersed, so much of that money already has several years of compounding 6.8 and 8.0 percent on it by the payback date (Nov. 12, 2012 if you started in the Fall of 2009 for the three year program).
Also, a lot of people on Reddit seem to think this is me complaining or feeling I've been tricked or I work at a bad firm and I'm untalented or something. Nothing could be further from the truth. This post is more just a snapshot of a moment in time of a somewhat unique situation. I know more about grad. student loans at this very moment than about 99% of the population; three years ago that was not the case. Even so I was very aware of my financial decision and its implications. That's why I never took out the 8% loans and paid as much of as humanly possible as early as possible. The larger problem is that it takes increasingly more to get your foot in the door in the field of architecture while the starting salaries remain low. It's essentially an arms race for education and experience where only those with money or who are willing to live as working poor are going to advance. It's less than ideal.
Showing posts with label finance. Show all posts
Showing posts with label finance. Show all posts
12 November 2012
07 October 2009
The Rule of 72... or 70, 69.3
If you have no idea what that title means then I guarantee (ironic global and personal events withstanding) that this is the most important thing you will learn today.
This is something my dad talked about constantly since I can remember, so when a lecturer at IIT today stated the "rule of 70" I chuckled to myself with my usual dorky demeanor. It was one architectural PhD talking to a bunch of other MA's and PhD's who don't know basic finance... which is of course why they design the objects that contain more of humanities combined wealth than any other profession by far. But that's not the point.
The point is that I wanted to know why he said rule of 70 and not 72. Upon further research I learned all sorts of cool things, and as usual Wikipedia and a subsequent Google search taught me more in fifteen minutes than I learned all day at my fancy school (sorry school, I still love you and your sweet sweet buildings and wood shop).
The rule of 72 is a quick and fairly accurate way of determining how long it will take an investment to double. Simply divide 72 by the interest rate and the result is the amount of time it takes the principle to double due to compounding interest. For example: if you are receiving an interest rate of 8% on $1 it will take 72/8 = 9 years for that dollar to double. Simple enough.
Here's the actual calculations (from Wikipedia):
72 is used because it's the multiple of many numbers and hence easy to use. The "appropriate", if that's the right word to use (pun definitely intended), number to use is 70 because ln(2) = 69.3; rounded up. Although it depends on what interest rate you're working with. For the numbers I tend to use, say... the real rate of return on an investment in the stock market which is about 6-7%; 72 works best. For small numbers use the others.
Use that link above and play with the stock markets numbers. I learned quite a bit. I did 1955-2002. My thinking was an era post-WWII and the boom afterwords and the period before we went totally nuts in the last few years. Average rate of return? About 10.6% (this is the geometric mean, not arithmetic - there's an explanation on the site and the number I give is far more accurate) and when it's adjusted for inflation the "real" rate of return is about 6.3%.
72/6.3 = 11.4 years
The take away from that is this. Say you have a kid and you decide it'd be nice if one day they had money to give their kids, you know, patience and forethought. Well, if when they were born you set up an IRA (savings account that doesn't get taxed) and put in a $100 bill by the time they could withdraw it at 59.5 it'd be worth roughly $40,000. Keep in mind this is already adjusted for inflation. So say you skipped buying that Acura and instead bought the Toyota and put the savings of roughly $15,000 in that account (over several years, you can only put in $6,000 a year currently) and they didn't withdraw it until they were 65.5 (using the 1871-2008 geometric mean of the average rate of return on the US S&P 500 adjusted for inflation which is 6.6%). They'd have $960,000 (again, in present value) tax free. That's a truly conservative estimate based off of the largest sample size available to anyone is the US that I'm aware of.
Capitalism may be brutal and inhumane, but over the long run it certainly doesn't have to be. Just think of how you live now - and the giant's shoulders we stand on to do so. The rich get richer because they know simple financial tricks like the rule of 72 that enables them to create a mental picture strong enough to allow them to invest in something that they will most likely never see come to fruition. But in the long run... $15,000? That was my tuition this semester. When we spend money in the present it has a great effect on the future that few ever give thought to. My decision to go to grad school is essentially me saying "with the knowledge I gain here I will effect the world in a more significant way than if I were to invest the money (3 years at over $30K per year) and bequeath to six people of my choosing one million dollars apiece in roughly 65 years." Understanding this relationship adds new meaning to these actions, or detracts it if you consider what most people spend their money on.
So yes, that's why I wear Hanes white tees and bring my lunch to class.
This is something my dad talked about constantly since I can remember, so when a lecturer at IIT today stated the "rule of 70" I chuckled to myself with my usual dorky demeanor. It was one architectural PhD talking to a bunch of other MA's and PhD's who don't know basic finance... which is of course why they design the objects that contain more of humanities combined wealth than any other profession by far. But that's not the point.
The point is that I wanted to know why he said rule of 70 and not 72. Upon further research I learned all sorts of cool things, and as usual Wikipedia and a subsequent Google search taught me more in fifteen minutes than I learned all day at my fancy school (sorry school, I still love you and your sweet sweet buildings and wood shop).
The rule of 72 is a quick and fairly accurate way of determining how long it will take an investment to double. Simply divide 72 by the interest rate and the result is the amount of time it takes the principle to double due to compounding interest. For example: if you are receiving an interest rate of 8% on $1 it will take 72/8 = 9 years for that dollar to double. Simple enough.
Here's the actual calculations (from Wikipedia):
Rate  | Actual Years | Rule of 72 | Rule of 70 | Rule of 69.3 | |
|---|---|---|---|---|---|
| 0.25% | 277.605 | 288.000 | 280.000 | 277.200 | |
| 0.5% | 138.976 | 144.000 | 140.000 | 138.600 | |
| 1% | 69.661 | 72.000 | 70.000 | 69.300 | |
| 2% | 35.003 | 36.000 | 35.000 | 34.650 | |
| 3% | 23.450 | 24.000 | 23.333 | 23.100 | |
| 4% | 17.673 | 18.000 | 17.500 | 17.325 | |
| 5% | 14.207 | 14.400 | 14.000 | 13.860 | |
| 6% | 11.896 | 12.000 | 11.667 | 11.550 | |
| 7% | 10.245 | 10.286 | 10.000 | 9.900 | |
| 8% | 9.006 | 9.000 | 8.750 | 8.663 | |
| 9% | 8.043 | 8.000 | 7.778 | 7.700 | |
| 10% | 7.273 | 7.200 | 7.000 | 6.930 | |
| 11% | 6.642 | 6.545 | 6.364 | 6.300 | |
| 12% | 6.116 | 6.000 | 5.833 | 5.775 | |
| 15% | 4.959 | 4.800 | 4.667 | 4.620 | |
| 18% | 4.188 | 4.000 | 3.889 | 3.850 | |
| 20% | 3.802 | 3.600 | 3.500 | 3.465 | |
| 25% | 3.106 | 2.880 | 2.800 | 2.772 | |
| 30% | 2.642 | 2.400 | 2.333 | 2.310 | |
| 40% | 2.060 | 1.800 | 1.750 | 1.733 | |
| 50% | 1.710 | 1.440 | 1.400 | 1.386 | |
| 60% | 1.475 | 1.200 | 1.167 | 1.155 | |
| 70% | 1.306 | 1.029 | 1.000 | 0.990 |
72 is used because it's the multiple of many numbers and hence easy to use. The "appropriate", if that's the right word to use (pun definitely intended), number to use is 70 because ln(2) = 69.3; rounded up. Although it depends on what interest rate you're working with. For the numbers I tend to use, say... the real rate of return on an investment in the stock market which is about 6-7%; 72 works best. For small numbers use the others.
Use that link above and play with the stock markets numbers. I learned quite a bit. I did 1955-2002. My thinking was an era post-WWII and the boom afterwords and the period before we went totally nuts in the last few years. Average rate of return? About 10.6% (this is the geometric mean, not arithmetic - there's an explanation on the site and the number I give is far more accurate) and when it's adjusted for inflation the "real" rate of return is about 6.3%.
72/6.3 = 11.4 years
The take away from that is this. Say you have a kid and you decide it'd be nice if one day they had money to give their kids, you know, patience and forethought. Well, if when they were born you set up an IRA (savings account that doesn't get taxed) and put in a $100 bill by the time they could withdraw it at 59.5 it'd be worth roughly $40,000. Keep in mind this is already adjusted for inflation. So say you skipped buying that Acura and instead bought the Toyota and put the savings of roughly $15,000 in that account (over several years, you can only put in $6,000 a year currently) and they didn't withdraw it until they were 65.5 (using the 1871-2008 geometric mean of the average rate of return on the US S&P 500 adjusted for inflation which is 6.6%). They'd have $960,000 (again, in present value) tax free. That's a truly conservative estimate based off of the largest sample size available to anyone is the US that I'm aware of.
Capitalism may be brutal and inhumane, but over the long run it certainly doesn't have to be. Just think of how you live now - and the giant's shoulders we stand on to do so. The rich get richer because they know simple financial tricks like the rule of 72 that enables them to create a mental picture strong enough to allow them to invest in something that they will most likely never see come to fruition. But in the long run... $15,000? That was my tuition this semester. When we spend money in the present it has a great effect on the future that few ever give thought to. My decision to go to grad school is essentially me saying "with the knowledge I gain here I will effect the world in a more significant way than if I were to invest the money (3 years at over $30K per year) and bequeath to six people of my choosing one million dollars apiece in roughly 65 years." Understanding this relationship adds new meaning to these actions, or detracts it if you consider what most people spend their money on.
So yes, that's why I wear Hanes white tees and bring my lunch to class.
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