Skipping the MBA and Questioning the Benefits of College - Why is it Uncomfortable?

The following is a guest post by Josh Kaufman, a business teacher and the author of The Personal MBA: Master the Art of Business. He teaches craftsmen, artists, and professionals how to learn the fundamentals of modern business practice without mortgaging their lives. Learn more at PersonalMBA.com.

Over the past few weeks, FMF has done a wonderful job exploring the value of MBA programs, as well as college degrees in general. If you missed them, here are the posts:

• The One Great Thing an MBA Does for You
• Three Big Problems with Business Schools (And the Smart Way to Get an MBA)

In my book, The Personal MBA: Master the Art of Business, I make the case that you don't have to go to business school to learn practical business skills and do well in the working world. In fact, skipping the MBA may actually help you be more successful in the long run.

That's a position that makes many people uncomfortable, and has sparked quite a bit of controversy. The question is: why?

Because I've publicly advocated skipping business school, I've been standing squarely in the middle of this firestorm for six years. To be honest, I've always wondered why people get so worked up. From my point of view, it's pretty straightforward: do the math and consider the risks - ALL of the risks.

I'm not really the enemy of the MBA - I'm firmly against unnecessary student loan debt. MBA programs can generate enormous debt loads extremely quickly, without providing enough value to compensate for the risks.

Business schools are, on average, over ten times more expensive than were twenty years ago - after you account for inflation. (Source) Most students, unless they're already wealthy, finance tuition, fees, and living expenses via debt. These loans feature 5-10% interest rates and are non-dischargeable in the US by law, even in the case of bankruptcy.

By paying for business school with loans, you're taking a huge risk: you're borrowing a ton of money all at once that must be repaid, no matter what happens in the future.

If all goes well, you'll be okay: assuming you land a high paying job you like, steadily increase your pay over time, manage your finances wisely, and nothing unexpected occurs, getting an MBA may prove to have been a decent investment.

If something unexpected happens, however, your life may not turn out so well.

Accurate risk assessment for any investment requires good Scenario Planning, which includes a Doomsday Scenario. Before you sign on the dotted line, it always pays to consider what could potentially go wrong.

In the case of business school, the list is quite long:

• You have trouble finding a job immediately after you graduate, or the search process takes longer than you anticipate.
• You're laid off, your department is downsized, or your company folds in a down market, and you're out of work for a while.
• You have an unexpected medical emergency, with accompanying unexpected medical bills.
• Your new job makes you miserable, and you decide to quit and do something else that pays less in the short term.
• You decide to start your own company, and need funding to cover your overhead, including rent and food, without an immediate income.

Financially, all of these situations boil down to one major risk: a short-term, unforeseen cash crunch that limits your available funds. If you're unencumbered with debt, it's not as big of a deal - you have the freedom to cut expenses with relatively few long-term repercussions. Also, if you aren't constantly paying debt service, it's far easier to establish emergency funds that can help you handle unexpected events more easily.

If you're encumbered with student loans that have minimum payments in the thousands of dollars, that short-term cash crunch becomes a huge deal. Every single time you miss a payment, defer a payment, apply for abatement or forbearance, or consolidate your loans, you automatically rack up massive fees and interest penalties on top of your already considerable loan balance. Missing payments can also jeopardize professional licenses, which may be legally required to do your job.

As a result, your outstanding debt (and future monthly payments) can spiral out of control overnight, with no recourse whatsoever. Modern student loans are not structured in favor of the borrower in any sense. If you're looking for the fastest way to ruin your finances in perpetuity, missing a payment on a student loan easily takes the cake. (See The Student Loan Scheme: Gateway Drug to Debt Slavery for details.)

Business school is now expensive enough that the direct costs alone are considerable, but the risks you assume with student loans are truly massive. This is not a theoretical exercise: the above scenarios play out every single day, and have a higher probability than you might originally think. It also applies if you have children, and you intend to co-sign their student loans.

Take a few minutes to browse around on StudentLoanJustice.org to survey the damage, and remember the Attribution Error - these people aren't uniformly boneheaded idiots who are getting their just deserts. Circumstances matter more than we like to admit, and risks aren't risks if they never come to pass.

If MBA programs had a proven track record of successful student outcomes, that would certainly help mitigate the cost and the risk. Unfortunately, research indicates that business schools do pretty much nothing when analyzed on every measure of professional success: job attainment, salary, lifetime earnings, promotion, job satisfaction, etc. (For details, see: "The End of Business Schools? Less Success Than Meets the Eye" by Jeffrey Pfeffer and Christina Fong, both business school professors.)

If you can mitigate the cost and risk by (1) paying less, and (2) minimizing student loans as much as possible, the situation improves considerably. FMF writes about how he made millions by investing $5,000 in undergrad and graduate school. I agree with his conclusion - if you can get a credential that opens useful doors for $5,000 total, it's very likely your investment will pay off, and the risks are minimal. In FMF's case, investing a small amount of money in college credentials helped him land a job at a big-name company, which payed off in spades for the rest of his career.

Here's my story: I landed a full-ride undergraduate scholarship from a state school, so I didn't pay anything for my bachelors degree. Part of my undergraduate program was co-operative education (essentially an extended paid internship), which landed me a job at the very same big-name company, which turned into a full-time management-track job when I graduated. That was a good investment, and the risks were minimal.

Here's the twist: most of the people I worked with on a daily basis at big-name company were recent graduates of top 15 business schools, with student loans to match. It was easy to put myself in their shoes. After a while in my shiny new job, I realized I was miserable doing this type of work, even though the job was prestigious and paid well.

The experience of taking a job I thought I'd enjoy, only to discover it made me miserable, was a huge wakeup call. After a few years, I left the company to start my own education/publishing company, which I bootstrapped. The lean times getting the business off the ground would have been impossible to manage if I was also responsible for paying a few thousand a month in student loans. Today, I have no debts, own my own business free and clear, and I'm doing work I love.

I'm very fortunate - student loans would've made it extremely difficult to do what I'm doing now, and my life would be immeasurably poorer for it. I dodged a bullet - a big one. If I'd have gone to business school, I'd be stuck doing work I don't enjoy just to pay the loans, which I'd likely carry for decades. I feel the equivalent of surviving a near miss with a semi truck - the reason I warn potential students to look before they leap.

Freedom and flexibility are enormously valuable - and enormously underrated. You give up both when you borrow money, particularly when student loans are involved. In many cases, having the freedom and flexibility to take advantage of unexpected opportunities may be even more valuable than trading those benefits for a credential.

In general, people are uncomfortable questioning the value of credentialing because it goes against many common and deeply-held beliefs about the intrinsic value of schooling, social status, prestige, and feeling clear about the world and their place in it. Credentials are also a common refuge for people in transition: in most circles, you're not "unemployed" if you're paying tuition, which makes credentialing a comfortable option. Compared to these values, the learning aspect of credentialing is a distant concern - even though the learning is far more important.

Aside from a few significant differences of opinion of how business schools should go about teaching business skills, I primarily counsel against taking on massive debts to finance any credential. Borrowing money to finance a credential puts you in a very shaky financial position - one that, regardless of the doors that credential opens, could easily make your life more difficult than it really needs to be. The risks must be considered along with the potential rewards.

That's not to say I'm against education - quite the contrary. I'm a huge advocate of getting the very best education you possibly can. Fortunately, education and credentialing aren't at all the same thing. More on that tomorrow.

In the meantime, where do you stand on credentialing? If you can't pay for a credential in cash, do you think obtaining a degree is worth the risk and loss of flexibility?

Comments

[Mary Kay]

I love the article. It makes so much sense, but it probably won't be widely appreciated because of the glamour of credentials.

[jim]

Get your employer to pay for an advanced degree. If they pay for it then theres nothing to lose. If they won't pay for it then they've decided that it ain't worth it and that says something too.

[Jeff]

"you're not "unemployed" if you're paying tuition, which makes credentialing a comfortable option. Compared to these values, the learning aspect of credentialing is a distant concern - even though the learning is far more important."

This spoke the most to me. I'm 28 years old and many of my friends are getting graduate degrees that will not pay off. These are also the kind of people, I'm sorry to say, will not survive in the cut throat business world. They prefer to live in academia where results are not as important. They compare themselves to some of our other friends who are receiving graduate degrees that *will* pay off such as engineering, law degrees, medical degree, etc. I keep telling them they need an end game plan, they tell me the pursuit of knowledge to better themselves is their end game. It boggles my mind.

[Nate]

WOW! Thank you for sharing this powerful insight my friend. I love it. That was the best post I have read all day.

I can say without a doubt that NOT getting my MBA has been the most financially rewarding move I have made in my career thus far. I have been given the opportunity to participate in multimillion dollar decisions on behalf of my company and clients because of a healthy mix of hard work, strong interpersonal skill and refined competence. I truly believe our economy is returning to a RESULTS based model. Companies (and other such clients) are less concerned with paying you for your time – but rather for your results. Learning how to provide those results within the context of your business/industry can absolutely be done WITHOUT an MBA. Also my generation can literally research, study, learn and practice concepts at any given moment using resources found on the internet. I was just watching a Harvard class lecture on the internet last night.

Thanks again for this great post – well done!

[Jeffinwesternwa]

get started in Biz with a Bach degree, make your mark working hard for a few years THEN have the business, or "government" entity (I used the USAF tuition assistance 75% plan) for my MBA. You'll still be working and getting a paycheck, work experience and the degree. In most cases this can be done easily in 3~ years or less!Then I used it and RETIRED @ 47! DoH!!!!

[MBTN]

Based on the title, I really REALLY wanted to hate this article. However, everything the author says makes perfect sense. Thank you for posting this.

[Josh Kaufman]

@MBTN - that's the best compliment I've ever received about a blog post. Thanks!

[Funny about Money]

Interesting. I know two graduates of an expensive private business school who landed on the ground as the recession was eliding into a depression. One was wealthy and paid the $100,000 tuition out of pocket. The other has $1500/month student loan payments. Both are still unemployed.

BTW, law school is not a solution to this. Law schools have turned out so many graduates that there are simply no jobs to accommodate them. Google law school scam blogs for a very scary story.

[Concojones]

Josh,

What you're describing is exactly why I decided not to get an MBA, despite my exceptional passion for business.

A few years later, I think I made the right decision, but your mileage may vary (if you're really sure you want to work for Goldman, go get that MBA).

Of course, the challenge is to get the meaningful experience that business school would have given you, to get that on your own, instead of watching tv or so.

Looking forward to seeing your book.

[Concojones]

What I'm trying to say in my last point, is that attending business school is stimulating because of the people around you, and can take you to new heights. You can do this on your own, but you'll be... on your own.