Bobbi the future Masters Student Case Study (Gail Vaz-Oxlade)

I love these!!! (Shut up. I’m a geek. I know.)

Here’s what Gail posted as the case study

Bobbi is a 24-year university graduate who feels she’s carrying too much debt. She’s currently working as an ESL teacher earning about $1600 a month net, and she plans to keep this job until she goes back to school to do her Masters in September 2009. Bobbi has a student loan of $23,000, which her Dad has agreed to pay off on her behalf. She has another $25,000 on a line of credit, and $4,000 in credit card debt. When Bobbi goes back to school for her Masters, she expects she’ll have to take on another $25,000 in debt. Bobbi feels overwhelmed. She believes if she starts making smart decisions now she can slowly build a bright financial future for herself, but she just doesn’t know where to start.

And this is what Gail wants:

What would you recommend to Bobbi? Make sure your recommendations are supported by cold, hard numbers (i.e., what Bobbi will have to pay monthly to deal with her total debt load before and after her Masters degree.) You want to convince Bobbi that the path you are recommending is one that will take her where she wants to go. Firm, realistic, and supportive recommendations make the most lasting impression.

FB’s Answer:

Disclaimer: If I were Bobbi, this is what I’d do. It may seem extreme to some, but I think it’s reasonable considering the payoff at the end.

The basics: she needs to come up with a budget, save up an emergency fund, and clear her credit card debt ASAP, and come up with a long term plan.

Her Income

Right now, she earns a net of $1600/month. Assuming she started in January 2009 as an ESL teacher, she has 8 months to go before she goes back to school as a Master’s student in September 2009.

$1600 x 8 = $12,800 (net)

Her Debt

She’s fortunate in having her father clear the $23,000 student loan, so she doesn’t have to worry about it (for now).

Her total debt:

-$25,000 (Line of credit)
-4000 (Bankwest)
-$25,000 (Come September 2009 for her Master’s degree)


– $29,000 (as of Jan 2009)
– $54,000 (as of Sep 2009)* (assuming she doesn’t follow my plan outlined below)

Her Budget
& The Short-Term until September 2009

I think she should consider a very frugal lifestyle to do what it takes to clear her debt because the looming amount of $54,000 is quite daunting for any new graduate.

I know, I graduated with a total of $60,000 in debt with just a business school degree when I left, and it bothered me so much, I cleared it in 1.5 years. But no one has to go through what I did, I just felt better not having that kind of noose around my neck.

She needs to make a budget and track her expenses if she wants to feel like she’s in control of her life.

A rough budget I came up for her assuming she takes public transportation and has no other outstanding loans:

  • Rent: $400
  • Food: $200
  • Public Transportation: $100
  • Entertainment: $50
  • Other: $50
  • Emergency Savings: $100
  • Credit Card Debt Payment: $600

Principles of the short-term budget:

1. She needs to have an emergency savings fund because anything can happen and she needs to get rid of the plastic, seeing as she racked up $4000 in debt.

2. She needs to clear those credit cards as soon as possible (and stop using plastic altogether), because the interest rate is most definitely higher than any line of credit or student loan.

In addition, the interest on the credit card cannot be deferred the same way as a line of credit or student loan. Those student loans normally have a grace period of 6 months to a year.

I chose $600/month which is 37.5% of her net income, and is higher than the normal 30% suggested by most, but it’s because I think it’s feasible and without knowing what she pays in interest on the credit cards, the sooner they’re gone, the better.

With $600 a month, and assuming she pays 15% interest on the credit card, she’ll be cleared that $4000 debt if she doesn’t incur any new charges by mid-August, just in time for her student loans to kick in for her Master’s degree.

She needs more money (as per my assessment)

Her budget is pretty tight as is, and I’m not even sure she could do that, depending on where she lives.

I suggest that if she cannot feasibly cut it back any more or if she cannot make the $600/month credit card payments, she should most definitely get a part-time job to earn more money, because those credit cards MUST be cleared as soon as possible, and she won’t be earning an income while she’s in school.

As an ESL teacher, she must only be teaching during the week. She could tutor on the weekends for $15/hour, pick up a part-time weekend job at Starbucks, or walk some dogs at $20/head.


With that extra income, she should put the extra amounts towards her credit card debt after covering her basic needs (if the budget is too tight), and clear off the cards sooner, which is the most important.

Once the credit cards are cleared

Once the cards are cleared, she should put the money towards building up an emergency fund of at least $4800 ($1600 x 3 months), and keep that in savings in a high interest savings account.

If she’s done creating her emergency fund, then she should now put $100 towards an RRSP and save the rest of the money for when the student loans collections come-a-calling.

Once the grace period is over on the student loans (which by the way, is not much of a grace period because they charge you interest from the day you graduate, not after the grace period), then use the extra money aside from the RRSP and the Emergency Fund savings to put towards the student loan with the highest interest, and snowball the payments from there into the rest of her loans.

After the master’s degree

My assumptions:

  • She followed my budget and cut back, made more money or both, but I didn’t factor in more cash over the $1600
  • A Master’s Degree in teaching is 1 year (I am not sure).
  • She didn’t work for an entire year starting Sep 2009.
  • Her student loans of $25000 paid for tuition and living expenses.
  • Her grace period for loans is 6 months after graduation (Sep 2010).

After graduating with her Master’s, she needs to draw up another budget (or tweak the old one) and pay off her line of credit and student loans.

She should now have the following:

  • $800 in an Emergency Fund
  • No Credit Card Debt
  • -$50,000 in Student Loans

And now that she has a master’s, let’s assume she made 50% more than her previous job, which is $2400/month, including a retirement plan that she automatically contributes to (if she’s a teacher in Ontario, she gets an automatic retirement plan based on her years of service).

Therefore, she doesn’t need to save for retirement (now) outside of what the government provides her, but she still needs to save an emergency fund.

Her new budget should be:

  • Rent: $400
  • Food: $200
  • Public Transportation: $100
  • Entertainment: $100
  • Other: $100
  • Emergency Savings: $300
  • Student Loan Before: $600
  • Student Loan After: $600

Her emergency savings should be added to until she saves $4800 ($1600 x 3 months) which will take her a little over a year.

If she can stick to her previous budget, I’d highly recommend she does, then she should. I did however, give her an extra $50 in Entertainment and Other because I’m nice like that.

About her debt load after her Master’s:

Putting $600/month towards each $25,000 loan this is what the breakdown looks like:

$25,000 @ 6% /year = $1500

$1500 / 12 months = $125/month in interest alone for one loan.

Double those amounts, and she’s paying $250/month just in interest alone on her $50,000 debt.

So out of the $1200 that she’s putting towards the debt, $950 goes towards the principal, which is a hefty chunk of change.

With that, she’ll be done her debt in roughly 54 months, or 4.5 years, just under the 5 year mark.

It’s quite aggressive because she’s putting 50% of her net income towards debt, but she’s single and I think realistic based on my assumptions above.

Other Notes

Even if she’s earning $2400/month net now, she should still consider taking on another job to make more money. 4.5 years is a long time to be paying off your debt using 50% of your income, and ideally I’d like her to use only 30% towards debt, which means she needs to bring home 20% more income, or $480/month.

Again, she could continue with her tutoring on the side, or picking up a part-time retail job or something that will give her extra cash without interfering with her teaching.

Once she’s done the debt in 4.5 years

She should now think about saving more money in her emergency fund up to about 6 months. I’m paranoid and self-employed, so I’m thinking a year to 2 years is really where I’d be comfortable, but for someone who’s salaried, she’ll be all right with 6 months.

$1600/month x 6 months = $9600 saved in an Emergency Fund

Then she should consider putting extra money towards her retirement fund, even though her employer covers some of it. It may not be enough to live off on comfortably, and to be financially secure she shouldn’t have to worry about where she’ll be in retirement.

I’d suggest out of the $2400 net a month, that she put at least 10% towards retirement, or $240/month.

She’ll also be thinking about a house or a condo, and she’ll need a down payment, or maybe get married and have a couple of kids, so there are many variables she’ll need to save for.

Other things to consider

For me, I’d consider repaying her father back if she feels that he could use the money and if it was not a gift he could’ve given freely and felt comfortable about it.

Parents do sweet things, but sometimes they know not what they do.

Last words

I think the plan I laid out (with making more money), is feasible if she’s really serious about clearing the debt and a good start to a financially secure life. The most important things to remember are to:

  • Keep a budget to know where you want your money to go
  • Track your expenses so that you know where your money is actually going
  • Save for emergencies and retirement
  • Live below your means, and if you cannot, make more money

Even if she takes slightly longer than 5 years to clear the debt, or doesn’t follow the budget exactly, at least with budgeting and tracking her expenses she will learn the basics of how to manage her money which is more important than just clearing the debt.

The feeling of knowing you’re finally in control of your money after years of being clueless and really feeling like you’re starting your life after being debt free is indescribable.

I know, I’ve been there and I’m still living it.

Phew! This was fun 🙂

About the Author

Just a girl trying to find a balance between being a Shopaholic and a Saver. I cleared $60,000 in 18 months earning $65,000 gross/year. Now I am self-employed, and you can read more about my story here, or visit my other blog: The Everyday Minimalist.