The results are in. You’ve been accepted to your top choice business school! Hurray! You’ve also received a decent scholarship and can contribute a good amount of savings to your degree. But, the numbers don’t lie. Your resources fall short – very short – of where they need to be in order to completely finance your MBA. The big question: should you take out a student loan to cover the remaining costs?
Every individual’s situation is different. There are no easy answers but consider the following points as you determine whether or not a student loan, and hence an MBA, is a good investment for you.
1) Your b-school can make all the difference.
An MBA from a top tier school like Harvard will carry a lot more weight in the eyes of hiring managers than an MBA from an unranked school on U.S. News & World Report’s 2017 Best Business School list. When determining whether or not you should take out a large loan for your MBA, research expected salaries for recent alumni of your school. A top tier school can make a big impact when job hunting, but the price tag for such a degree can be a lot steeper. Weigh these factors to determine if a student loan makes sense for you.
2) Your field of concentration after graduation is huge.
The typical MBA program focuses on teaching general business skills like marketing, finance, statistics, accounting and operations. If you anticipate going into a management position in finance or consulting, then an MBA can be a great value for you. On the other hand, if you want to become part of a tech startup, the CEO may not be looking for someone with a traditional business background. Not only that, the base salary at a startup will likely be lower than at Morgan Stanley or Goldman Sachs. More specialized industries may not appreciate an MBA as much as you might think. Salaries can vary wildly depending on your career goals. Before taking on the heavy debt burden of an MBA, make sure you research the skill set needed for your particular career path. An MBA may not be the best option for you.
3) Calculate your need.
With tuition costs increasing each year and salaries not keeping pace, the average amount of debt an MBA student takes on can be alarming. Take a glimpse at the b-schools with the highest average student loan debt, according to US News & World Report:
Shocking, right? As you can see, the average MBA indebtedness is in the 6 figure range for 8 schools on the list.
Suppose you’ve been accepted to Tuck, a top tier b-school. The program comes with a high price tag. You estimate that you’ll make $148,000 per year after graduation, based on average salaries of last year’s graduates. You received scholarships and have some savings so you’ll need a loan of about $110,000. Common Bond, a private lender that offers graduate school loans for a selection of 29 top-ranked MBA programs, provides useful student loan calculators. The calculator pulls information directly from your school of choice, assuming it is among the 29 eligible b-schools. The following screenshot was taken from Common Bond’s calculator, using Tuck’s data.
The nice thing about Common Bond’s calculator is that it does nearly all the work! Notice the monthly loan repayment is $1,328. That’s a lot of money, but the debt to income ratio is 11.67%. The federal government considers a debt to income ratio of 20% manageable, though the median debt to income ratio for MBAs is about 30%. If you go through a budget based on a reasonable prediction of your annual earnings post-MBA, you might find this debt to be pretty manageable, making the MBA a good investment. If you have undergraduate debt or a mortgage, you’ll need to consider those as well.
4) Determine the ROI (Return on Investment) of your MBA.
Look no further than GMAC (Graduate Management Admissions Council) to help you figure out the ROI. To calculate your ROI, find your school’s data and sit down with the numbers. GMAC has a handy slideshow to help you determine the ROI. GMAC looks at three time periods to calculate the ROI – 3, 5 and 10 years after graduation.
Some final words.
It’s worth noting that MBAs aren’t as rare as they used to be. In the United States alone, there are 470 accredited schools with MBA programs. The Economist reports, “Nearly 200,000 students from American institutions have been awarded Master’s degrees in business every year since 2010.” Keep this in mind as you determine whether or not a loan is a good investment.
That said, GMAC’s 2014 Alumni Perspectives Survey Report finds that “The vast majority of alumni (83%) from the classes of 1959 through 2013 report that their graduate management degrees were essential for obtaining employment; 94 percent rate their graduate management education as offering good to outstanding value compared to its total monetary cost.” Don’t discount the value of an MBA! It can be well worth the cost even if you run into debt for a short period of time after school.