tl;dr — If you’re taking out loans for your MBA, borrow from the government and refinance with a private lender later.
Applicants from around the world, including some of my friends, received good news last month. With their first round acceptances comes a new list of to dos; attending admit events, deciding on multiple offers (for the lucky few), debating whether to apply to somewhere “better” round 2, figuring out how to quit gracefully, and/or planning how to pay for the MBA.
Today, the average cost of a top MBA is about $200k for 18 months. The cost of attendance doesn’t include the summer between your first and second year since you’re expected to have a paid internship. My current experience suggests that $200k is on the conservative side.
Over half of all students incur debt for business school. According to U.S. News, the average debt burden for students who borrow is around $60k. Students at some of the leading programs average $100k in debt upon graduation.
For those who borrow, the good news is that there are a lot of options out there, especially if you’re at a top program. Innovative lenders such as SoFi, CommonBond, and Earnest have figured out that many MBAs are fairly credit worthy and deserve lower rates. New entrants such as WeFinance help you tap into your social network for financing. Many of these options are for U.S. citizens and permanent residents only. International students are out of luck.
The bad news is that with so many options, it’s hard to figure out where to start and what’s best for each individual circumstance. After doing countless hours of research trying to figure out what my options are and not finding a great primer on this topic, I decided to put what I’ve learned into writing.
Before taking out any loans, you should consider all the options to avoid borrowing, including any savings you have. After all, taking out a loan means you’re paying interest.
Many schools offer scholarships and fellowships, based on merit and other considerations. You should contact each school to see what’s available to you. You may have been automatically considered for these, and it was reflected in your offer letter. In that case, congrats! If not, there are also third party fellowships that you can apply for. One example is the P.D. Soros Fellowship for New Americans. Word of advice, search and apply early.
A number of students enter the MBA sponsored by their firms. This is especially common for those who come from consulting. Even if your firm doesn’t have a formal program, it may be worth exploring whether your firm will sponsor you (if you have the intention of going back). Finally, if you are a U.S. military veteran, the GI Bill gives you another option to choose from.
There are two types of federal loans typically available to U.S. graduate students who do not demonstrate financial need. Both are available directly through the U.S. Department of Education (aka Direct Loans). You can use the Direct Unsubsidized Loan to cover up to the first $20k of borrowing each year and then use the Direct PLUS Loan to cover the rest.
For both loans, interest is deferred while you’re in school, but is accrued once the funds are disbursed. Origination fees are deduced at the time the loan is disbursed (so you actually get less than what you borrowed). Accrued interest is added to the principal when repayment starts.
Repayment begins 6 months after graduation, and you typically have 10 years to repay the loan with fixed monthly payments. A benefit of federal loans is that there are a range of repayment options including extended and pay as you earn plans. Details on the various repayment options are listed here.
Private loans typically have fewer repayment options and are more expensive than federal loans. Fixed rates range from 6% to 13%, and the rate you get depends on your credit history. The Department of Education has a comparison of the main differences between federal and private loans. If you feel that private loans are a good option for you, FinAid.org has a table listing the terms of many of the private loans out there (if the page doesn’t render correctly in Chrome, try opening in another browser).
As mentioned earlier, a few companies have popped up catering specifically to MBA students enrolled at top programs who have good credit. SoFi and CommonBond both offer MBA loans to students at select programs with better terms than traditional private lenders. These are worth looking into if you can get them. For example, CommonBond offers a 10 year, 5.59% fixed rate loan with a 2% origination fee. If you don’t plan to take advantage of certain federal loan features (e.g. loan forgiveness for students who work in public service after graduation), these private loans may be a great option.
Given the current low interest rate environment, many students with good credit wonder why they’re still paying 6%+ to the government and private lenders when the prime rate hovers at 3.5%. After all, you’re pretty much guaranteed to have a six figure job after graduation (right?).
Enter the world of student loan refinancing. A number of lenders have recognized that once you graduate with a world class MBA and land that six figure job, you’re not as risky as compared to when you first entered grad school. I’ve summarized a few of these companies below. They all advertise refinancing rates as low as 3.5% fixed, and you can apply for these loans directly online.
A word of caution here. Though a number of the companies I’ve written about offers very low rates, it doesn’t mean that you’ll be able to get these rates. Read “When Non-High Earners Attempt to Refinance Their Student Loans”.
Assuming your MBA costs $200k and you’ll be borrowing $100k, this is what your loans can look like. To make the math easier, I’m assuming the loans are all disbursed on day one, and you start repayment six months after your two year program.
With a good job, hopefully it wont take 10 years to pay back your loans.
I’ve provided links to primary sources throughout this post. Note that rates/options do change on a regular basis. Check these sites for the latest figures and terms.