They are important questions because so many people, including many of our clients, consider going back to school when they want to change careers. But an MBA isn’t an automatic ticket to success, and it carries a high price.
A full-time MBA at a top-ranked school costs between $96,000 and $127,000 in 2011, according to Businessweek. The costs at second-tier institutions (many of them big state schools) are $30,000-$40,000 less, but that’s still hefty.
The price of school is only the beginning. The opportunity costs of forgoing two years of salary and career advancement are likely to be far larger. Even attending a second-tier school could be a loss of $300,000 or more, if your salary is between $100,000 and $150,000.
Is it worth it?
We believe an MBA may be worth the high price tag under the following circumstances:
• You need the MBA to pivot your career
• You will benefit from the network you develop
• You’ll get a lot of satisfaction from the education you receive
If you get into a top-tier school, and one or more of those conditions apply, an MBA is probably worth the cost. A degree from a top-tier school, such as Harvard, Stanford, Wharton or MIT, will get you an interview almost anywhere. The education is arguably better because the top schools draw high-level faculty.
A network from one of the top-tier schools is incredibly valuable. The difference between earnings over a 20-year period by a top-tier grad and one from another business school was $1 million, an analysis by Businessweek found.
The differential tells you how valuable the imprimatur of a top B-school is. The schools’ names and known selection criteria get their graduates more and better interviews, and the elite networks may be even more valuable.
The value of an MBA is much less clear the lower down the rankings you go.
(The good news for your chances of getting in anywhere is that the number of applicants at some top MBA programs is reportedly falling).
The financial calculation
The median starting salary for U.S. MBA graduates was only $83,000, according to the Graduate Management Admission Council’s annual alumni survey. The average starting salary for grads from top-tier schools was $126,000.
For additional perspective, consider that over a lifetime, the holder of a master’s degree earns only $400,000 more than the holder of a bachelor’s degree, on average, according to this study from Georgetown University.
Except for an MBA from a top-tier school, justifying the cost of an MBA on purely financial terms is difficult. If you seek an MBA to pivot from a non-traditional career to a business career, or just from one kind of business career to another, consider how much higher you anticipate your salary will be, and do the math.
Getting an MBA may make you happier in your career, too. Even if the math comes out slightly to the negative, the happiness that comes from being in a job that you enjoy more could push your equation to the positive.
The value of education
One other note: We’re not discounting the idea that you might get an MBA simply because you love business, or love to learn, and that you will learn lessons you can apply in your career. Only you can put a price tag on the value of the actual education you’ll receive.
How do you pay for graduate school?
Before you decide to apply, it’s worthwhile to understand the different options for paying. That step will help you figure out how much debt you’re likely to carry out of an MBA program, and help you make a rational choice about whether it’s worthwhile to pursue one. Multiple sources and studies agree on the fact that about two-thirds of people who get an MBA graduate with debt, though amounts vary widely.
International students face extra challenges funding an MBA because they aren’t eligible for federal loans. Businessweek posted a good article on the options for international students here.
There are five main sources of funds for a full-time MBA program
• Your own savings
• Financial aid from the university, including grants, loans and assistantships
• Federal loans and
• Private loans
Your own savings
If you’ve saved enough to defray some or all of the costs, wonderful. If you’re reading this and considering going to school in a few years, start saving now. Whatever you accumulate will make your decision to pursue an MBA that much easier and lessen your pain during the school years because you won’t have to cut back your lifestyle as much. Anything you pay out of pocket will mean less chance of graduating with expensive debt.
However, you should not dip into your emergency fund (six months of liquidity). Nor do you want to tap into your retirement savings in a traditional 401(k) or traditional IRA. The penalty for early withdrawal (10%) is more than the interest you would pay on loans. You can withdraw the amount you contributed to a Roth IRA, because you’ve already paid taxes on that amount. You would, however, owe taxes on the earnings.
Grants to study for an MBA are relatively rare, because it’s assumed that people who are working on an MBA are returning after some years in the working world and have some money to pay. We found a few ideas here. UCLA has a good database that lists some grants and fellowships available to people looking to fund an MBA and other management education.
Money from the university
Different schools have different pools of money available for MBA students. Top-tier schools will offer you financial aid to cover part of the cost of attending. The aid might come in the form of grants, loans and assistantships. However, assistantships and fellowships that cover the entire cost of attending a top school are intensely competitive. Plan to apply – and plan not to receive one.
Financial aid offices also will point you in the direction of federal and private loans to fill in the gaps, and show you how to combine funding sources so that you can pay for the program and your living expenses.
As an example, Stanford’s MBA financial aid office offers clear information about what kinds of financial aid you can expect from the university.
The low and fixed interest rates on federal student loans make these the best choices for most people, but there are advantages of getting loans in the private market.
Subsidized Stafford Loans and Unsubsidized Stafford Loans have an interest rate of 6.8%. The subsidized loans were a better deal, because there was no interest on the loans while you were in school or during certain deferment periods, but they have been discontinued for graduate students.
Unsubsidized Stafford loans accumulate interest while the student is enrolled in school, and this interest is added to the principal balance (capitalized). Stafford loans offer a six-month grace period after graduation before payments begin. Stafford loans offer additional deferment if you go back to school to complete a degree or conduct post-graduate study.
Each year, a graduate student may borrow up to $20,500 in Federal Stafford Loans (not exceeding $8,500 in subsidized loans per year). The maximum amount a graduate student can borrow upon graduation is $138,500 (up to $65,000 in subsidized loans).
GraduatePLUS Loans, the third kind of loans available through the federal Department of Education, are more expensive than Staffords, charging 7.9% a year in interest, plus 4% in up-front fees, resulting in a total annual percentage rate of 8.8%. You can use this money to cover your living expenses while you’re in graduate school. The maximum PLUS Loan amount you can borrow is the cost of attendance (determined by the school’s financial aid office) minus any other financial assistance received.
Typically, people who cannot pay their entire graduate school bill with savings, grants and federal loans turn to the private loan market. Federal student loans have fixed rates. Most private student loans (PSLs) are variable-rate loans with risk-based pricing. In December 2011, a major government survey of the private loan market found variable-rate loans ranging from 2.98% to 19%, with an average rate of 7.8%.
Your school’s financial aid office will help you find lenders.
The bottom line
If you have a clear reason to get an MBA, and you can get in to a top-tier school, the high costs may well be worth it. If you’re thinking about an MBA, but you don’t have the track record to get in to a great place, take the time to do a much longer and harder calculation. The time and energy you would have committed to the MBA may well be better spent working on your career in other ways.