How to Think about Business School Debt

I was recently catching up with a friend when he said “Wow so you’ve finally graduated. You must be in like 200k worth of debt by now correct?” While most top business school programs cost about $200,000.00, the median debt burden for a top ten school according to Poets & Quants is $88,500. This is because some students get generous scholarship awards, and others save substantial parts of their pre-MBA salaries to offset the cost of their graduate business education. While I didn’t get any scholarship money from Kellogg, I did have some meager pre-MBA savings. This meant that I definitely had to borrow “big”, but I didn’t have to borrow as much as $200,000. 🙂

Before attending business school, I spent a lot of time agonizing over business school debt, and I asked current students and alums lots of questions about it. The questions I asked, and the answers I will give today – with the benefit of hindsight – are as follows:

1. How Easy/Difficult is it to Pay Back the Loan?: I think this was the main source of my agony. What if I did this MBA and the debt burden made me financially worse off than I was before my MBA? A lot of people told me that this was not a very likely scenario, and that I’d be fine, but I wasn’t ready to take their word for it. Instead of asking you to do the same – take my word for it, I’ll provide you with a loan repayment tool. What I tried to do here was make some estimates that helps one see how much she might have to pay after business school, and how easy the payments might be to make. In using this tool, you’ll have to make some estimates about:

  • how much you’ll be borrowing,
  • your interest rate,
  • your repayment duration,
  • your post MBA salary (please don’t be too optimistic here),
  • where you’ll live after business school (and the corresponding taxes of that location)

Notwithstanding the amount of “guesstimation” involved, and the fact that I use a fixed salary for the total duration of the loan, I still think this tool can provide some valuable insight into one’s financial situation after getting that flashy but expensive MBA. From my analysis, I think that it is in most cases possible to easily pay back your loan. For example, if you want to spend no more than 20% of your monthly after-tax salary on loan repayment, and you borrow $95,000 at an interest rate of 5.5%, the only scenario where you will fail to achieve your goal is with a post-MBA salary of $80,000, and a payback period of 10 years.

loan repayment

It is important to pay close attention to the variables mentioned above, since as they get more aggressive (payment duration gets shorter, or loan amount gets larger), payment becomes more difficult. Please feel free to play around with the tool, and let me know if anything seems off.

2. Is it worth it to take on this incredible amount of debt?: This is definitely a more nuanced question. How does one decide if an amount of debt was worth it? For me it came down to this question: has the business school experience delivered what I expected it to? While my answer so far has been yes, I know that this is not the case for all of my classmates. With that in mind, I’d say that there is an element of risk associated with funding an MBA through debt. In most cases, you will get what you want from the experience, but sometimes you may not; you have to be comfortable with both outcomes.

3. Should you borrow more to go to a higher ranked school?: Now that I’m out of the business school bubble, I can tell you for a fact that the people who care the most about rankings are the students deciding to go to business school, and the business schools themselves. Most employers are satisfied with knowing that you went to a ‘top’ school. How you decide to define ‘top’ is another matter, but I won’t touch that one. My point is that going to Wharton instead of Kellogg, or Booth instead of Ross will not significantly affect your career prospects. I work with people from a bunch of different business schools right now and we’re pretty much interchangeable. That said, I think there’s something to be said about the experience of a school. I decided to attend Kellogg even though it was the only school I got into that didn’t give me any money, and the reason for my decision was the people I met during my campus visit.

4 .Should you borrow more to get a richer business school experience?: Short answer: yes, I think it’s fine to borrow for certain parts of the bschool experience, but you have to be smart about it. If you’re like most students, you can’t afford to do everything, and you will have to pay back this money sometime in the future. I’ve started my own repayment process, and I can tell you that it’s not fun. 🙂 I’ll definitely love to be using that money for something else at this point. Therefore, my advice would be to optimize for things that have lasting value to you. For me that was participating in the tech trek to San Francisco and Seattle and doing my study abroad in Madrid.

This post is longer than I’d have liked it to be. However, I hope it’s helpful in some small way to someone somewhere, asking the same questions as I was in 2012.

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