Choosing an MBA Program: The New Cost-Benefit Analysis
When it comes to choosing an MBA program, cost is only one consideration. For years, business schools, pundits and publishers of MBA rankings have urged that you should also weigh factors such as average class size, required test scores and placement rate when choosing where to apply. This advice still rings true, but it fails to convey a harsh reality.
In fact, cost is an increasingly important consideration for any higher education decision – let alone when you’re staring down the barrel of a six-figure MBA program. Of course, I’m partially speaking from experience here, as I remember breaking into a cold sweat when I saw the price of the business schools I was considering. But if you need more than just anecdotal evidence, here are a few recent stats:
*Tuition prices are on the rise for top MBA programs
*Average MBA student loan debt is now estimated at $42,000 (and likely skews much higher based on what we’ve seen among thousands of SoFi’s MBA borrowers)
*Many MBA candidates are still paying off undergraduate student loans (now estimated at $35,000 on average), so they’re dealing with a double whammy of debt
None of this is to say that a business degree isn’t worth the cost, but if you’re getting an MBA primarily for the financial benefits (e.g., increased earning potential), these stats illustrate some pretty clear headwinds. Like any investment, the cost of an MBA factors into your net return, and results can vary widely by program choice. That’s why it’s critical to do a thorough cost-benefit analysis on any school you’re thinking of attending.
Fortunately, assessing an MBA’s return on education (ROEd) is easier than ever in today’s information age. In addition to traditional MBA rankings, there are a number of resources available to help you calculate a program’s potential ROEd and make an informed decision about where to invest your precious time and money.
First, do the student loan math
If you plan to take out student loans, it’s crucial to factor interest rate cost into your analysis. Federal student loan interest rates for graduate students are currently between 5.84% and 6.84%, and have been less than favorable over the years. On a $100,000, 10-year term loan, 6.84% equals more than $38,000 in interest.
To help provide transparency into the MBA student loan landscape, SoFi recently analyzed data points from 240,000 student loan refinancing applications to determine average salary and student loan debt by MBA program. We found that many of the schools that delivered the best salary-to-debt ratio don’t even register on most traditional MBA rankings – which means it could be good to keep an open mind when seeking the most bang for your buck.
Consider all the costs
When it comes to pricing an MBA program, tuition is only part of the equation. “A yearly tuition rate of $40,000 can easily be augmented with $20,000 in additional boarding and book expenses, depending on your location,” says Marv Dumon in his recent article, The Real Cost of an MBA. Dumon asserts that these and other extras like fees, laptops and overseas trips can easily double the sticker price of advertised tuition.
To help you assess the total damage, most school websites and financial aid offices can fill in the blanks on non-tuition expenses. And if you have any connections who are recent grads, ask them if they encountered any unexpected costs – most alumni are happy to help. Finally, be realistic when you set your budget. Unless you live like a hermit, extra costs are going to occur, and it’s better to be prepared for them.
Calculate the breakeven point
To get an idea of when your MBA investment will start to pay off, you can use a business school breakeven calculator. Enter assumptions like program, in- vs. out-of-state tuition and expected post-graduation salary, and the calculator estimates how long it will take for you to “break even” on your investment.
Of course, this calculation gets more complicated when you factor in student loans and their accompanying interest rates (see above). One way to curb the cost is to refinance student loans at a lower interest rate as soon as possible after graduating. Cutting the interest rate from 6.84% to 4% on a $100,000, 10-year loan would save almost $17,000 in total interest. Refinancing can also allow you to choose a shorter term, saving even more on interest and hitting that breakeven point sooner than expected.
Before refinancing federal loans, take a look at the government benefits and make sure they don’t apply to you – they won’t transfer to the private lender through the refinance process.
Keep the big picture in mind
While financial outcome is a key piece of the puzzle for most MBA candidates, there are obviously less quantifiable benefits to consider – for example, the network you’ll gain, the education you’ll receive and the experiences you’ll cherish for a lifetime. In my case, for example, SoFi never would’ve happened if I hadn’t met my co-founders in business school. If you can find the program that fits your financial expectations and delivers the intangible benefits, then you’ve struck MBA gold.