Your Guide to Choosing an MBA Student Loan
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Applying to business school is a journey in itself. Choosing the right business schools to apply to, prepping for the Graduate Management Admission Test (GMAT), writing essays and preparing for interviews is a challenge all its own. Then, once you get through all of that, there's the small issue of paying for your MBA.
According to BusinessBecause, the total cost of an MBA at a top-ranked US business school can exceed US$200,000.
The way that most MBA students afford this is by taking out an MBA student loan. In fact, the average US MBA student takes out US$62,000 in graduate student loans per year.
But how do you navigate graduate student loans? What's the difference between federal student loans and private student loans? How can you avoid racking up huge student loan debt and make a smart decision for your long-term career?
Here's everything you need to know about choosing an MBA student loan.
How do people fund their MBA?
Before you start considering your MBA loan options, it's important to understand where they fit into the big picture of financing your MBA.
This may vary depending on your age, but for the average MBA student who is 28 and older, our research suggests loans will account for at least a quarter of your MBA funding. This will be alongside financial aid (26%), personal savings and earnings (29%), and employer sponsorships (11%).
We'll discuss financial aid opportunities down below – for now, let's discuss other funding sources.
Personal savings and earnings
There's no getting around it: you need to plan to finance a large chunk of your MBA by yourself. This could be through long-term savings, or perhaps, if you're pursuing a part-time MBA, your current earnings.
Let's look at an example. For an out-of-state student at the University of North Carolina's (UNC) Kenan-Flagler Business School, tuition fees are US$68,000 per year. For a two-year program, this amounts to US$138,000.
If around a quarter of your total tuition were to come from your own savings, this would be around US$34,500 over two years.
Employer sponsorship
If you work at a large company and are committed to moving up the ranks, you may be able to secure employer sponsorship for graduate school. Many corporations sponsor MBAs for their employees, including big brands like Apple and Bank of America.
To secure this, you'll need:
- Willingness to commit to your employer for at least two to five years post-graduation
- A compelling pitch for why they should invest in your education
- Openness to part-time MBA options so you can work alongside your studies
If you succeed in securing sponsorship from your employer, make sure you understand the terms of their offer. This means the requirements they have of you, and whether they are offering to front the cost of the program or reimburse you for costs (for example, based on your grade attainment).
MBA student loans
Once you've got an idea of your other sources of funding, it's time to start thinking about MBA student loans.
The right MBA loan can be your ticket to the myriad benefits of attending business school – management training, network, career progression, and a return on your investment.
The wrong MBA student loan can land you in a mountain of student loan debt, struggling to keep up with your monthly payments and making you regret your decision to go to graduate school.
Choosing the right student loan isn't so hard. You just need to know your options. There are two main student loan types you'll be considering for your MBA: federal student loans and private student loans.
Federal student loans
As a domestic MBA candidate in the United States, you have the option of both federal and private MBA loans.
Federal loans are loans provided by the US government, through the US Department of Education. As a graduate student you have access to both Direct Unsubsidized Loans, and Direct PLUS Loans.
Direct Unsubsidized Loans
Your school determines how much you can borrow through a Direct Unsubsidized Loan based on the cost of your attendance and other financial aid you receive.
You are responsible for paying the interest on a Direct Unsubsidized Loan, and there is a maximum annual loan limit of US$20,500, with the aggregate limit sitting at US$138,500.
As graduate students do not have access to the subsidized loans offered to undergraduate students, direct unsubsidized loans will accrue interest while you are still at school.
However, overall, Direct Unsubsidized Loans tend to come with lower interest rates than Direct PLUS loans. This means you should opt for this type of loan first, before topping up your financial aid package with a PLUS loan.
Direct unsubsidized loans also do not take your credit history into account, whereas PLUS loans do.
💲 Read more: Exploring How to Pay for Business School
If your financial aid package includes federal student loans, your school will let you know how to accept the loan. Generally, according to studentaid.gov, the repayment terms stipulate 10-to-25 years to repay your loan.
Direct PLUS loans
Direct PLUS loans are available to US candidates who have maxed out their Direct Unsubsidized Loan and still need additional funds to cover the cost of business school.
To receive a PLUS Loan you mustn't have an adverse credit history. The maximum you can receive is the cost of attendance calculated by your school, minus any other financial aid you've received.
Federal loans have a fixed interest rate and the rate is usually lower than a private loan. You don't need a credit check or a co-signer for most federal loans. Federal loans are only paid back once you've graduated from your MBA.
MBA student loan origination fees
Whether you take out Direct Unsubsidized Loans, Direct PLUS Loans, or both, you will have to pay origination fees to the government.
This is not an administrative burden for you: the government removes the fee amount before they send you the loan, however it does mean that the loan amount you receive is less than the total loan cost, so it can be a surprise!
Repayment options for federal loans
The standard student loan term for a federal student loan is 10 years. That means that, providing you make all of your minimum monthly payments as planned, your MBA loan will be paid off in a decade.
This is useful because, combined with the fixed interest rates usually offered by federal student loans, it's easy to calculate your predicted interest payments and therefore your total loan cost. This might not always be possible with a private lender.
Flexible repayment options
Federal student loans are useful if you expect to go into a stable job post-MBA. Many graduates do this, with many graduate students from top programs doubling their salaries after business school.
However, you do have more repayment options available to you if you are concerned about a lack of stability post-MBA. For example, if you are using your MBA to start a new business, you might not be able to rely on a steady salary after you graduate, and consequently fall behind on your payments.
Defer payments
You can opt to extend your repayment period by using income based repayment options.
For graduate student loans, this extends your repayment term to 25 years and will set your monthly payment at around 10-20% of your discretionary income.
Student loan refinancing
You can also lower your monthly payments on federal student loans through student loan refinancing.
Student loan refinancing simply means transferring your federal student loan to a private lender. This can be a way to secure a lower interest rate.
However, this is not an easy fix. Lowering your monthly payment amount – even if it means lowering your interest payments – could mean you end up paying more interest overall, as it will take you longer to pay back the loan amount.
Private student loans
There is also the option of taking out an MBA student loan from a private lender.
Generally speaking, federal student loans are preferable to private student loans. This is because federal student loans will usually offer a fixed rate for the duration of the loan, whereas private student loans might have variable interest rates.
Additional loan fees and interest rates
One advantage of using private lenders is that you will likely pay less in fees. PLUS loans carry an origination fee of more than 4 percent, while most private lenders don't include those types of fees in your loan application.
One situation in which you should consider private student loans over federal student loans is when you have an excellent credit history. In this case, private student loan providers may offer you a lower interest rate than the federal student loans offer, which could be a good deal long-term.
In any case, when choosing between private lenders, you should shop around to find the best private student loans for you.
Nerdwallet ranks providers like Ascent, earnest, SoFi, and commonbond as the best private student loans providers for borrowers with a good credit score or co-signer.
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Repayment period
Private student loans will usually offer a similar repayment period to federal student loans, but there will also be more scope to shorten or lengthen your repayment period, as well as defer payments.
For example, Ascent's MBA student loan offers repayment terms of seven, 10, 12, or 15 years with a variable interest rate, or seven, 10, or 12 years with a fixed rate. You can also pursue deferred repayment options of up to nine months after graduating from your MBA.
Discounted deals
When you're looking at private student loans, you should be aware of the possibility of negotiating discounts.
Juno – formerly LeverEdge – was set up by former Harvard Business School MBA grads, Chris Abkarians and Nikhil Agarwal. Juno gathers groups of MBA candidates to get top lenders to offer bulk discounts across their student loans. The negotiated deal is shared equally across the group of candidates.
When the pair were first setting up, they got together a group of 700 people who needed loans. A dozen private lenders then bid on the rates they would offer to members of the group. Juno is currently setting up another round of negotiations for fall 2021.
Paying off your MBA student loans: Key tips
Taking on an MBA loan can be stressful. It's a big financial commitment with many moving parts, navigating variable interest rates and repayment terms over many years.
But paying off your MBA student loans doesn't have to be stressful – there are things you can do to ensure that your monthly payments are as manageable as possible.
1. Compare multiple lenders to find the best deal
Before you take out a loan, shop around to find the best MBA student loans for you. A lower interest rate with a flexible period to pay off your debt will mean you're more comfortable paying off your MBA student loans.
Also, if you're considering private student loans, shop around with multiple lenders and compare interest rates and fees. The interest rate of the Grad PLUS loan is around 5.3 percent, on top of the 4 percent origination fee. Don't take out a private loan that doesn't beat the federal PLUS loan.
2. Factor in your post-MBA salary expectations
As we've mentioned already, your career plans after you leave graduate school will have a big effect on how you repay your MBA student loans.
Once you graduate from your MBA program, the likelihood is you'll see a salary spike and paying off your loan won't seem as much of a burden as it did pre-business school. This is particularly true if you go to one of the top MBA programs, where the average student doubles their pre-MBA salary.
For example, MBA grads from the University of Pennsylvania's Wharton School saw an average 115% increase in their salaries after graduating, for an average post-MBA salary of over US$200,000.
However, if you're starting your own business or entering a lower-paid sector after your MBA program, you should factor this into your plans for paying back your MBA student loans, for example by pursuing income based repayment options.
3. Research student loan forgiveness programs
Another thing that you can do if you are concerned about repaying your MBA student loans is to research student loan forgiveness programs.
If, as we've mentioned before, you're going into an altruistic profession like healthcare or public service, you may be able to defer your student loan payments or even get them forgiven altogether.
Some schools, like Yale School of Management and Stanford Graduate School of Business, offer MBA loan forgiveness programs for grads who enter the nonprofit/public service sector.
Do MBA programs give financial aid?
While federal loans are often referred to as "federal student aid", the financial aid we're referring to here is any grant or scholarship you receive to study your MBA program.
Most MBA programs will automatically consider you for merit-based financial aid when they receive your application. These might cover the cost of tuition, textbooks, or living costs.
You can also apply for scholarships from independent organizations, particularly if you belong to a marginalized group.
For example, the Forté Foundation offers scholarship opportunities for women in business. In fact, the financial aid received by women MBAs from the Forté Foundation since its inception totals over US$226 million.
There is ample financial aid out there to help graduate students access business education and further their careers. However, it isn't possible for every student to receive a full-ride scholarship, and you shouldn't rely on it when creating a funding plan.
Factor an MBA loan into your MBA funding plans, whether by relying on federal student aid or shopping around for the best MBA student loans from private lenders.
Fund your program with the right MBA student loan
There you have it: everything you need to know to get started choosing an MBA student loan.
The conclusion is clear. When starting out on your graduate student loan search, consider federal student loans first. Then, compare the offers you find with the multiple private lenders operating in the marketplace.
Keep an eye on the interest payments and seek out flexible repayment options if you're concerned about your monthly payment calculations.
Finally, put yourself out there for scholarships with business schools and the independent organizations who are there to support you. Financial aid is there, you just need to know where to look.
Read more about how to pay for business school, including scholarship and financing opportunities.