Fewer Than 20% of MBAs in Loan Default

by John A. Byrne on

Roughly one in five MBAs are failing to make their payments on student loans, Fortune reported today (Nov. 23).

Oddly enough, in comparison with most other students, business school grads are the elite of the elite. The report, based on government data, shows that business school students, in fact, have the best record of any students in repaying their loans. In fact, even the 20% number does not reflect actual defaults. One in five have gotten deferments or some kind of income-based payment reduction. The actual default rate is in all probability far lower than 20%.

In comparison, the average repayment rate for public colleges and universities is an estimated 54%–far below the 20% number for business schools. Fortune reported that it was 56% for private nonprofit schools and a dismal 36% for the for-profit colleges. Under proposed federal regulations, for-profit schools with student loan repayment rates under 45% would face some restrictions in federal aid, and those with rates under 35% could lose government financial aid altogether.

Among B-schools reporting repayment rates, Harvard Business School led the pack. Some 88% of Harvard students over the last four years have paid down at least one dollar on the principle of their federal student loans, Fortune reported. “The other 12% have taken advantage of debt repayment options like forbearance, income-based repayment or deferment. Some of the students among that 12% probably never graduated. And some likely defaulted,” Fortune said.

Stanford University’s Graduate School of Business and the London Business School, both with 84% repayment, along with Babson College in Massachusetts, at 83%, also did well.

Duke University’s Fuqua School of Business and the Wake Forest Schools of Business landed at 80%. Columbia University was at 77%, and the Pepperdine University Graziado School of Business and Management and the Thunderbird Global School of Management came in just below 70%.

Fortune noted that those rates could have a high margin of error, making direct comparisons between the schools difficult because each school has its own approach to loan repayment.

In any case, MBA students are borrowing more heavily than ever, in part because of the rising costs of attending an elite business school. Graduates who have the most debt hail from Wharton, according to a recent study by U.S. News & World Report,  the only school where MBAs leave with six-figure debt totals. The average debt burden of a Wharton grad is a whopping $105,489, according to U.S. News. Next on the list? Graduates who get their MBAs from Yale ($99,418), Duke ($88,050), Carnegie Mellon ($87,592), and Chicago ($86,758). The least debt? According to U.S. News, it’s MBAs from Fayetteville State University in North Carolina ($3,810).

  • Arthur Dullsworthy

    What conclusion do you draw from contrast between Wharton’s relatively high debt burden vs. HBS? More grant money at Harvard? Wharton student body drawn from a broader economic base? Latter hypothesis might be tested by looking at mix of public vs private undergrad in the class. Could be that applicant preference for Harvard has less to do with case study method than with family wealth of a typical class. Or does too much study of finance at Wharton induce a propensity to use leverage? Inquiring minds want to know.

  • http://poetsandquants.com/members/jbyrne/ John A. Byrne

    Arthur,
    Those are terrific questions you’re asking that give rise to possible answers, for sure. I’ve wondered about this myself. I tend to think that Harvard has more money to throw around. One clue: 83% of Harvard MBA students are getting financial aid, with the average package of $53,519. The average scholarship at Harvard is $24,100. At Wharton, 76% of students are getting financial aid–a full seven percentage points lower, according to BusinessWeek. Wharton, interestingly enough, does not report average financial aid or scholarship packages, which leads me to think those numbers may not compare favorably to Harvard.

  • Arthur Dullsworthy

    I don’t know what these numbers mean. For a start, what’s financial aid? Is it grant money or some combination of grant money plus subsidized loans? I wouldn’t consider unsubsidized loans as financial aid. I’m also not sure whether I’d include loans available under various federal programs as financial aid offered by the school. Then there’s the question of how many of those financial aid recipients at HBS are receiving grant money. 83% receiving financial aid (in some form) is not the same as 83% receiving an average $24,100 in grants (where was mine!). Unless we have a precise definition of these numbers, it’s an apples to oranges comparison where we don’t know what the apples are and we don’t know what the oranges are.

    I’m inclined to think that an MBA should pay for itself and that students should fund their education through borrowing without recourse to their families or savings that they very likely don’t have. Borrowing makes sense if it’s for the purpose of obtaining a degree that assures (or nearly assures) a certain level of income. Those students who borrow the most may be the most certain of a successful outcome for their studies. Or they could be the kind of reckless people who will go on to blow up large financial institutions and the western economies. You tell me.

  • Ram

    This sounds impressive when you contrast it with undergrad loans. However, if you contrast Harvard’s rate with that of Grameen Bank, a micro-finance organization, it is not as impressive. Both organizations are training people to be successful in making money in running businesses. But Grameen, with a cumulative repayment ratio of 88%, is evidently doing better at creating sufficient participant wealth that participants can pay off their loans. If you look at total recovery rate, the number is 97%, and even stronger number.

    Of course there are lots of other factors that impact both statistics and prevent this from being a true direct comparison. But it is an interesting contrast nonetheless.

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