MBA Debt: The Burden Grows Heavier & Gets Scarier

Still, even some B-school deans are beginning to worry. Harvard Business School Dean Nitin Nohria is concerned that escalating debt burdens will put more pressure on MBAs to accept jobs they don’t want. “You might take the highest paying job whether you are committed to that as a career or not because it’s a way to pay off your debt,” he says. “If the cost of an MBA education keeps rising, it may lead to a situation where both only people who have the wherewithal to pay will get MBAs and the others will make choices that don’t line up with their passions and interests.“

MBAs, of course, are not the only students with eyes for education bigger than their wallets. U.S. student loan debt has outstripped consumer debt, and by the end of 2011, it will top $1 trillion. [You can watch the debt rising here.] Student debt can be especially pernicious because U.S. bankruptcy law rarely forgives student loans. A recent report by Moody’s Analytics, the debt rating agency, warned that an increasing number of student borrowers are likely to default in coming years. Moody’s found that the student loan market continued to expand even during the Great Recession, in contrast to mortgages and other kinds of borrowing that was significantly tightened.

A DEBT BINGE CAUSED BY RISING TUITION AND EASIER BORROWING

There are many reasons for the debt binge, from the rising cost of attending an MBA program to the increased availability to borrow money. In the decade since 2001, Poets&Quants’ top ten U.S. MBA programs lifted tuition an average 80% (not including fees) for their two-year programs. The nearly 5,800 students who make up the Class of 2013 at the elite ten will pay an average $105,923 in tuition next year, before grants or scholarships help to discount the price. (Pepperdine’s incoming MBAs will pay about $80,000.)

But with fees and living expenses, the total ticket creeps dangerously close to $200,000: The Wharton School’s incoming MBAs will pay close to $178,000 to study and live in Philadelphia. If they continue to borrow at rates similar to their predecessors, the average Class of 2013 graduate will rack up estimated debt of nearly $124,000.

Schools have gotten away with steep tuition rises, but critics say these hikes are unsustainable, partially because students are borrowing too much to study. “We’re starting to get to a point of diminishing returns,” says Mark Kantrowitz, founder and publisher of FinAid, as well as FastWeb, a free scholarship matching service. “The pricing power of the colleges is going to hit a ceiling.”

There is some evidence that potential MBA students are voting with their feet, taking their talents elsewhere or sticking with their current jobs. A recent Poets&Quants report showed that applications to many B-schools will drop between 3% and 10% in 2011-12. The reason? A less-desirable value proposition from full-time programs.

IT TYPICALLY TAKES 5.8 YEARS TO REALIZE AN INVESTMENT IN A TOP-TEN MBA

The risk-benefit analysis for any one candidate is often hard to do because it’s dependent on lots of different variables. MBA graduates from top business schools are obviously paid more than their counterparts at lesser-known schools. However, students at the elite schools also pay a lot more for the privilege—and generally require more years to realize their investment. (A 2006 GMAC report called “Value Added by Graduate Management Education” shows that grads from “top-ten” B-schools need 5.8 years to realize their investment, vs. 4.4 years among graduates from other programs.)