Financing Your MBA

25-Year Repayment Estimate

	$20,500 Direct Loan	$63,500 Direct PLUS	Sum of two loans	Doubled to cover 2 years
Loan Balance	$20,500	$63,500	$84,000	$168,000
Loan Fee	1%	4%
Adjusted Loan Balance	$21,970.84	$74,018.32	$95,989.16	$191,978.32
Loan Interest Rate	6.8%	7.9%	Effective 7.65%
Loan Term	25 years	25 years	25 years	25 years
Monthly Payment	$152.49	$566.39	$718.88	$1,437.77
Cumulative Payments	$45,748.04	$169,917.23	$215,665.27	$431,330.54
Total Interest Paid	$25,248.04	$106,417.23	$131,665.27	$263,330.54

 

Those are mortgage-sized numbers. And you can’t live in your diploma. But rest assured, there are ways around expensive government debt. Legal ways, too.

PRIVATE LOANS.

You know how every corner in America seems to have a branch of some national bank on it? You know how the banks fund those branches? By taking in deposits and lending the money back out to people like you.

As interest rates and origination fees have risen on federal loan products relative to commercial interest rates, private banks have come back as a popular source for student loans. Unlike most federal products, these will have different qualifications and depend substantially more on your personal credit history and that of any guarantor. This is why it is key to get your financial house in order as quickly as possible.

Spend the $15 to get a copy of your credit score and credit report. Double check to make sure that there aren’t any errors and approach your local banks to see what sort of products are available. Don’t be shy about shopping around and ask your classmates about how they’re structuring their own loans. Ask current students if they know of a friendly banker you should approach.

The nice news about private loans is that if you have good credit, you may be eligible for lower rates at banks than you are through the government.

You can’t do much to change your credit score now; it is what it is for the near term. If your credit is weak, you might even swallow your pride and ask a family member with better credit to co-sign. For example, if the interest rates you can obtain are half of the federal rates, then all else being equal in the Wharton model (and if those rates never changed at all), you’d pay almost $500 less a month over 25 years, saving nearly $150,000 in total interest paid. The difference between a set of loans at 7.65% and another at 3.82% is enormous. You may not have taken finance yet; you need this finance lesson now.

Additionally, private loans can be used to close the gap between federal loans (capped by that horribly inadequate ‘moderate lifestyle’ budget) and the real budget you’ve determined, since there is no predetermined cap to the amount that can be borrowed.

Still, think through the ramifications of over-borrowing. In this case, the piper always gets his money, no matter what it costs you. Even in catastrophic circumstances, student loan debt is as hard as child support or alimony to get rid of—normal bankruptcy doesn’t shake it. So don’t bite off more than you can chew.

Another key difference between federal and private loans is that private loans are usually variable-rate loans—they pass interest-rate risk on to you. So, although rates are beautifully low right now, understand how the rates could go up in the future. You think the numbers for 7.9% fixed are bad? Wait until you have a private loan at a 10% variable rate.

This is why it’s good to think of building a portfolio of debt. Have some fixed government loans (which you can only obtain while you’re in school) and some private loans, lower interest but variable. If interest rates stay low, you pay off the fixed federal loans faster. If interest rates shoot up, you pay off the private debt faster. Over the period of time you’re going to be repaying these loans, interest rates will do a lot of things. They’re not going to stay low forever, so reduce your risk by taking your loans in a few different flavors.

We have to note that private loans for international applicants may be much harder to come by now than they were in the past. In the fall of 2008, Citibank cancelled the CitiAssist Student Loan Program for several top schools. Before then, the program was funding over 60 percent of the private student loans at many schools. Hopefully, banks will step up to fill this need in the future. Until then, international students would be wise to speak with financial aid officers early and often to learn what aid, if any, will be available.