MBA Debt: The Burden Grows Heavier & Gets Scarier

“If I hadn’t gone to Cornell, I would have been in serious trouble,” he says. “The only way to break into these top-tier companies is to come from a top-tier school. I was astounded at what an on-campus recruiting season looks like at (Cornell).” Sixty-three companies came to campus in the autumn of 2010 to recruit 110 students. “Of the people interested in corporate HR, all but two had jobs or internships set and signed before winter break. That was an incredible statistic.”

Jenkins accepted a job with Hewlett-Packard (HP) in Texas. His human resources role delivers a total compensation package in the low six-figures. Thanks to the low cost of living in Dallas, he plans to overpay his monthly $1,750 loan payments and hopes to be debt free within five years.

In addition to taking on too much debt, MBA hopefuls must weigh the salary they’ll forfeit while they study. In 2002, Mandy Moore made the difficult choice of leaving a well-paid job in Silicon Valley to attend London Business School. A return on investment calculator had told her to stay put – it would take her years to recoup her lost earnings and to pay back her loans – but she wanted the ability to change job functions or industry, to develop a broader network, and she craved an international experience.

HER STUDENT DEBT PAYMENTS WERE MORE THAN HER MORTGAGE

After graduating from London, Moore waited four years to celebrate a return to her pre-MBA salary. Meantime, her debt, borrowed in U.S. dollars and GB pounds, added up to $140,000, which required payments of $2,500 a month. “It was more than my mortgage,” she recalls. In fact, she and her husband (a classmate from London Business School who graduated sans debt) refinanced their home to pay off one of her U.S. loans, which was accruing interest at a rate of 11%.

Moore argues that the experience was worth every penny. But she cautions that it wouldn’t have been the case elsewhere. “A lot of my classmates were rock stars,” she says. “But an MBA isn’t worth it if you’re not going to a top-ten school. There isn’t a market for it. Employers like the vetting process (that top schools provide). I have a hard time imagining that you’ll be better off taking two years off from work, losing salary” at a school with less clout.

It’s no good deluding your self about the payback an MBA offers, warns David Wilson, President and Chief Executive Officer of the Graduate Management Admission Council, which owns and manages the Graduate Management Admissions Test (GMAT). When MBA applicants plug numbers into an affordability or return-on-investment calculator, or build an excel spreadsheet to determine how much the MBA will really set them back, “don’t make those numbers up,” he says. “Don’t take them out of the glossy books of the highly competitive schools. Take them from the school that’s in your decision set. And don’t look at the salary that one guy in private equity got if you’re looking at a school that private equity firms don’t recruit from.” (See our interview with David Wilson)

Applicants trying to prove themselves worthy of an MBA program should prove the same thing with their personal finances, says David Simpson, associate director, marketing & MBA admissions at London Business School. “Don’t apply for a program, get in and then think about how you’re going to pay for the [degree].  We advise students to look at any possible source of funding ­­– savings, local schemes, or scholarships. Free money is better than borrowed money.”

THE GREAT RECESSION HAS ONLY LED TO MORE BORROWING

Today’s MBAs have another profound disadvantage compared with their predecessors: most started their careers during the Great Recession. “We’re seeing needier students,” says Jack Edwards, director of financial aid at Stanford’s Graduate School of Business. “Prior to the crisis, students came with assets. Those assets were considered part of the (financial aid) calculation.”

In 2010, Stanford’s MBAs graduated with an average $71,403 debt, one of the lowest burdens among the top-ten schools. Stanford tends to award financial aid packages comprised of fellowships (25%) and loans (75%), Edwards says. In 2010, his office also upped the average fellowship award by $4,000. “I work with the development team on a daily basis,” he says of the school’s strategy to keep debt burdens lower. “If our graduates have less (debt) to pay off, the likelihood of supporting the school (through fundraising) is there.”