How To Pay For Your MBA Degree

SOURCES

Now that we’ve established how much we’ll be paying, it’s time to turn to how we’ll pay for it. I think of sources in two broad categories: “equity” and “debt.” Equity includes your savings as well as any grants or scholarships you receive. Debt includes federal student loans, private student loans, and/or any family loans.

Equity (or “Funding from Savings…”) Heading to business school, you typically have a good idea of how much you have in savings accounts and scholarships by the time you’re budgeting. That’s important, but you don’t need an article or calculator tool to tell you that you can use these to pay for school. The one equity piece that you may not have considered – and some have – is using existing retirement accounts such as a 401k or, an IRA in my case, to help pay for business school. Many people will tell you that you should almost never take funds out of a retirement account early, and I think that’s generally true, but it’s important to note that withdrawals from IRAs for “Qualified Higher Education Expenses” are exempt from early withdrawal penalties. I think it’s a decision that depends on your personal profile. I’ve always considered my retirement account to be a cushion and therefore considered it as another potential “source” for business school. Additionally, as job-less grad students, most of us will be in a lower tax bracket, making business school a potentially favorable time to withdraw from a retirement account.

Whether this is right for you will depend on your specific situation, but if you have significant savings in retirement accounts it might be worth consulting your tax and/or financial advisor to see if it worth withdrawing some funds to pay for school.

Debt (or “Funding from Student Loans”) Now that we know what we need to spend and what we have on-hand to stack against it, we know how much we have to borrow. Where should you borrow from? There are 3 potential sources: family and friends, the federal government, and private lenders. If you’re lucky enough to have friends or family helping you out with paying for business school, then that’s great! The calculator tool has a default interest rate of 3% on those loans, but that is adjustable depending on what you might work out privately.

The vast majority of student loan borrowers take loans out with the federal government. The new rates for the 2014-2015 academic year were released last week. For graduate students, the first $20,500 you borrow will be at a fixed 6.21% interest rate; this is known as the Federal Direct Loan (or simply “Stafford” loan). For any money borrowed after the first $20,500, you borrow at a fixed rate of 7.21% through a loan called the Federal Direct Grad PLUS Loan (or simply “Grad PLUS” loan). A final option is to go with a private lender. Increasingly, student loan platforms such as CommonBond are providing rates that are competitive with federal rates. The MBA Student Loan through CommonBond carries a 6.24% interest rate.

Ok…so how am I doing?

The calculator lets you see how different mixes of debt can work for you. One of your goals could be to have the lowest weighted average interest rate possible.

Once you’ve figured out what works best for you there, you can enter an expected salary after business school to see what your Debt-to-Income Ratio (DTI) looks like. According to industry data, the median DTI for MBAs is around 30%.