For years, a number of business school deans have urged organizations that rank their MBA programs to do so in groups or tiers, rather than with numerical ranks. The underlying assumption is that many schools are so close together that actually ranking them by number has no statistical justification.
Today Feb. 10), a student loan provider published a tiered-ranking, but you can bet that few business school deans will give it much love. It’s the first financial rating of the top MBA programs based not on the quality of a school or MBA program but rather the ability of an average student at each school to pay typical program-related student loan obligations after graduation.
The system employed by M7 Financial, an offshoot of the MBA admissions firm mbaMission, awards schools ratings of A+ to C grades based on the a “leverage ratio”–the average student indebtedness divided by average starting salary and bonus–and a “debt service coverage ratio”–the average starting salary and bonus divided by the estimated annual principal and interest payments on a ten-year student loan.
‘THE RANGE OF SALARIES AMONG THE TOP SCHOOLS AND THOSE THAT ARE NOT ELITE IS NARROW’
A top rating of A+, met by only one MBA program in the U.S., would indicate that student loan obligations are typically expected to be modest relative to initial career prospects. The lowest rating of C, which was not awarded to any school in this first go around, would mean that student loan payments are expected to be very demanding relative to early career prospects.
“We think this provides a very unique perspective on rating schools,” says Cory Pollock, co-president and co-founder of M7 Financial, a firm focused on the careers and student loan requirements of students and alumni. “What we tried to look at is the ability of the average graduate to payback program debt. People should think twice after the debt they are taking on.” The numbers indirectly take into account scholarship aid given by schools because the ratios are based on average student debt which tends to be lower at schools that are more generous with tuition discounts.
The rating is not likely to dislodge any of the more influential rankings from such organizations as U.S. News & World Report or The Financial Times. But Jeremey Shinewald, founder and president of mbaMission, believes that “this is one of the truly objective rankings. It’s a good counter balance to rankings that have a lot of articifical information in them.” One surprise for Shinewald was that “the range of salaries between the top schools and those that are not elite is pretty narrow. It’s just not that significant and yet so many applicants only want to go to an elite school.”
THE BIGGEST WINNERS: BYU’S MARRIOTT SCHOOL AND THE WISCONSIN SCHOOL Of BUSINESS
In general, public university business schools did exceptionally well on this scorecard, along with elite schools that have been handing out large sums of scholarship money, including Harvard Business School and Stanford Graduate School of Business. But the only school to earn an A+ is certainly a big surprise: It’s Brigham Young University’s Marriott School of Management.
According to the report, the typical Marriott MBA graduates with just $27,942 of student debt, requiring payments of principal and interest of $3,929 a year (based on a ten-year loan with even amortization and an annual interest rate of 7.21%, which is the current rate for Federal Direct PLUS Loans). Yet starting salaries and bonuses for MBAs average $110,216 annually, 28.05 times more than the required yearly debt payments. The lower the debt service coverage ratio, the more burdensome the debt service requirements. “It is a modest debt load and is extremely manageable,” says Pollock. “The reason for that is their tuition is low, just $22,560 for non-LDS members, and the cost of living is low. if you look at other schools in major cities, the tuition is higher and the cost of living in Provo, Utah, is dramatically lower, too.”
In comparison, the debt ratio for graduates of B-rated Pepperdine University’s Graziadio School of Business and Management is 6.42. At Pepperdine, the average debt burden at graduation is $89,245, requiring annual debt payments of $12,550.80 a year. Yet starting salaries and bonuses average only $80,592. “Because the average debt coverage ratio is only six times, that could be a very difficult debt payment to make,” adds Pollock. Meantime, the graduate leverage ratio–which measures q person’s student debt at graduation relative to annual before-tax income–for Marriott is also impressive at 0.25, A higher ratio would indicate a higher level of relative indebtedness. At Pepperdine, this number is 1.11.