Does the MBA pay off?
Me: Hell yes it pays off.
You: Is that a guarantee?
Me: Yeah, man. Haven’t you been paying attention?
You: So it will absolutely, positively have a positive financial ROI?
Me: Well …
While attaining an MBA will move you down the road to enlightenment, getting an MBA is still really, really expensive. You might logically ask yourself, “What’s the ROI on enlightenment?”
Excellent question! Now you’re thinking like an MBA.
Let’s do the math. For our purposes here, we’ll assume that you are going to Harvard Business School (hey, you deserve it).
• HBS first-year tuition for Class of 2017 = $61,225
• HBS books, materials, fees = $7,655
• Total for first year = $68,8809
We will assume that tuition and fees increase 5% for year two, so that:
• Total tuition and fees for second year = $72,324
• Two-year Total = $141,204
And this does not include room, board and health insurance because you would have to pay for these whether or not you went to HBS.
Yikes! That’s a lot of dough. And like the guy selling knives on late night TV says, “But wait—there’s more!”
The average HBS grad walks out with about $84,000 in student debt, and that debt costs money. The price is the interest that you pay until you pay it off. If you have the means, you can pay it off more quickly, but let’s assume it takes you a decade to knock it all out:
• Student loan interest: 6% * $84,000 * 10 yrs = approx. $27,908
• $141k in tuition/fees + $28k in interest = $169,000
And we’re still not done. Because you won’t be working during your two years at HBS you have to factor in your lost wages in the calculation. Let’s say you make $85,000/year at your good pre-MBA job. Including your foregone income of $170,000, the total cost of getting a Harvard MBA (or one similar) is about $339,000.
Holy crap. Enlightenment is expensive! Is it really worth $339,000? Enlightenment is hard to put an exact number on, but wage growth isn’t. And this is where HBS has a dynamite return on average (we’ll get back to the assumptions we’re making a little later).
If you go to HBS, you will not only get a bunch of crazy smart friends and a closet full of crimson hoodies, you’ll also get on average a very juicy pay bump and an accelerated career path. Here’s what that might look like:
• Base pay bump from $85,000 to $140,000
• Signing bonus: $25,000
• Summer internship income: $20,000
• Career accelerator (4% raises v 2% raises)
Let’s take a look at what that pay bump and career accelerator look like in action. Your MBA begins paying off in the form of increased income in your first year out of school. You make $55,000 more than you would have without it, and life is good.
But wait—there’s more!
Because HBS has put you on an accelerated career path (and the steeper income growth trajectory that comes with it), your pay grows at a faster rate than it would have sans-MBA.11 So that annual pay differential continues growing as you relish your MBA-ness and continue to kick business world ass.
It is in this stream of MBA-powered increased income that we answer the question, “Does an MBA pay off?” You can see that over your first 10 years out of HBS, your income will be $750k more than it would have been had you never pursued that MBA.
Using our friend NPV (Net Present Value), we then measure how much that stream of income is worth today, relative to the $369k that the MBA costs. While the NPV is less than the $750k, and varies depending on your weighted average cost of capital, in both scenarios, an HBS MBA is a homerun, positive ROI fiesta de dinero!
By the way, weighted average cost-of-capital is one of those great things you’ll learn about at business school, along with NPV.
And this is just for the first 10 years out of HBS. You will likely work for another decade or two beyond this, and in those prime earning years, that pay differential will—theoretically—be even more pronounced.
ON THE OTHER HAND …
There are some really meaningful and impactful assumptions we’re making in the model above. And, to paraphrase the monetary philosopher Ol’ Dirty Bastard, assumptions’ll “bust yer ass.” So we should be aware of them, lest our assuming asses get busted.
First, remember that the average first year income for HBS alumni includes very non-average people making crazy money in consulting, investment banking, hedge funds and the like. If you are not committed to a career in one of these fields (or if you’re in these fields but below the mean earners in those fields), your income will likely be lower-to-much-lower. This doesn’t mean that your HBS degree will have a negative ROI over the long run, but it just might take longer to break even. That’s worth keeping in mind.
Second, these reported incomes are skewed way high by alumni living in New York, London, San Francisco and Hong Kong, i.e. the most expensive cities in the world. So while they may be making hundreds of thousands of dollars a year, they may also be paying $4,000/month (or lots more) to rent a one-bedroom apartment. You shouldn’t look at these average incomes and think, “I am going to live like a king on $175,000/year in Tulsa, OK!” ‘Cuz that’s probably not where you’re going to find these juicy pay packages.
Third, you are a growing and evolving human being. Your interests, desires and passions will change over time. The career you find intriguing right out of business school might not float your boat 5, 10 or 15 years later. Maybe you just decide that you’re not interested in doing [fill in the name of career] any more, and that you really want to [work with kids / do something for the developing world / become a stand-up comedian]. Or maybe the grind of an 80+ hour work week is something you can tolerate when you’re young and single but not when you’re older, married and raising children. Or maybe some heath issues present themselves and you need to hit “pause” on your career to deal with them. In any of these scenarios, the juicy comp packages and steepened earning curves pretty much fly out the window.
Fourth, the model above represents an uninterrupted, positive career trajectory. Due to the vicissitudes of the market, the economy and personal wackness, careers often do not maintain a smooth progression upward and to the right. If historical economic trends continue, you should expect some kind of ugly macroeconomic tornado to blow through seven years or so. Whether it’s dot-com bubbles busting, global mortgages imploding or Adam Smith’s invisible hand getting caught in the cookie jar, bad stuff that is way out of your control happens, and it’s going to affect your career.
And then, of course, you could just forget it. There are other things you could buy with $141,000 (watch the video above to find out exactly what you could get for what that MBA will cost you).
Author Paul Ollinger is a writer and stand-up comedian who has opened for some of the biggest names in the business. He also has an MBA from Dartmouth’s Tuck School and was one the first 250 employees of Facebook where he served as VP of Sales for the Western United States. When he’s not on the road speaking, doing stand-up and sharing his unique POV on business and life, he lives in Atlanta, GA, with his beautiful wife, two wonderful children and French bulldog, Colonel Tom Parker. This article is excerpted with his permission from his newly published book, You Should Totally Get An MBA: A Comedian’s Guide To Top U.S. Business Schools, now available on Amazon.
‘You Should Totally Get An MBA’ Video Series