How to fund an MBA programme

Once you have made your choice of which schools to apply to, it is time for another serious decision: how are you going to finance your studies?

An MBA is a big investment, with average tuition fees of almost $75,000 for the top 100 programmes ranked in the FT Global MBA Ranking 2014. The top 10 programmes charge average tuition fees of $112,000.

Although most MBAs will be less expensive, study costs extend well beyond tuition fees. The GMAT – the global standard entry exam for business school – costs $250. Full-time MBA students will also face accommodation and living costs, and must factor in income lost while studying.

To cover these costs – particularly in the absence of full-time employment – many students turn to multiple sources of funding to finance their MBA.

Scholarships/financial aid

In competition for the best students, most leading business schools offer a range of financial support to strong applicants. School websites usually list available scholarships. “Start your financial aid research at the same time as your business school research,” advises David Simpson, MBA admissions director at London Business School.

Merit-based scholarships are widely available at leading US schools to students whose resources do not cover the full cost of tuition. The University of Virginia’s Darden School of Business, for example, provides financial assistance to about 70 per cent of its current MBA students. For top-ranked Harvard Business School, the figure is 65 per cent.

According to FT data, 54 per cent of students who graduated from a ranked US MBA programme in 2010 received some form of financial assistance from their school or an external source. Among their peers who studied in Europe, 31 per cent received such assistance.

There are many private scholarships, supported by companies and foundations, for which students may also be eligible. Some, such as Fulbright scholarships (for foreign students studying in the US and US students studying abroad) and Forté fellowships (for outstanding female MBA candidates), are open to students at a number of schools.

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Individual schools usually have their own scholarships. In the past couple of months, for example, London Business School has announced a scholarship for female UK residents, sponsored by Lloyds Banking Group.

Banks/credit unions

Before the 2008 financial crisis, a number of banks in Europe and the US offered loans tailored to MBA students. Following the withdrawal of many banks from the MBA lending market, choice has been limited, particularly for international students.

Although some banks are now returning to the MBA market, there remains a focus on lending to local students, says Irina Schneider-Maunoury, assistant director for degree programme financing at Insead.

For US citizens studying at home or abroad, federal loans offer the lowest interest option in many circumstances. Direct Plus loans, which currently have an interest rate of 6.41 per cent, are available to cover the full cost of tuition and study fees. Alternatively, Federal Stafford loans offer borrowers up to $20,500 per year at an interest rate of 5.41 per cent. The Wells Fargo graduate loan, by contrast, offers fixed interest rates ranging from 6.36 per cent – taking into account all possible discounts – to 9.44 per cent.

There are fewer options for foreign citizens studying in the US. Non-US citizens do not qualify for federal loans and are required to have a creditworthy US resident cosign any private loan with a US bank to guarantee its repayment.

To fill the gap in the market, many leading US schools – including Wharton and Duke Fuqua – have partnered with credit unions to offer loans to international MBA students without a co-signer. The Fuqua school’s international student loan – with Coastal Federal Credit Union – offers non-US citizens up to 90 per cent of their cost of attendance, currently at an interest rate of 8.25 per cent.

In the UK, there are few tailored MBA study loans offered by high street banks, leaving higher interest personal loans as the predominant option for bank borrowing. Santander offers loans to MBA students at a handful of schools including Oxford Saïd, where the bank lends MBA students up to £20,000 at interest rates from 10 per cent.

Crowdfunding

The withdrawal of traditional lenders from the MBA student market provided room for the development of crowdfunding, where prospective students borrow capital from those interested in supporting their degree as an investment.

Prodigy provides loans to MBA students at eight European schools, including Cass Business School and Insead, where its founders studied. Investors, primarily alumni of these schools, invest in one class of students. Rather than focusing on credit history, Prodigy uses a predictive model that calculates borrowers’ potential future income. Interest rates, for loans up to the value of tuition fees, start at 6 per cent.

CommonBond, founded by Wharton MBA alumni, currently lends to students enrolled on 20 top-ranked MBA programmes in the US. Money lent to students has been raised from crowdfunding – with alumni as investors – and institutional investors. Interest rates are fixed at 6.24 per cent, lowered to 5.99 per cent when paid by automatic debit.

Recent reductions in the cost of federal loans have prompted peer-to-peer lender SoFi – which has funded $300m in loans to students at more than 100 US universities – to refocus on graduate refinance, says Mike Cagney, chief executive. Lower interest rates can be offered to employed graduates, he says, as the main causes of student default are dropouts and post-study unemployment.

Employer sponsorship

Some employers may contribute towards the cost of an MBA, often providing that you are willing to commit to return after your studies. In some industries, such as consulting, there is notably more of a culture of investment in mid-career education.

Among MBA alumni who graduated from a top 100 programme in 2010, 9 per cent received either partial or total sponsorship from their employer.

Plan your money

Ms Schneider-Maunoury emphasises the importance of early planning and research. “Students should reach out to financial aid offices to explore what business schools have to offer.” As well as information on scholarships and support, schools will also be able to present loan options that are available to its students.

“I advise students to build a portfolio of funding [before their MBA],” says Mr Simpson. “It won’t just magically fall into place.”

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Case studies

Maryanne Maina, MBA student at HEC Paris, graduating class 2015

After she was accepted on to the MBA at HEC Paris, Maina researched the scholarships available. She successfully applied for a HEC scholarship that is awarded to high-potential students on the basis of their application, past experience and career plans. The €12,000 award covers a quarter of her total tuition fees.

To supplement her savings, Maina needed a study loan to cover the majority of her costs. As a Kenyan citizen, she was however unable to obtain an appropriate study loan from a French bank. She says that while local banks BNP Paribas and Société Générale do lend to international students, they required a French guarantor to secure the loan.

High interest rates on loans offered by Kenyan banks were prohibitive, and the lenders did not offer a grace period before repayment. Maina therefore sought funding from her friends, who have lent the amount she needed, to be repaid after she graduates.

Peter Novak, MBA student at the University of Maryland: Robert H Smith School of Business, graduating class 2014

As a permanent US resident, Novak, who is originally from the Czech Republic, was eligible for a federal loan to cover his instate tuition fees at the University of Maryland’s Robert H Smith School of Business. He decided, however, to put the low-interest loan to other uses.

In the years before his MBA, Novak bought a handful of properties under foreclosure in Baltimore, Maryland, for renovation and resale. He invested his federal loan into these property developments, which have been “a hobby” alongside his studies and previous full-time job.

Income from these investments, complemented by a “good chunk of money” saved up from his old job, has largely covered Novak’s degree costs.

In his second year, however, he has also taken up a graduate assistant position in the school’s Center for Social Value Creation. Novak says this has provided him with both extra income and “a great experience”.

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Read more on applying to business school:

How to choose the right business school and MBA programme

How to apply for an MBA programme