Financing your MBA

Studying for an MBA is expensive and like all major investments needs good financial planning. Tuition fees for the top 10 global programmes, as ranked by the Financial Times, are currently listed at an average of $102,000.

Although most programmes will not be as expensive, the direct costs of full-time MBA study also extend to accommodation, living costs and a variety of fees ranging from the GMAT application to graduation. There are also the opportunity costs to consider – the loss of earnings while studying for the degree.

Many people draw on multiple sources of funding to finance their MBA.

Loans

Before the 2008/09 financial crisis, banks were traditionally the leading lenders to aspiring MBA students. The withdrawal by large banks, on both sides of the Atlantic, of their specific MBA finance packages has left a gap in the market.

Case study

Profile: Jeff Malenfant, Canadian. City University: Cass ‘13

As a Canadian citizen pursuing graduate studies in the UK, Jeff Malenfant says he was not eligible for a loan from the provincial government of Ontario. Being self-employed before his MBA, company sponsorship was not an option either.

Mr Malenfant was able to secure a low interest private loan with a Canadian bank, with the help of a guarantor with assets in Canada. This loan covered MBA tuition fees and provides a substantial line of credit to supplement personal savings to cover living costs in London. Under the loan’s conditions this credit line will be maintained for a year beyond graduation, when the loan is converted to a structured loan.

Having been admitted to Cass Business School, Mr Malenfant applied for scholarships that were listed on the university website. Earning a £10,000 entrepreneurship scholarship, reducing his net tuition fees to less than £25,000, played a major role in his choice of Cass.

To obtain a private loan with a US bank, non-US citizens are required to have a credit-worthy US resident co-sign the loan to guarantee its repayment. In the UK, where high street banks were previously a source of low interest loans for domestic and international students alike, higher interest personal loans are now the predominant option.

For US citizens who wish to study domestically or overseas, the lowest interest loans are, in many circumstances, those offered by the federal government. Known as Stafford loans, funds are available to cover tuition and other study fees. For loans dispersed in the 2012-2013 academic year, interest rates are 6.8 per cent and are generally repayable over 10 to 25 years.

Many institutions have co-ordinated alternative means of funding. Leading US institutions, including Harvard Business School and Duke University’s Fuqua School, have forged partnerships with credit unions to offer low interest student loans without the need for a co-signer.

A growing development in the market for MBA funding is crowdfunding, where prospective students borrow capital from those interested in supporting their degree as an investment.

Prodigy, founded by three MBA alumni from Insead, has funded more than $37m of MBA student loans to date. The company’s model is essentially a group of investors, principally alumni of a school, who invest in one specific class of students. Prodigy has partnered with eight European schools – including Insead and London Business School – whose admitted students are eligible to apply for a loan up to the amount of their tuition. Unlike bank loans, which focus retrospectively on credit history, Prodigy uses a predictive model that takes into account borrowers’ potential future income. The repayment schedule is relatively short, being seven years after a grace period of six months from graduation. Interest rates vary between six and nine per cent. According to its chief executive and co-founder, Cameron Stevens, Prodigy is hoping to launch in the US this year.

SoFi in the US was founded by Stanford Graduate School of Business alumni in 2011. Its model is similar to that of Prodigy’s and it has established lending relationships with 89 leading US universities. CommonBond, which launched last year, currently connects MBA student borrowers with alumni investors at the University of Pennsylvania’s Wharton School, is a further example.

Scholarships/financial aid

Financial aid to students has historically been much higher in the US than Europe, particularly among the top schools where admissions to MBA programmes are renowned for being ‘needs blind’. Merit-based scholarships are widely available at leading US institutions to admitted students whose resources do not cover the cost of tuition.

As schools increasingly compete at a global level for top students, many continue to extend prospective students’ access to financial aid.

“We have made a significant effort to increase our scholarship funds,” says Stacey Kole, deputy dean at the University of Chicago’s Booth School of Business. Around 40 per cent of the most recent graduating class received support from Booth, she says. According to Harvard Business School’s website, 65 per cent of its current MBA students receive some form of financial assistance from the university.

Case study

Profile: Oriana Torres, Colombian, Babson College: Olin ‘13

Before applying to study for an MBA in the US, Oriana Torres was aware of the financial challenge facing her. Despite a strong salary in Colombia, she says that funding her degree was always contingent upon borrowing money and gaining scholarships.

Upon acceptance to the Babson MBA, Ms Torres applied to all scholarships for which she was eligible and was successful in obtaining a university-funded scholarship worth $10,000 in each study year. In her second year, she was also awarded a grant for female entrepreneurs valued at $5,000.

However, Ms Torres has funded a large proportion of her MBA through two large loans. The first, with Citibank, required a US resident relative to co-sign the loan. The interest rate, she says, was much lower than any commercial loan available in Colombia.

The second funding source was Colfuturo, an organisation that lends to Colombian professionals studying graduate degrees overseas. If certain conditions – including returning to Colombia for a period after graduation – are met, a quarter of the loan may be forgiven. Ms Torres says that the publicly funded loan option, Icetex, would not have offered her sufficient support.

Many schools feature scholarships that are available for admitted students on their websites. Wharton lists the university’s own fellowships alongside externally supported scholarships that are available at a number of schools. These scholarships include Forté fellowships – awarded to outstanding female candidates and Fulbright scholarships, which are awarded to non-US students studying in the US and to US students studying overseas.

According to FT data, approximately half (53 per cent) of students who graduated from ranked North American institutions in 2009 received some form of financial aid, either from their school or an external benefactor. For those who graduated in the same year from European MBA programmes, this figure was 33 per cent.

Employer sponsorship

Some companies do contribute financially towards their employees’ MBAs. Among graduates of 2009 who were surveyed for the FT Global MBA Ranking 2013, 10 per cent received either partial or total sponsorship from their employers.

Despite training budgets being widely squeezed over the past few years, a handful of large companies continue to pay full tuition fees for chosen employees. The employees then return to the company for a period of time after graduation.

Savings and family assistance

Leveraging personal sources of funding, if available, can obviously assist in financing an MBA. “We see students today looking more at their families for assistance,” says David Simmons, admissions director at Cranfield School of Management. “Others are offsetting the costs of their MBA by letting out their properties at home.”

Final thoughts

“Counting every nickel that you think that you’ll need [for business school] will often leave you short,” warns Stacey Kole, deputy dean at Booth.

In her experience estimates of living costs that students will incur during their studies often fall short of reality. Aside from variations in individual lifestyle preferences, Prof Kole cites the additional cost of study trips and extra-curricular activities offered during an MBA.

“Make sure you have extra built into your budget because you’re unaware of the opportunities that there will be,” she adds.