Frequently Asked Questions About Financing your MBA

What are the typical costs of an MBA?
The standard period for a full-time international MBA in the USA is still two years and the $49,020 annual cost of the Chicago Booth full-time MBA is typical. Other blue-ribbon American schools, such as Harvard, Wharton, or Stanford, are much in line with these figures. With travel, books and living costs, an annual budget of $80,000 is recommended.

In Europe, the London Business School (LBS) is one of the rare institutions to offer a two–year programme, costing £45,500. In general, European MBAs are shorter. The programme at the International Institute of Management Development (IMD) in Lausanne lasts 11 months and costs US$60456. The INSEAD MBA runs for ten and a half months and costs €51,000, whilst the 18 month MBA at Manchester Business School costs £34,500. Financial aid can make the most expensive programmes affordable.

Is loan financing becoming more difficult to find since the credit crunch?

In our low interest global economy of today, loan financing denominated in a local currency, seems a sensible option for MBA students. Although most MBA applicants will try to seek out scholarships, the reality is that the majority will resort to loan financing, supplemented by personal savings or family savings.

Although the credit crunch did result in some banks withdrawing their MBA loan schemes, as credit markets ease in 2010, new products are becoming available to ensure financing an MBA is still possible. Rose Martinelli, Associate Dean and Director of Admissions at Chicago Booth School of Business, points to the new ALPS (Affiliated Loan Program for Students) facility. ALPS, which launched in September 2009, is provided by a consortium led by Deutsche Bank. ALPS packages the student loans directly into securities which can be purchased by capital markets participants, like Deutsche Bank, providing a source of liquidity to universities and low interest rates to students. Martinelli confirms that any applicant from anywhere in the world, offered a place at Chicago Booth and with no prior credit default history, will be eligible for a loan through ALPS.

In the USA, approximately 80% of MBA applicants take some form of loan financing to fund their MBA studies, whilst many also use personal savings, according to the TopMBA.com Applicant Research 2009.

In Europe there are large variations between countries. In the UK loan financing is readily available and as popular as in the US. Only 40% of Germans take a loan to fund their studies. Amongst Russian candidates, the TopMBA.com research shows 22% seek to finance their MBA primarily through loans, whilst 49% rely on scholarships and 27% will use own or parents savings.

For applicants from Russia and Eastern Europe there are a number of banks offering loan facilities. In addition to the ALPS scheme, Banque Société Générale Vostok offers loans to cover full tuition for MBA students attending INSEAD as well as other good business schools.
 

How can MBA Applicants find scholarships?

The QS web site www.topmba.com provides information on many scholarships available at over 350 accredited business schools. QS also offers $1.6million of exclusive scholarships to attendees of the QS World MBA Tour, which visits leading European cities in March and October each year. Business school web sites also list scholarships available to applicants as well as other forms of financial aid which can help make the MBA affordable. In particular there are many partial scholarships available from business schools around the world. Many US business schools still have very large alumni endowments which help fund full merit-based scholarships, or scholarships offered under special criteria.

At Chicago Booth, Martinelli emphasises that all scholarships are merit based but “they take into account the country of origin of the candidate and especially low income countries.” Merit is judged not just by “academic grades, but by leadership experience, work experience, contributions beyond work – an amazing track record of success.”

What are some less well-known channels of financing an MBA program?

Company sponsorship is the least common route to funding an MBA. Less then 5% of full-time MBA students receive company funding for their studies, whilst approximately 50% of Executive MBA students receive company funding. Most people take an MBA to achieve significant career progression or to completely change career. This often involves changing employer and as a result, employers are less inclined to provide funding, or if they do, it is on condition that the student returns to work for them for a certain period of time.

Does an MBA make financial sense? What is the current payback period for MBAs graduating from US and European business schools?

Even though course fees have risen in recent years, salaries and bonuses have also risen and the payback period has remained similar over the last five years.

Salaries for graduating MBAs from top international programmes have increased significantly over the last five years, despite being flat in 2009. Average salaries for MBAs graduating from a top US school like Tuck, Chicago, Wharton and Stanford averaged $110,000 last year, compared with an average of $91,500 amongst MBA in the USA and Europe as a whole. To calculate ‘true earnings’ one should also take into account a “sign-on” bonus offered by many MBA recruiters, and the potential to earn a further $15,000 during a summer internship. In the US, there are many jobs on campus, like teaching assistantships.

Against this, to estimate the ‘true cost’ to complete an MBA, we should take into consideration tuition costs, living, travel and book costs. We assume annual living costs and book costs of $23,000 per annum and apply a weighting depending on whether the location is rural, suburban or metropolitan. In addition the opportunity cost of salary foregone, must be included in the calculation and the tuition cost of the target school - say $49,000 per annum.

Using these assumptions, for someone with a pre-MBA salary of $50,000 and joining an average recruiter in the US or Europe, a two year MBA taken at a top US business school would have a payback period of just over three years. Using the same assumptions, for a one-year European MBA the typical payback period is approximately two and a half years. Someone returning to an average Eastern European salary would not necessarily have much longer payback period – it would depend on the differential between their pre- and post-MBA salary. The higher the pre-MBA salary, the longer the payback period.