Paying for the MBA you can’t afford, yet

tl;dr — If you’re taking out loans for your MBA, borrow from the government and refinance with a private lender later.

Applicants from around the world, including some of my friends, received good news last month. With their first round acceptances comes a new list of to dos; attending admit events, deciding on multiple offers (for the lucky few), debating whether to apply to somewhere “better” round 2, figuring out how to quit gracefully, and/or planning how to pay for the MBA.

It doesn’t feel real until you get a $21k bill.

Today, the average cost of a top MBA is about $200k for 18 months. The cost of attendance doesn’t include the summer between your first and second year since you’re expected to have a paid internship. My current experience suggests that $200k is on the conservative side.

Over half of all students incur debt for business school. According to U.S. News, the average debt burden for students who borrow is around $60k. Students at some of the leading programs average $100k in debt upon graduation.

For those who borrow, the good news is that there are a lot of options out there, especially if you’re at a top program. Innovative lenders such as SoFi CommonBond, and Earnest have figured out that many MBAs are fairly credit worthy and deserve lower rates. New entrants such as WeFinance help you tap into your social network for financing. Many of these options are for U.S. citizens and permanent residents only. International students are out of luck.

The bad news is that with so many options, it’s hard to figure out where to start and what’s best for each individual circumstance. After doing countless hours of research trying to figure out what my options are and not finding a great primer on this topic, I decided to put what I’ve learned into writing.

Savings/scholarships/sponsorship

Before taking out any loans, you should consider all the options to avoid borrowing, including any savings you have. After all, taking out a loan means you’re paying interest.

Many schools offer scholarships and fellowships, based on merit and other considerations. You should contact each school to see what’s available to you. You may have been automatically considered for these, and it was reflected in your offer letter. In that case, congrats! If not, there are also third party fellowships that you can apply for. One example is the P.D. Soros Fellowship for New Americans. Word of advice, search and apply early.

A number of students enter the MBA sponsored by their firms. This is especially common for those who come from consulting. Even if your firm doesn’t have a formal program, it may be worth exploring whether your firm will sponsor you (if you have the intention of going back). Finally, if you are a U.S. military veteran, the GI Bill gives you another option to choose from.

Federal loans

There are two types of federal loans typically available to U.S. graduate students who do not demonstrate financial need. Both are available directly through the U.S. Department of Education (aka Direct Loans). You can use the Direct Unsubsidized Loan to cover up to the first $20k of borrowing each year and then use the Direct PLUS Loan to cover the rest.

• Direct Unsubsidized Loans — These are currently 5.84% fixed rate loans with a 1.073% origination fee and an annual borrowing limit of $20,500. They are offered agnostic of the student’s credit history.
• Direct PLUS Loans — These are 6.84% fixed rate loans with a 4.292% origination fee. The loan limit is the cost of attendance minus all other aid. To receive this loan, you must not have an adverse credit history.

For both loans, interest is deferred while you’re in school, but is accrued once the funds are disbursed. Origination fees are deduced at the time the loan is disbursed (so you actually get less than what you borrowed). Accrued interest is added to the principal when repayment starts.

Repayment begins 6 months after graduation, and you typically have 10 years to repay the loan with fixed monthly payments. A benefit of federal loans is that there are a range of repayment options including extended and pay as you earn plans. Details on the various repayment options are listed here.

Private loans

Private loans typically have fewer repayment options and are more expensive than federal loans. Fixed rates range from 6% to 13%, and the rate you get depends on your credit history. The Department of Education has a comparison of the main differences between federal and private loans.

If you feel that private loans are a good option for you, FinAid.org has a table listing the terms of many of the private loans out there (if the page doesn’t render correctly in Chrome, try opening in another browser). You can also use the online lending marketplace Credible to see what private lenders are willing to offer you.

As mentioned earlier, a few companies have popped up catering specifically to MBA students enrolled at top programs who have good credit. SoFi and CommonBond both offer MBA loans to students at select programs with better terms than traditional private lenders. These are worth looking into if you can get them. For example, CommonBond offers a 10 year, 5.59% fixed rate loan with a 2% origination fee. If you don’t plan to take advantage of certain federal loan features (e.g. loan forgiveness for students who work in public service after graduation), these private loans may be a great option.

Refinancing

Given the current low interest rate environment, many students with good credit wonder why they’re still paying 6%+ to the government and private lenders when the prime rate hovers at 3.5%. After all, you’re pretty much guaranteed to have a six figure job after graduation (right?).

Enter the world of student loan refinancing. A number of lenders have recognized that once you graduate with a world class MBA and land that six figure job, you’re not as risky as compared to when you first entered grad school. I’ve summarized a few of these companies below. They all advertise refinancing rates as low as 3.5% fixed, and you can apply for these loans directly online.

• SoFi — One of the first venture back companies to enter this market back in 2011 and currently one of the largest. Includes other perks such as career support, an entrepreneur program, and unemployment protection.
• CommonBond — Has a partnership with Prodigy Finance to offer loans to international students. Access to events such as borrower dinners and networking socials.
• Earnest — Touts “radical repayment flexibility” and a greater emphasis in using data analytics to customize loans compared to other lenders. Has an in-house Client Happiness team.
• Lendkey — Lets you refinance your loans through community lenders (e.g. credit unions). Lendkey has 300+ community lenders on their platform.
• Credible — An online marketplace for consumers looking for student loans and refinancing. Similar to Lendkey but with traditional lenders such as Citizens Bank. You’re offered a real quote (not a range of interest rates) that you can sign within a 30 day window.
• WeFinance — A platform where you can borrow money from your social network. You set your own terms and your friends/family fund you. WeFinance handles the transactions and interactions for you (e.g. loan repayments move automatically each month to your lenders).

A word of caution here. Though a number of the companies I’ve written about offers very low rates, it doesn’t mean that you’ll be able to get these rates. Read “When Non-High Earners Attempt to Refinance Their Student Loans”.

Bringing it all together

Assuming your MBA costs $200k and you’ll be borrowing $100k, this is what your loans can look like. To make the math easier, I’m assuming the loans are all disbursed on day one, and you start repayment six months after your two year program.

1. Max out the Direct Unsubsidized Loan at 5.84% fixed rate with a 1.073% origination fee and an annual limit of $20,500. You only receive $40,560 because the origination fee is deducted from the disbursement.
2. Borrow the remainder $59,440 through CommonBond at 6% fixed with a 2% origination fee.
3. Six months after graduation, your accrued interest, origination fees, and principal totals $117,842.
4. You then refinance with SoFi at 4% with no origination fee. Your monthly payments for the next 10 years will be $1,193.

With a good job, hopefully it wont take 10 years to pay back your loans.

Other options to consider

• Opening a 529 Plan — If you are a few years away from graduate school and know that you’ll be going, 529 College Savings Plans may be a good option to save for school. These plans are operated by states or educational institutions. One of the main benefits is that earnings and withdrawals are not taxed, though your initial contributions are.
• Withdraw from your IRA — Early withdrawals can be made from your IRA for qualified educational expenses without the 10% tax penalty, but the money will be taxed at your ordinary income tax rate.
• Borrowing from your 401(k) — Some 401(k) plans allow you to take out a loan on your retirement savings, though typically only while you’re employed. Check your plan documents for details. Typically, up to 50% of the vested balance (up to a maximum of $50k) can be borrowed, and the rate starts at prime + 1%.

Useful resources

• nerdscholar (by nerdwallet) — FAFSA guide, scholarship search, student loan educational articles.
• Federal Student Aid — Department of Education’s site on financial aid.
• FinAid — Financial aid guide started in 1994 by Mark Kantrowitz, a nationally recognized financial aid expert.

I’ve provided links to primary sources throughout this post. Note that rates/options do change on a regular basis. Check these sites for the latest figures and terms. Information on Credible was added 1/17/2016 after I learned of it.