Saturday, March 15, 2014

The True Cost of an MBA

Back when I was deciding between Kellogg and Tuck, I came across an interesting page on Kellogg's financial aid website. It contains a table showing average indebtedness and the sample repayment. These numbers are astounding (not in a good way)!

It's hard to fathom taking on $150,000 in debt at this point in my life. I've never made such an expensive purchase before, and I honestly find it incredibly frightening. I keep reminding myself that its an investment, but that doesn't make it any less scary.

Below are sample debt figures from the Kellogg website and "the average monthly payment calculated using an interest rate of 7.6% (an average of the Subsidized and Unsubsidized Stafford Loan fixed interest rate of 6.8% and the Grad PLUS Loan fixed interest rate of 8.5%)."

Average Indebtedness/Sample Repayment

Loan Balance: $150,000
Loan Interest Rate: 7.6%
Loan Term: 10 years
Monthly Loan Payment: $1788.37
Number of Payments: 120
Total Loan Payments: $214,603.52
Total Interest Paid: $64,603.52

--------------------------------------------------------------
Loan Balance: $125,000
Loan Interest Rate: 7.6%
Loan Term: 10 years
Monthly Loan Payment: $1490.30
Number of Payments: 120
Total Loan Payments: $178,836.76
Total Interest Paid: $53,836.76

-------------------------------------------------------------
Loan Balance: $100,000
Loan Interest Rate: 7.6%
Loan Term: 10 years
Monthly Loan Payment: $1,192.24
Number of Payments: 120
Total Loan Payments: $143,069.41
Total Interest Paid: $43,069.41

-----------------------------------------------------------------
Loan Balance: $75,000
Loan Interest Rate: 7.6%
Loan Term: 10 years
Monthly Loan Payment: $894.18
Number of Payments: 120
Total Loan Payments: $107,302.06
Total Interest Paid: $32,302.06

--------------------------------------------------------------------
Loan Balance: $50,000
Loan Interest Rate: 7.6%
Loan Term: 10 years
Monthly Loan Payment: $596.12
Number of Payments: 120
Total Loan Payments: $71,534.71
Total Interest Paid: $21,534.71

-----------------------------------------------------------------------
Loan Balance: $25,000
Loan Interest Rate: 7.6%
Loan Term: 10 years
Monthly Loan Payment: $298.06
Number of Payments: 120
Total Loan Payments: $35,767.35
Total Interest Paid: $10,767.35


Note: The above data was calculated by the Kellogg Financial Aid Office. These numbers may be somewhat outdated. 


So basically, if I took out a $150,000 loan, I'd end up paying over $60K in interest alone, and would have a monthly payment of $1700 for the next ten years -- that's like a mortgage!

Thanks to the full scholarship I've been offered by Tuck, I'd only have to worry about the cost of living expenses and other fees, which would be a huge weight off my shoulders. However, if I were to be accepted to HBS or Stanford, I have no clue what my finances may look like. 

Readers, how are you planning to finance your degree? Do most people have huge savings that they're planning to deplete, or are you going to take out major loans? Feel free to post in the comment box below. I'd love to hear your plans!

7 comments:

  1. Wow.... It looks pretty gloomy. $1,780 as a payment on a monthly basis.... the MBA tuition more than doubled in the last 10 years and that's annoying.

    At the same time, there are some bright spots to the story:
    1. You get 6 months as a grace period after graduation to give you breathing room
    2. MBA's have the lowest default rate, indicating that we are not necessarily trustworthy but rather capable of producing income
    3. Most starting salaries/bonuses for your schools will be in the $100K territory, so as long as you are careful with money you will be fine. 100K is not 2x of $50K due to taxes and psychological reasons
    4. If you don't make 100K, your interest will be tax deductible
    5. As to what $1,700 buys you per month, our family mini-van (I am not ashamed to admit I drive a Toyota Sienna sometimes), is $850 per month, so it is the same as buying 2 $40K cars or a Tesla/high end car.
    6. You will get raises so $1,700 will be easier over time with inflation (it is closer to $1,800 actually).

    Just trying to paint a brighter picture :-)
    Congratulations on getting into the amazing bschools! with that kind of success (which indicates effort, commitment, and quality of work), I don't think you need to worry too much about the recruiting process and eventual repayment.

    ReplyDelete
    Replies
    1. BB, thanks for the insight! Hopefully, I won't need to end up taking out $150K, so this is probably the worst-case scenario. But it's still crazy to think about.

      p.s. congrats on being a proud mini-van driver :-) haha

      Delete
  2. Unfortunately I'm not lucky enough to get any scholarship (as an intl student, it's prob harder to get one) so loan it is for me. I'm trying not to think too much about how many years I'll need to pay it back or how much the interest will be so no thanks to you on this post! lol

    but seriously speaking, I'm just hoping for the best after graduation & hoping I'll earn enough to pay it back faster. I'll probably need to be frugal in the first few years post graduation but I'm confident I can make it work.

    - tinkered

    ReplyDelete
    Replies
    1. Hey Tinkered, I agree that the only thing we can do is hope for the best, that we'll earn enough post-MBA to pay off our loans quickly.

      Delete
  3. Have you looked into SoFi? I'd be interested to see how the rates compare

    ReplyDelete
    Replies
    1. It's funny that you mention that. I was just chatting with someone this weekend who mentioned SoFi. I haven't done much research into it yet. Is it something you're considering?

      Delete
  4. Thank you for sharing such great information. It has help me in finding out more detail about Education Loan For Mba

    ReplyDelete