There are two costs to consider in acquiring an advance degree: out-of-pocket costs and opportunity costs (or foregone income). Out-of-pocket costs (including living expenses) at well-known schools can total $50,000 to $60,000 per year although at some state-supported institutions, the amounts can be 20-30% lower.
Most graduate business degree candidates for a full-time program expect to pay these costs from a variety of sources. The most-often cited sources are: personal savings, loans, and grants or scholarships (merit and need-based). Some students also plan to continue working on a part-time basis while in business school.
The majority of degree programs offer financial aid, particularly for applicants who are well qualified (based on GMAT score, work experience, etc.). While the amount of aid and the percentage of the incoming class receiving it can vary widely, it is not unusual to see as much as 50% of an entering class receive some aid with the amount ranging from 20% to 50% of tuition. In some instances, such scholarships or grants are larger with a few covering full tuition and providing a modest stipend for other expenses.
Because the perceived earning power of MBA and MS degree holders is reasonably high, low interest loans are also readily available and their costs can be justified. Currently, interest rates on these loans are relatively low. In most cases, all interest and principal payments are deferred until after graduation.
Finally, many MS and MBA students work part-time and this income should be taken into account. In addition, spouses will often supplement household income with a full-or part-time position.
The second cost, foregone income, is recovered by the enhanced earning prospects associated with obtaining a graduate business degree. Recent research indicates that women managers, entrepreneurs and healthcare professionals who obtain an MBA or MS degree from a recognized school can earn significantly more compensation in their first position after graduation and throughout the remainder of their careers. Most MBA schools track these employment data so make sure you contact schools of interest to get all of the stats they collect and factor these increases in compensation into any analysis you use to make a decision to apply or enroll in business school.
For the sake of analysis below we assume that existing salary is $50,000 and it takes two years to obtain a degree, the opportunity cost is $100,000.
It is fairly easy to see that, on a simple payback basis, those funds will be recaptured in just over 3 years, even if earnings are reduced by repayment of an education loan of some reasonable size.
A simple cost-benefit analysis might look like the following:
|Out-of-pocket costs:||$120,000 (including living expenses)|
|Less (Scholarship):||$ 28,000 (@ 40% of $35,000 tuition for 2 years)|
|Less (Savings):||$ 25,000|
|Less (Part-time work):||$ 15,000|
|Amount to be financed:||$ 52,000 (or $26,000 per year)|
Or, loan payments of less than $1,000 per month for 5 years. Assumes interest rates on these loans are in the 4.5%-6% range.
|Forgone Income:||$100,000 (2 years @ $50,000)|
|Salary differential:||$ 50,000 (annually $100,000* versus $50,000)|
|Loan payments:||$ 12,000 (per year)|
|Available to offset forgone income:||$ 38,000|
Or, payback of approximately 3-3.5 years assuming no bonuses or salary increases.
Obviously, the numbers will vary based upon whether the school you attend is in a big city or a small one, the size of your family, etc. Still, even a 25% increase in cost only results in loan payments for an additional 1-1.5 years.
This is a simple analysis using averages. However, it shows, like the opinion shared by most students who are satisfied with their MBA or MS, that the benefits of obtaining an MBA currently outweigh the costs associated with getting a graduate degree.
* According to Forbes, the expected median starting salary for recent MBA graduates in the U.S. was $100,000 in 2015. This represents an increase of $45,000 over what survey respondents are paying candidates with bachelor’s degrees.