Authored by Rex Carazo, as originally appeared on Poets and Quants.
Many of you are now admitted MBA students – Congratulations!
I was in your shoes around this time last year and suddenly realized that after all of the effort of the admissions process that I now had to figure out how to pay for my MBA.
So I decided to approach the problem just like a company looking to optimize its capital structure, by creating a spreadsheet to lay out the “Sources and Uses” of my business school expenses. (You can read more about my experience and that first tool I built here.)
But that was a year ago and a lot has changed since then. First, the way federal student loan rates are determined has changed. The rates are now set for the upcoming school year at 6.21% for Stafford Loans (for the first $20,500 borrowed) and 7.21% for Grad PLUS loans (for any amount borrowed after the first $20,500). Second, the MBA Budget Calculator I created last year has now been updated to reflect this change – and to make it even easier to use. I recommend you take a look at the new and improved tool here – MBA Budget Calculator – it should help you figure out your personal financial situation, especially as it relates to financing your business school experience.
HOW TO USE THE MBA BUDGET CALCULATOR
Need help navigating it? Let me take you through the budget calculator step-by-step and discuss some of the finer points I’ve picked up a year into earning (and paying for) an MBA at Wharton. The calculator has three broad sections of input: Cost of Attendance by School (“Uses”), Funding from Savings (“Sources” – Equity), and Funding from Student Loans (“Sources” – Debt).
Cost of Attendance by School is what I’d consider the “Uses” of your money. The calculator allows you to pull in cost of attendance by school automatically, using the dropdown, as pictured below. If you’re unable to find your school in the dropdown, you can still manually enter the information into the tool. Most schools make the cost of attendance information available via their financial aid website.
Once you click “Calculate my budget,” your cost of attendance by school will auto-populate. You’ll notice that, in addition to traditional data provided by schools (tuition, fees, room/board), there are two extra fields for “Once-in-a-lifetime trips” and “Cushion.”
Business school offers a great chance to see the world through global treks, to spend time between semesters to get out and see the world. Traveling can, however, cost quite a bit. I think it is worth a budget line-item simply because these experiences are truly once-in-a-lifetime. As far as a cushion goes, this may be a personal preference, but I like to factor in a cushion for the unexpected because business school offers plenty of opportunities to get involved, with a club for just about any interest you want to explore.
Now that we’ve established how much we’ll be paying, it’s time to turn to how we’ll pay for it. I think of sources in two broad categories: “equity” and “debt.” Equity includes your savings as well as any grants or scholarships you receive. Debt includes federal student loans, private student loans, and/or any family loans.
Equity (or “Funding from Savings…”) Heading to business school, you typically have a good idea of how much you have in savings accounts and scholarships by the time you’re budgeting. That’s important, but you don’t need an article or calculator tool to tell you that you can use these to pay for school. The one equity piece that you may not have considered – and some have – is using existing retirement accounts such as a 401k or, an IRA in my case, to help pay for business school. Many people will tell you that you should almost never take funds out of a retirement account early, and I think that’s generally true, but it’s important to note that withdrawals from IRAs for “Qualified Higher Education Expenses” are exempt from early withdrawal penalties. I think it’s a decision that depends on your personal profile. I’ve always considered my retirement account to be a cushion and therefore considered it as another potential “source” for business school. Additionally, as job-less grad students, most of us will be in a lower tax bracket, making business school a potentially favorable time to withdraw from a retirement account.
Whether this is right for you will depend on your specific situation, but if you have significant savings in retirement accounts it might be worth consulting your tax and/or financial advisor to see if it worth withdrawing some funds to pay for school.
Debt (or “Funding from Student Loans”) Now that we know what we need to spend and what we have on-hand to stack against it, we know how much we have to borrow. Where should you borrow from? There are 3 potential sources: family and friends, the federal government, and private lenders. If you’re lucky enough to have friends or family helping you out with paying for business school, then that’s great! The calculator tool has a default interest rate of 3% on those loans, but that is adjustable depending on what you might work out privately.
The vast majority of student loan borrowers take loans out with the federal government. The new rates for the 2014-2015 academic year were released last week. For graduate students, the first $20,500 you borrow will be at a fixed 6.21% interest rate; this is known as the Federal Direct Loan (or simply “Stafford” loan). For any money borrowed after the first $20,500, you borrow at a fixed rate of 7.21% through a loan called the Federal Direct Grad PLUS Loan (or simply “Grad PLUS” loan). A final option is to go with a private lender. Increasingly, student loan platforms such as CommonBond are providing rates that are competitive with federal rates. The MBA Student Loan through CommonBond carries a 6.24% interest rate.
Ok…so how am I doing?
The calculator lets you see how different mixes of debt can work for you. One of your goals could be to have the lowest weighted average interest rate possible.
Once you’ve figured out what works best for you there, you can enter an expected salary after business school to see what your Debt-to-Income Ratio (DTI) looks like. According to industry data, the median DTI for MBAs is around 30%.
Adjustments Once you’re done filling out the information initially, it can be beneficial to make some adjustments just to see how that impacts your DTI and overall costs. For instance, perhaps you’ll want to live in a broom closet with three roommates and survive on free food from information sessions? Those estimates for your room and board may be a bit high, go ahead and shave it down.
Or maybe the opposite is true and after your fourth small group dinner of the week you enjoy coming home to a peaceful one bedroom in a doorman building with a view. No way is that budget going to cover the lifestyle you’ve grown accustomed to while working – go ahead and bump that estimate up.
The point is, minor adjustments can make a big difference. Especially because we’re talking about borrowing money that you might be paying interest on for 15 years or more.
My Budget Experience
On the one hand, I was able to save some money on textbooks (read: renting cheap or not buying at all), which I would say is pretty consistent across MBA programs. On the other hand, I ended up spending a little bit more overall, driven primarily by once-in-a-lifetime experiences. To charge up to the summit of a volcano in Ecuador (what else would one do during spring break?), you probably are going to have to buy a bunch of gear that you’ve never needed because you aren’t Bear Grylls. Then there are the experiences that I never could have predicted – flying cross-country for a rugby tournament, hosting a mustachio bashio for 200, or a newfound interest in home-brewing coffee equipment – that didn’t quite make it into my initial budget. You don’t need me to tell you that any budget estimate you make will be just that, an estimate, you might spend more, you might spend less. It’s helpful to come in with a plan and leave yourself a reasonable cushion.
Come in with a Plan
You’ve gotten into school and you’re going places. I recognize that it is tempting to say “I will just borrow what I need and worry about it later.” But you can really do yourself a favor by mapping it out and truly understanding how you’re spending your money and where that money is coming from. Fortunately, CommonBond has taken my tool and built a great interface for it – check it out: MBA Budget Calculator. You can even email yourself the results and come back to your unique scenario as you tweak your estimates. I hope this helps you plan and helps demystify the process of paying for business school. It did for me.
Ready to start saving?
Rex Carazo recently finished his first year as an MBA at the Wharton School and previously worked in Business and Community Development at CommonBond, a student lending platform that provides a better student loan experience through lower rates, superior service, and a commitment to community. This is a follow up to his previous post, “I’m in… Now What? Paying For It”.