Have B-Schools become debtors' prisons?August 18, 2011: 9:34 AM ET
MBA grads are shouldering record levels of debt as tuition rates head skyward, making the degree a risky investment that's not often approached with caution or restraint.
(poetsandquants.com) -- In 2008, Brian Jenkins moved to Malibu, Calif., to start his MBA at Pepperdine University's Graziadio School of Business and Management. He had big ambitions for B-school, expecting the degree to help him land a six-figure-salary job in human resources at a top company.
Pepperdine seemed poised to deliver. When he was a mere applicant, the admissions director gave him a personal tour of the business school, which commands a stunning perch overlooking the Pacific. His student experience was "amazing," he says, handing top marks to his professors and classmates. The weather – "perfect every day" – was an added perk.
To pay for it all, Jenkins took out $120,000 in loans. But his six-figure-salary job never materialized. "The career services staff basically said, 'We'll help you edit your resume, good luck out there,'" he recalls. "A lot of [my classmates] found jobs paying $55,000 to $65,000 per year, and they were very excited that they had a job."
In fact, Jenkins' class earned a mean base salary of $69,167, according to Pepperdine's official stats. They also owed an average $66,242. When the economy was doing well, and there was upward mobility, MBAs made sense, Jenkins says. "People were able to manage their debt load."
Wallowing in a sea of B-school debt
MBAs like Jenkins are shouldering record levels of debt, approaching a tipping point that makes the degree – no matter how good the experience – a risky investment that isn't always being approached with financial caution and restraint. It's now common for many graduates to leave a top business school with six-figure debt, and in some cases, MBAs are graduating with more than $150,000 in loans that will take them 10 or more years to pay back.
At a few elite business schools, including Wharton and Columbia, the "average" debt burden is already six figures. Wharton grads left Philadelphia last year with loans that averaged $109,836 -- the most among all business schools. Overall, graduates from Poets&Quants' top-10 U.S. MBA programs owed an average $87,049 last year (MIT-Sloan did not release its debt figures).
Several business schools, including Stanford and Dartmouth College's Tuck School, expect these numbers to increase this year. The reason: Many students are starting their MBAs with diminished assets due to the Great Recession. They drained their bank accounts as the economy went south to maintain their lifestyles, so many of them will have to borrow more than their predecessors. And they're doing this at a time when starting salaries for MBAs have flattened overall.
"The numbers scare me," concedes Diane Bonin, director of financial aid at the Tuck School. "People coming in are making a little bit less and have much less in available savings." She expects the average debt burden of latest Tuck grads to rise to $98,500 for the class that just graduated from the record $96,292 last year.
Despite the alarming figures, members of the incoming class of 2013 have expressed little concern over taking on the debt. Like Jenkins at Pepperdine, they're betting that the degree will pay off in the long run, providing salaries and bonuses that will allow them to repay the loans. "No one says, 'How am I going to pay for this?'" says Rod Garcia, director of MBA admissions at MIT's Sloan School.
Still, some B-school deans are beginning to worry. Harvard Business School Dean Nitin Nohria is concerned that escalating debt burdens will put more pressure on MBAs to accept jobs they don't want. "You might take the highest paying job whether you are committed to that as a career or not because it's a way to pay off your debt," he says.
Tuition reaching skyward
There are many reasons for the debt binge, from the rising cost of attending an MBA program to the increased availability to borrow money. In the decade since 2001, the top 10 U.S. MBA programs lifted tuition by an average of 80% (not including fees) for their two-year programs. The nearly 6,000 students who make up the class of 2013 at the elite 10 will pay an average $105,923 in tuition next year, before grants or scholarships discount the price. (Pepperdine's incoming MBAs will pay about $80,000.)
But with fees and living expenses, the total ticket creeps dangerously close to $200,000: The Wharton School's incoming MBAs will pay close to $178,000 to study and live in Philadelphia. If they continue to borrow at rates similar to their predecessors, the average 2013 graduate will rack up debt of nearly $124,000.
Schools have gotten away with steep tuition rises, but critics say these hikes are unsustainable, partially because students are borrowing too much to study. "We're starting to get to a point of diminishing returns," says Mark Kantrowitz, founder and publisher of FinAid, as well as FastWeb, a free scholarship matching service. "The pricing power of the colleges is going to hit a ceiling."
There is some evidence that prospective MBA students are voting with their feet, taking their talents elsewhere or sticking with their current jobs. A recent Poets&Quants report showed that applications to many B-schools will drop between 3% and 10% in 2011-12. The reason? Full-time MBA programs don't offer the value they used to.
The risk-benefit analysis for any one candidate is often hard to do because it's dependent on lots of different variables. MBA graduates from top business schools are paid more than their counterparts from lesser-known schools. However, students at the elite schools also pay a lot more for the privilege -- and generally require more years to realize their investment.
Graduates from Poets&Quants' top-10 schools earned a median $107,905 in 2010. Graduates from the schools rated Nos. 40 to 50 earned about $30,000 less, an average $81,599. On first glance, those salaries look nice; but hiding among every the averages are pay ranges that dip frighteningly low, especially when compared against the debt. At Wharton, where the average debt was nearly $110,000, graduates earned a range of annual base salaries that stretched from $350,000 to $25,000.
MBA graduates who land a six-figure job loaded with extra compensation are not likely to be kept awake at night worrying about such debt. Columbia Business School sent 48% of its graduating class to the financial services industry in 2010, where the median salaries ranged from $95,000 in commercial banking to $115,000 in hedge funds. So when some 65% of your MBAs borrow money through the financial aid office, according to Marilena Botoulas, director of financial aid, and their debt "hovers" around $100,000, it may not be quite so scary.
Columbia encourages its MBAs to live on less during school, which "allows them to live less like a student later," Botoulas says. "It's not a cheap monthly payment. It's another rent payment in New York for the most part."
Meantime, post-MBA salaries have not kept pace with tuition increases. At L'Oreal, for example, starting MBA salaries have risen once since 2008, when Cecilia Nelson, director of talent development for L'Oreal's consumer products division, joined the company. When the human resources department considers salary, "MBA debt isn't our concern," she says. Instead, salaries are set "to remain competitive in the market."
The curse of easy money
The ease at which borrowers can now access federal loans is another debt-fueling culprit. A piece of July 2006 federal legislation made grad students eligible for the Direct PLUS Federal Loan -- previously restricted to the parents of students -- allowing grad students to cover the full whack of the student budget, which each school sets, with federal loans.
U.S. graduate students no longer have to lean on as many private loans after they max out on their annual Direct Stafford Loan limits ($20,500 per year), as well as the Federal Perkins Loan, a need-based, low-interest rate loan reserved for students in exceptional circumstances, and limited to $8,000 per year of grad school.
"We had seen too many people saying, 'An education will make me better off,'" says Dan Thibeault, president and co-founder of student loan servicer Graduate Leverage, "That carries into 'any education will make me better off,' but that's not the case anymore."
Jenkins sobered up to that lesson at Pepperdine. Short of a job offer that would allow him to pay off his debt, he took a calculated risk and moved to Ithaca, New York, and enrolled in Cornell University's 12-month master's program in industrial relations. Thanks to a dean's scholarship, he only needed to borrow $20,000 for the privilege.
"If I hadn't gone to Cornell, I would have been in serious trouble," he says. "The only way to break into these top-tier companies is to come from a top-tier school."
Jenkins accepted a job with Hewlett-Packard (HPQ) in Dallas. His human resources role delivers a total compensation package in the low six-figures. Thanks to the low cost of living in Dallas, he plans to overpay his monthly $1,750 loan payments and hopes to be debt free within five years.
Facing the cold, hard financial truth
In addition to taking on too much debt, MBA hopefuls must weigh the salary they'll forfeit while they study. In 2002, Mandy Moore made the difficult choice of leaving a well-paid job in Silicon Valley to attend London Business School. A return on investment calculator had told her to stay put -- it would take her years to recoup her lost earnings and to pay back her loans -- but she wanted the option of changing industries and she craved an international experience.
After graduating, it took Moore four years to return to her pre-MBA salary. Meantime, her debt, borrowed in U.S. dollars and GB pounds, added up to $140,000, which required payments of $2,500 a month. "It was more than my mortgage," she says. In fact, she and her husband (a classmate from London Business School who graduated sans debt) refinanced their home to pay off one of her U.S. loans, which was accruing interest at a rate of 11%.
Moore argues that the experience was worth every penny. But she cautions that it wouldn't have been the case elsewhere. "A lot of my classmates were rock stars," she says. "But an MBA isn't worth it if you're not going to a top-10 school. I have a hard time imagining that you'll be better off taking two years off from work, losing salary" at a school with less clout.
It's no good deluding yourself about the payback an MBA offers, warns David Wilson, president and CEO of the Graduate Management Admission Council, which owns and manages the Graduate Management Admissions Test (GMAT). "Don't look at the salary that one guy in private equity got if you're looking at a school that private equity firms don't recruit from," says Wilson.
Graduating into recession
Today's MBAs have another profound disadvantage compared with their predecessors: most started their careers during the Great Recession. "We're seeing needier students," says Jack Edwards, director of financial aid at Stanford's Graduate School of Business. "Prior to the crisis, students came with assets. Those assets were considered part of the [financial aid] calculation."
In 2010, Stanford's MBAs graduated with an average $71,403 debt, one of the lowest burdens among the top-10 schools.
Applicants who do hold assets are also tightening their belts. "Students are only borrowing what they really need," Edwards says. "They're thinking, 'maybe, because I'm early in my career, it's worth liquidating my assets, because I can rebuild those for the future.'"
Some MBA alumni suggest that people avoid the costly degree altogether, unless an employer is footing the bill. "I guarantee you dollars to doughnuts that I can find you a cheaper option than an MBA," says Christian Schraga, a member of Wharton's MBA class of 2002, and now a vice president at Columbia Records. He graduated in a year when MBA jobs were scarce. His debt was a frightening $112,875 -- 10 years ago.
"Instead of thinking about signing the promissory note and taking two years at B-school, just do what you want," he says. "If you want to be in the music business, find someone who sings well and book them gigs. If you want to sell toothpaste, sell it. You'll learn a hell of a lot more that way and it will be a hell of a lot less expensive."
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