Douglas Olsen
The cost of an MBA can exceed $200,000, with the average US MBA student taking out $62,000 in graduate student loans per year. The average MBA debt in 2015-2016 was $66,300, but this figure is likely to be significantly higher as of 2023. The standard loan term is 10 years, but there are a variety of repayment options available, including refinancing, federal repayment plans, and income-driven repayment plans. The optimal repayment strategy will depend on the career path chosen by the MBA graduate, their financial outlook, and the business school they attended.
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What You'll Learn
Weigh up federal vs private loans
When it comes to weighing up federal versus private loans, there are several factors to consider. Federal loans are generally considered safer due to their flexible repayment terms. They also offer protections that private lenders do not, such as the possibility of loan discharge in cases of permanent disability. Additionally, federal loans have competitive fixed rates, and you can extend your repayment term through income-driven repayment plans. However, federal loans may have higher interest rates compared to private lenders, and you must complete the Free Application for Federal Student Aid (FAFSA) to determine eligibility.
On the other hand, private MBA loans can offer lower interest rates and fees than federal options if you have excellent credit. They also provide competitive rates and customizable terms. Private lenders may give more flexibility in customising a longer repayment term. However, private student loans are rarely discharged in cases of permanent disability, and you may need to consider refinancing options if your repayment term becomes unmanageable.
It's important to compare loan features, such as repayment plans and cosigner requirements, to find the financing that aligns with your needs and financial goals. Additionally, consider your legal status, borrowing history, and enrolment status (part-time or full-time) when deciding between federal and private loans.
In terms of repayment strategies, those with debt exceeding twice their income may benefit from an income-driven repayment plan to keep payments low and maximise taxable loan forgiveness. Conversely, those with debt less than 1.5 times their income may opt for an aggressive payback strategy, throwing every dollar towards repaying their loans within 10 years.
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Consider refinancing
If you're struggling to make ends meet, refinancing your MBA student loans could be a good option to help you manage payments and qualify for a lower interest rate. This could save you a significant sum over the life of your loan.
However, it's important to note that refinancing your federal loans with a private lender means losing access to any current or future federal student loan forgiveness programs and benefits, such as the Public Service Loan Forgiveness program. You will also no longer be able to make use of income-driven repayment plans, which offer lower monthly payments and potential loan forgiveness, although you will pay more in interest over time.
If you have a high income, refinancing a large amount of debt can result in higher interest rates as you are a riskier borrower. In this case, you could make a lump-sum payment against your loans before refinancing to decrease the amount you borrow, or you could choose to refinance your debt over time, opting to refinance a portion of it now and the rest later.
If you're having trouble affording your monthly payments after graduation, refinancing can be an effective solution. You can opt for a longer loan term, reducing your monthly payments and giving you more breathing room in your budget. However, you'll likely pay more in interest charges with a longer term.
Overall, refinancing can be a good option to help you manage your payments and save money on interest, but it's important to carefully consider the trade-offs and your financial goals before committing to a new loan.
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Explore repayment plans
The best MBA student loan repayment option for you will depend on your job, financial outlook, and business school. If you qualify for MBA student loan forgiveness—by working for the government or a nonprofit—prioritize receiving it. Many MBAs will likely have large enough salaries to aggressively repay loans. If you won't, options are available to keep payments manageable.
The standard student loan term is 10 years. All federal student loans come with 10-year terms, and many private student loans also have this option. So, if you make your required on-time payments each month, you’ll repay your MBA debt in a decade. The benefit of sticking with the standard repayment plan is that it gives you a set repayment timeline and debt payoff date. It also allows you to know your exact monthly payment and the total interest cost. This can be a good option for those who value stability and predictability. However, depending on how much debt you have and the interest rate on that debt, your payments may be too high.
You can make your repayment term longer through a federal government program, like income-driven repayment, or by refinancing. Extended federal payment plans are typically 20 years for undergraduate debt and 25 years for graduate school debt. Private lenders may give more flexibility in customizing a longer term. By extending your repayment term, you can lower your monthly payments. If you have federal student loans, you can do this through an income-driven repayment plan. These plans will set your payments between 10% and 20% of your discretionary income and extend your term to 25 years for your graduate school debt. You could extend your repayment plan on private and federal loans through refinancing with a private lender, too.
For private loans, the simple strategy of finding the lender that offers the lowest interest rate and paying off the debt quickly to maximize cash flow in the long run is probably best. However, MBA student loan debt repayment on federal student loans is a little trickier due to the repayment options available. If you owe 1.5 times your income or less (e.g., the MBA grad who makes $100,000 with loans at $150,000 or less), your best bet is usually to throw every dollar you can into paying back your loans as fast as possible for no more than 10 years.
For people who owe more than twice their income (e.g., an MBA grad who makes $60,000 and owes $120,000 or more), the goal is to get on an income-driven repayment plan that will keep their payments low and maximize taxable loan forgiveness. This can be optimal due to simple interest, as well as the difference in paying off the debt in full compared to having 20 to 25 years to save and invest for the tax portion.
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Understand interest rates
Understanding interest rates is crucial when taking out loans to prevent being overwhelmed by debt. Interest rates are the additional charges you pay on top of the money you borrow, and they can significantly impact your finances. Here are some key points to help you understand interest rates on MBA student loans:
Types of Interest Rates
There are two main types of interest rates: fixed and variable. A fixed interest rate remains constant throughout the loan period, while a variable interest rate can fluctuate over time based on market conditions or other factors. Variable rates may increase or decrease, making it challenging to predict your total repayment amount.
Factors Affecting Interest Rates
The interest rate you receive depends on several factors. For federal student loans, everyone gets the same interest rate, which is set by Congress each year. For private student loans, the interest rate is based on your credit score, income, existing debts, and other factors. A strong credit score may help you secure a lower interest rate, while a poor credit score could result in a higher rate.
Repayment Options
The repayment term you choose can also affect your interest rate. Generally, shorter repayment periods result in lower interest rates but higher monthly payments. Longer repayment terms reduce your monthly payments but extend the loan duration and increase the overall cost. Some lenders may offer exceptions, so it's important to compare terms before deciding.
Interest Accrual and Deferment
Interest on your loan typically starts accruing as soon as the funds are sent to your school. During your studies and for a short period after graduation (known as the grace period), you may not be required to make any payments, but the interest continues to accumulate. This accrued interest is then added to your principal amount, increasing your total loan cost. Some lenders may offer deferment periods where you can postpone payments, but interest continues to accrue.
Strategies to Minimise Interest Costs
To minimise interest costs, consider selecting a shorter loan term if you can manage the monthly payments. Additionally, look for lenders who offer interest-only repayment options, which can help reduce your monthly payments during school and the grace period. Refinancing your loan by taking out a new loan with a lower interest rate can also help lower your overall interest costs, but be cautious of losing any federal protections and benefits if you switch to a private lender.
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Look for loan forgiveness
If you're looking to pay off your MBA student debt, one strategy to consider is loan forgiveness. Loan forgiveness means that you won't have to pay back the full amount you borrowed and can be a great option if you qualify.
The first step is to find out if you're eligible for loan forgiveness. Federal student loan borrowers can enrol in income-driven repayment plans that forgive balances after a certain number of years. The most widely available income-driven plan is Save on a Valuable Education (SAVE). With this plan, borrowers with graduate student loans receive forgiveness after 25 years. To be eligible for an income-driven repayment plan, your federal student loan debt must be more than your annual discretionary income. These plans are designed to make your payments more affordable, so if you can afford the payments, you may be better off with a standard repayment plan.
If you work for the government or a non-profit organization, you may qualify for MBA student loan forgiveness. This option is worth prioritizing if it's available to you.
It's important to consider the tax implications of loan forgiveness. While a provision to the 2021 COVID-19 relief package allows tax-free debt forgiveness for qualifying debts cancelled between 31 December 2020 and 1 January 2026, it's always a good idea to check with a tax specialist to understand your specific situation.
While loan forgiveness can be a great option, it's not the only way to manage your MBA student debt. You may also want to consider refinancing your private student loans to get a lower interest rate and shorten your loan term, or look into other repayment strategies that fit your financial situation and goals.
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Frequently asked questions
The best repayment option for you will depend on your job, financial outlook, and business school attended. If you qualify for MBA student loan forgiveness by working for the government or a non-profit, prioritize receiving it. If you won't qualify, options are available to keep payments manageable.
You can pay off your debt faster by refinancing your MBA debt through a private lender, which may allow you to shorten your loan term and decrease your interest rate. You can also pay extra on your federal loan each month.
The standard student loan term is 10 years. All federal student loans come with 10-year terms, and many private student loans also have this option.
