President Obama announced new plans on Monday to ease the strain on graduates struggling to repay student loans. Using an executive order that takes effect in December 2015, the government will expand a 2012 law that allows borrowers to slice their monthly income-based repayment bills by a third, from 15 percent to 10 percent of their discretionary income.
Students who got expensive degrees, even of the type that tend to yield lucrative jobs—like MBAs—stand to gain from these changes. At least, certain ones do.
While MBAs as a group are the least likely to graduate with student debt of all degree types in the U.S., 57 percent of them still emerge from school with loan burdens. They are also seeing stagnating pay, and some studies have forecast diminishing employer demand. For some business school grads saddled with big debts and without high salaries to match, this expansion is an extra lifeline.
Here are five things business school grads should know about the new rules:
Big rewards for big borrowers
The two-year-old law that’s now being expanded is called Pay As You Earn, which caps monthly loan payments at 10 percent of the borrower’s discretionary income.
Previously, anyone who took out loans before October 2007 or had not borrowed since October 2011 did not qualify for the program. The program’s expansion takes away that restriction, making an additional 5 million people eligible. Alumni of graduate programs, who often have older undergraduate debt in addition to the loans they’ve taken out for graduate school, have reason to cheer. So do those with massive debt loads, for whom a one-third debt burden cut amounts to a lot more money.
The program provides “most benefits to those with a high debt-load-to-earnings ratio,” says Andrew Gillen, a senior researcher at the American Institutes for Research, a non-partisan research group focused on education, health care, and workforce issues.
For some MBAs, this rule change will be a windfall
MBAs who borrowed a lot are rewarded under this income-based repayment program.
In the expanded program, borrowers who work in the private sector will see their loans forgiven after 20 years. Because of that, borrowers with larger debt loads get a bigger chunk taken out of the total amount they owe.
Take, for example, an MBA graduate who has a high debt load of $180,000 and a mid-level job paying $80,000 a year at a private company. Under PAYE, she will pay $427 per month. That’s the same monthly burden as someone who owes $80,000 but earns the same amount, calculates Jason Delisle, director of the Federal Education Budget Project at the New America Foundation, a nonpartisan public policy institute. And since both alums will stop paying after 20 years, the first borrower will end up paying a much smaller portion of her total loan amount.
…But for many, little will change
The average MBA probably won’t have to cash in on these changes. A March New America Foundation report showed the median combined undergraduate and graduate debt load for a typical MBA student is $42,000 a year—far less than the $57,600 average for graduate school borrowers overall. Even MBAs in public service or government jobs who graduated between 2010 and 2013 earned $63,000 a year, according to data provided by the Graduate Management Admission Council.
As Bloomberg Businessweek reported in March, the average MBA student debt load stayed roughly flat between 2004 and 2012, while debt levels for law school and other degrees skyrocketed. There are a few possible reasons for that. Law school typically takes three years to complete, costing at least 50 percent more in tuition than a U.S. MBA degree, most of which last two years. Most MBAs have several years of salary built up from work experience before entering graduate programs, unlike law or medical students. Business students also often get their employers to chip in tuition assistance.
MBAs doing good can worry less about doing well
Business schools increasingly tout buzzy ideas like corporate social responsibility, sustainability, and impact investing as students look for alternative ways to earn a paycheck (and after a brief post-financial-crisis lull in banking jobs). A 2011 study by the Aspen Institute noted a “striking increase” since 2009 in required courses that incorporated social, ethical, and environmental issues.
Some of that education may result in a few MBAs getting siphoned off the typical consulting/finance career path. About 10 percent of employed MBAs in the U.S. who graduated between 2010 and 2013 work in the nonprofit or government sectors, according to a March report by GMAC. But graduates who want to pursue positions in those industries that don’t offer big payoffs may still avoid them if they’re worried about meeting their monthly loan payments.
With the student loan payment expansion, MBAs may feel freer to choose public service. If borrowers end up working for nonprofits or local, state, or federal government office, they can stop paying back loans after 10 years, as opposed to the 20-year relief period for graduates who go into the private sector.
“It removes the debt as a disincentive to go into that public service job,” says Mark Kantrowitz, a senior vice president who specializes in student aid at Edvisors, a publisher of education information websites.
Indebted MBAs have other options
MBAs using income-based repayment plans could pay for longer periods of time, and owe more in interest, than they need to. The Pay As You Earn program will help out the most indebted MBAs, but those with smaller bills to pay still have existing options.
Graduates without six-figure debt loads and with decent-paying jobs—even that of the average public-sector worker—would be better off with a loan consolidation with a fixed payment instead of an income-based repayment, Delisle says.