By Francesca Di Meglio
Dan Thibeault, a second-year MBA student at Harvard Business School, talked about student loans during an impromptu discussion in one of his first-year classes -- and set off a firestorm of interest from his classmates. They wanted his advice on everything from finding the best interest rates to loan consolidation -- and with good reason. One of Thibeault's jobs before going back to school was at Goldman Sachs, where he dealt with student loans and other debt instruments.
Thibeault responded to his classmates in a big way. In 2003 he, along with other students, launched Graduate Leverage, a student loan consolidation and debt-management company in Cambridge, Mass., that this year will offer advice to about 5,000 MBAs and other graduate students.
There's certainly a ready market among MBAs. Two years at a top B-school costs upwards of $150,000, including living expenses. The average student, who usually already owes about $15,000 in student-loan debt after undergraduate studies, can afford B-school only by taking on more loans. And between 75% and 92% of MBAs at top-tier schools, where the average financial aid package is about $50,000, do just that.
So, unless your family is wealthy, most of the money will have to be borrowed from the government or private lenders. It can be done -- lenders consider MBAs a good credit risk if they've shown good money-management skills in the past. But that's still a big chunk of change and a lot of issues to juggle.
Here are some helpful hints about the ins and outs of student loans and other financial questions for current and aspiring MBAs:
Don't be afraid to ask for help. If you're in school already and feeling financially strained, don't fall for the common misconception that business students don't need financial advice. "Even at B-school, [many] students aren't aware of whether their loans are floating or fixed or when they should lock in rates," says Thibeault. It's important not to let paying for B-school get you into financial trouble: About 35% of all employers now look at applicants' credit histories before deciding who to hire, according to the Society of Human Resources Management.
Take time to prepare. If you're just applying, getting your finances in order is one of the first steps in preparing for B-school. "Get debt to a manageable level before taking on a student loan," says Bonnie Lack, associate director of financial aid at Carnegie Mellon's Tepper School of Business in Pittsburgh, one of the few B-schools with its own financial-aid office apart from the one undergrads and other grad students use. "Pay off that car and all those credit cards," she adds. Brian O'Connell, author of Free Yourself from Student Loan Debt, warns that the biggest mistake students make is racking up bad credit-card debt.
To find out where you stand, get a copy of your latest credit report and score (the number creditors give you to express whether you are a big credit risk) from at least one of three major credit bureaus -- Equifax, Experian, or TransUnion. A score in the low 600s signals a problem, and one in the upper 700s will probably get you a lower interest rate because you're a good risk, according to O'Connell's book. By September, 2005, every American will be able to get one free report each year from each bureau. Until then, the fee ranges from $9 to $30.
Borrow intelligently. Your school's financial-aid office is a one-stop shopping service for federal loans, private lenders, and merit- and need-based scholarships. But keep in mind that these services have a lot of demands placed on them.
"Start early and be polite but persistent," advises Michelle Rock, a second-year student who has taken out government and private loans to finance her education at Emory University's Goizueta Business School in Atlanta. "I have had pretty good service but often find it necessary to meet face-to-face to take care of the details."
Anyone with a U.S. Social Security number is eligible for up to $18,500 in federal loans. Experts suggest considering these loans first because at 2.77% federal or Stafford Loans are at the lowest rate in their history. If you consolidate your loans between now and June 30, 2005, you can lock in this low interest rate and save yourself lots of money. In July, interest rates on student loans are expected to increase for the first time in five years, to as much as 4.5%.
Private lenders will probably charge you higher interest rates than the government. But MBA students generally need more than that $18,500 to pay tuition and living expenses. If you're one of them, ask for your school's list of preferred private lenders, which offer special rates to students at partner schools. According to Carnegie Mellon's Lack, some lenders have a $20,000 annual cap on how much they'll lend a student, and most won't lend more than a total of $150,000.
Learn to budget. Returning to a student lifestyle can be quite a shock for B-school entrants leaving a job with good pay. It might be a good idea to cut your spending before entering school to save a little extra money and ease into the transition. Another good idea is to build frugality into your new lifestyle from the beginning. Cherie Scricca, associate dean of Master's Programs & Career Management at the University of Maryland advises living with roommates and refraining from eating out all the time. "Don't live like a CEO when you're in school."
That doesn't mean you have to skimp on your education. Rock took out extra loans so she could spend four months studying and working at American Greetings Interactive's Paris office. "Living in another country is an amazing and, for many, a once-in-a-lifetime experience, and you can get additional loan money," says Rock.
Research Your Repayment Options. Rock says she expects to pay off her loans in no more than 20 years and plans to put all her bonuses toward payments. To maintain the integrity of her credit, she should keep in touch with her lenders whenever she moves or if she ever has trouble making a payment, says Carnegie Mellon's Lack. Most lenders offer deferments for life's unexpected twists, such as a death in the family.
The government also will reduce or eliminate your loan if you're taking a nonprofit job after graduation, says O'Connell. Also, Scricca notes that some companies are open to paying off employees' student loans, so try negotiating with your employer.
B-school is usually a good investment that pays for itself over time, says O'Connell -- as long as you're smart about it. And for MBAs, of all students, making smart financial decisions should be second nature.