The Most Bang For Your Mba Buck

Let's face it: You don't go to business school just to expand your mind. It's a major investment, and when you emerge two years later with a diploma, you want your intellect and your pockets to be deeper.

Other than buying a house, going to grad school is probably the single largest investment a twenty- or thirtysomething will make. Think about it. In addition to nearly 50 grand for two years of tuition at many top schools, most MBA students give up twice that in lost earnings. The total cost usually runs to six figures; at Harvard University, the most expensive of the B-schools, the median is $183,300.

So it's important to analyze the MBA as you would any other investment. "When you make a big decision, like buying a house or buying an education, you'd like to know how long it's going to take to pay back and how much you're going to make after that," says Jens Stephan, an associate professor at the University of Cincinnati's College of Business. Stephan, along with colleague Chris Allen, analyzed data compiled from BUSINESS WEEK's sur-vey of 4,830 recent MBA grads in order to explore a central question: Is an MBA worth it?

Their answer is an emphatic yes--at least at the top 50 or so schools. Despite those two valuable years and all that money, an MBA from a leading school pays for itself within five to eight years--including the two years you spend in school. That's based on the assumption that grads will earn, on average, a 10% raise each year after school--certainly less than the jump some investment bankers will see, but more than twice the typical pay boost for white-collar workers today. The MBAs' signing bonus is considered to be a one-shot payment, but the analysis folds half of any other compensation--such as guaranteed yearend bonus and moving costs--into the first-year salary. Then, the 10% raise is calculated from that base to account for future bonuses.

Since the issue for many people is not whether to get an MBA but where to get it, all this begs another question: Which B-schools offer the quickest return on that investment? It's not simply the ones that make BUSINESS WEEK's top 25 ranking. After all, most of them--like Wharton, Michigan, and Northwestern--charge more than $20,000 a year. But the list of quick-return MBA programs isn't just a Who's Who of the less expensive state institutions, either. Instead, the roster is an eclectic mix of public and private, top 25 and second-tier--just as the laggards include both affordable state universities such as Wisconsin and elite schools such as Columbia.

The University of Pittsburgh weighs in at No.1 because its program lasts just one year. That cuts both tuition and lost earnings in half, while the school's grads still see a 63% boost in pay over pre-MBA earnings. Then come, among others, Brigham Young, Texas A&M, Penn State, and Texas, all of which charge less than $13,000 in annual tuition. Scattered among them are private universities such as Dartmouth, MIT, and Carnegie Mellon, which help grads gain enough of a hike over pre-MBA earnings--usually close to 100%--to earn a fast return despite the high tuition students shell out and the high-paying jobs they leave.

NUMBER CRUNCHERS. The analysis generates some important observations. For starters, there's a clear difference between state schools such as Michigan and UCLA that have allowed tuition to rise for out-of-staters to around $20,000 and those such as Texas that have kept it at a reasonable $11,900. That second group of public schools becomes even more attractive when you consider the much lower tuition for in-state residents--which the accompanying chart does not.

Another theme cuts across the list of high-value programs: an emphasis on hard, quantitative skills. At Carnegie Mellon, MBA students spend 75% of their first four months crunching numbers in such courses as data analysis and managerial accounting. A mathematical rigor seeps into nearly every class at MIT. And Texas A&M has traditionally required that entering students have a college calculus course on their transcript. "Employers value the fundamental skills that these students employ to attack whatever set of problems they find," says Douglas Dunn, who ended a 26-year career at AT&T this summer to become dean at Carnegie Mellon. In other words, even in the '90s, when "managing people" is one of the buzz phrases of business, there's still no substitute for concrete knowledge.

Consider Mike Martinez, a 29-year-old consultant at American Management Systems in Boston and a '96 grad of MIT's Sloan School of Management. He applied only to Sloan three years ago, in large part because he knew MIT would make him quantitatively competent. "I felt my resume was a little lacking in that area," he says. "And everyone comes out of MIT with a bare minimum of quant skills--or they don't come out." Martinez left a job running insurance programs for the state of Massachusetts. In his new job, he's doubled his earnings, not including the signing bonus. Like the typical Sloan grad, he will pay off his MBA in about five years, including the two spent in school.

He'll earn back his investment in less time it takes an MBA at MIT's prestigious competitors, such as Chicago, Columbia, Stanford, and Harvard. Even though the average grad leaves those campuses for a job that pays a base salary of more than $60,000, they need about seven years to recoup their investment. Why? Look at the high salaries of the students when they enter. The fatter paychecks run up the cost of lost earnings--and keep down the pay boost that can be attributed to their new degree. When you enter school already pulling down $45,000, the jump to $60,000 is less striking.

A number of other slow-return schools suffer the opposite problem. MBAs at the universities of Georgia and Wisconsin enter with among the lowest salaries of any school's students, but they leave with raises of just $10,000 to $15,000. At that rate, a $100,000 investment won't be paid back overnight--or even in two thousand nights.

Measuring the value of an MBA has its limitations. Columbia University officials say that a 10% annual median raise is too low an estimate for their graduates, more than half of whom head for finance jobs. "For a place like us, this doesn't apply," argues Safwan Masri, vice-dean at Columbia, who says that many grads triple their starting pay packages within a few years. That said, however, Columbia finishes far lower on the list than Wharton, a school that recruiters say is an even better hunting ground for finance jocks.

HEADHUNTERS. The study also leaves out intangibles. If there's an MBA on your resume, you may be less likely to be passed over for that great promotion. More headhunters are likely to call you with job offers, and you will have gained entree into an alumni network that could be helpful with future business deals or when you're ready to search for new employment.

The study's horizon also is short-term: It doesn't attempt to project the value of the degree over your lifetime. A longer-term analysis like that--which requires more assumptions--would favor a school that awards grads a hefty first-year salary. "I wouldn't recommend anyone look at this rank order and make a decision based just on it," Stephan says. "It's another piece of information to help guide a decision."

Consider this scenario: You're sitting at home in Texas, and you've just been admitted to UCLA, Michigan, Washington University in St. Louis, and the University of Texas. You're making $36,000 a year. Which one is the best deal? At the first three schools, you'll be making an investment of nearly $150,000 that will take more than six years to pay off. By heading up the road to Austin, as an in-state resident, you can cut both your investment and payback time by nearly a third. By itself, that might not be enough to swing you. But as any sensible investor can tell, you'd be crazy to ignore the information.

Before it's here, it's on the Bloomberg Terminal.