An MBA: Is It Still Worth It?

Salaries for 2002 MBAs have shrunk. That means it will take longer to get a payback

It has been a cold comedown for the MBA class of 2002. With demand for bodies waning across Corporate America--especially in B-school-friendly industries--recent MBA grads' expectations have fallen to earth with a thud. For the first time since BusinessWeek began keeping tabs in 1988, the overall average starting salary for a B-school grad is essentially flat, down slightly from $75,900 in 2000 to $75,000 in 2002.

That's a screeching about-face after a 15% increase in 2000 from 1998 and a huge 30% increase in 1998 over 1996. But before we strike up the violins, consider that even in this dismal economy, the average MBA still corralled a 71.9% pay hike from the pre-business-school salary, according to data BusinessWeek collected from 5,834 students at 88 B-schools across the globe.

Still, the more modest compensation means it's going to take this year's graduates longer than usual to earn a payback on what has likely been the largest investment of their lives. The average 29-year-old MBA student sank more than $122,300 in tuition, fees, and lost earnings into a two-year program and is left saddled with an average debt load of more than $27,600. That makes cost of attendance all the more important. To measure the time it takes grads to recoup their total outlay and each school's return on investment (ROI), BusinessWeek once again tapped Jens Stephan, associate professor of accounting at the University of Cincinnati's College of Business Administration, who has been calculating ROI for the ranking project since 1996.

The winner: Reigning champ Brigham Young University's Marriott School of Business, which again tops the list at just 4.1 years to payback, including the two years at school. Dirt-cheap tuition--only a $71,100 average total investment--and an impressive 97.8% salary increase kept BYU ahead of Pennsylvania State University's Smeal College of Business, which shot up from ninth-quickest in 2000 to No. 2 this year.

To calculate the payback, Stephan first figures out the students' opportunity cost of attending--both the tuition payments and the forgone salary. He assumes a student in a two-year program loses 18 months of income (allowing for a summer internship). Then he projects the graduates' earnings over the next eight years, folding bonuses and other compensation into the post-MBA salary. Stephan assumes a 10% raise each year after graduation--which smooths out differences in occupations as well as economic ups and downs over the course of 10 years.

This year, BusinessWeek also accounts for cost-of-living more precisely than in the past. Using data from Runzheimer International, a Rochester (Wis.)-based relocation consultancy, Stephan adjusted pre- and post-MBA salaries according to locale. Sure, a student moving pre-MBA from New York to post-MBA Kansas may not command as many bucks as in the Big Apple, but dollars go further outside pricey urban areas. Thus, this ROI calculation eliminates any big-city salary bias.

The analysis shows that the quick payback that fortunate boom-cycle graduates enjoyed has slimmed considerably. The average '02 grad won't break even on his investment for 5.6 years. Compare that with the 4.7-year payback horizon for the Class of 2000 and the 5.2 years for the Class of 1998. An even more sobering statistic: Once cost of living is factored in, 745 students--almost 13% of those providing salary data--have taken a pay cut from pre-MBA levels.

Therein lies the big trade-off that prospective MBAs have to make. Two years ago, David Hunter, a former Towers Perrin Co. health-care consultant, checked out MBA programs, looking to make a move to the banking business. He considered applying to pricier schools like Wharton or Columbia, but Brigham Young's combination of a great finance faculty and enticingly low tuition led him to apply only there. Smart move: Now Hunter has his dream job working in Bear, Stearns & Co.'s private client services in San Francisco and says he'll be loan-free after a year or two. That's a huge relief for Hunter, whose wife, Kate, is expecting their first child in just a few weeks.

Hunter's personal balance sheet is unusual, though. Mostly, B-school tuition keeps rising while salaries from 2000 have either dipped or remained flat. That makes a pricey program such as Stanford's even more formidable. True, Stanford grads notched the second-highest average starting salary among U.S. schools--$96,500 excluding signing bonus and other compensation (Harvard grads make the most). But it and other elite schools often attract individuals who are already raking it in, hiking the opportunity cost that much more. To make matters worse, there were fewer job offers. That put recruiters in the driver's seat. The upshot is that '02 grads have little leverage to reel in bigger paychecks.

Serious bargain hunters may want to look across the pond. In Europe, where a one-year MBA course is more common, B-school students get a 5.1-year payback. Grads at Switzerland's IMD took home an average starting salary of $99,300--tops of any school. Such robust starting salaries, coupled with the smaller total investment required of a one-year program, explain why IMD grads can expect a 3.1-year payback, quickest among all MBA programs.

That's not to say that great value can't be had at a top-ranked U.S. B-school. In fact, half of the 10 fastest ROI B-schools appear on BusinessWeek's Top 30--No. 26 Purdue, No. 23 Michigan State, No. 20 Indiana, No. 18 University of North Carolina-Chapel Hill, No. 12 University of Virginia, and No. 29 Notre Dame. For state schools, BusinessWeek used in-state tuition in the calculation; out-of-state students can expect a slightly longer payback period. But even at state schools, the cost of attendance has dramatically outpaced inflation over the past two years and could rise even more as states slash budgets in the downturn.

All this confirms what most B-schools already glumly acknowledge: The MBA isn't quite the winning ticket it used to be just a few years ago. The chastened outlook may give some prospective MBAs pause before shelling out the big bucks for a brand-name sheepskin. Of course, the average B-schooler can still expect a 35.5% annual return on investment over a 10-year period, thanks to their higher salaries. And in this economy, who wouldn't be happy with that?

By Brian Hindo in New York

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