Easing B-School's Financial Pain

Bonnie Lack of Carnegie Mellon's Tepper School talks about the fine points of financial aid, and she dishes some advice

As tuition -- which already costs upwards of $50,000 -- continues to rise, many potential students wonder how they can afford to get an MBA. The Tepper School of Business at Carnegie Mellon University in Pittsburgh awards financial assistance based on merit, like most B-schools. It takes many other aspects into consideration: a candidate's GMAT performance, undergraduate GPA, interview, résumé, letters of recommendation, and overall application.

About 65% of the Tepper incoming class receives some form of financial aid. The average debt MBAs graduate with is $65,000.

Bonnie Lack, associate director of financial aid at Tepper, recently fielded questions from audience members and BusinessWeek Online's Francesca Di Meglio and Jack Dierdorff. An edited transcript follows:

Q: Why does the Tepper School of Business have its own financial-aid office separate from the one for the university?


[Because of] the nature of our students and their specific needs. They require a little more expertise and attention. Being that our students are more affluent, coming from the professional world, they have more detailed issues. They often have families.

Q: When do schools release financial-aid information to students?


Typically, when a school receives your FAFSA [Free Application for Federal Student Aid], and more often than not, the supplemental financial-aid application, and you've been accepted to the program, you will then receive your financial-aid eligibility letter. Please note that you can put up to six schools on the FAFSA because, traditionally, B-school students apply to more than one school.

Q: How much does a student's current credit score factor into a school's financial-aid awards?


Your credit score is not a factor. It can, however, hinder you when applying for a private education loan.

Q: Is it common for students to finance 100% of tuition themselves?


Actually, this is very common. I always encourage people to borrow as little as possible, because the debt is waiting for you when you're done.

Q: Can you offer any advice on financial planning?


First and foremost, get your credit in order. Pay off any existing credit cards [and stop using them], and car payments, etc. Be aware of what you're spending. I would advise everyone to do that, not just prospective students. Realize that going to B-school is for a short time, and you need to adjust your standard of living. You spend most of your time at school.

I always tell my students, practice living as a student before school. For example, don't go out to eat as much. If you're thinking of coming to B-school in two years, now would be a good time to start taking care of financial obligations and putting money aside for your tuition.

Q: What should a student's budget be during the summer between the first and second year?


Typically, a student is away in the summer for three months on an internship and is -- I hope -- gainfully employed. Depending on the city in which students are attending their internship, they may be required to maintain a residence and pay rent. For this time period, you are unable to borrow, and a suggestion of about $2,000 per month would be a good budget figure.

Q: How can you best position yourself in a financial-aid application to maximize grants and scholarships, as opposed to loans?


Depending upon your school's criteria for scholarships, the best way is with a strong admissions application.

Q: What is considered when determining need-based aid?


Need-based aid is determined predominantly by your Expected Family Contribution (EFC) from filing your FAFSA. Your EFC is determined using your prior year's income tax returns, as well as your investment savings and net worth. But you can always petition the financial-aid office to reevaluate your case. Most will do this on a case-by-case basis.

Q: What percentage of incoming students receives enough aid to cover 100% of the attendance cost?


Nearly all. Only the ones who have bad credit have difficulty. This is why knowing your credit situation, and your credit score, should be a vital part of your planning. We've been quite successful at Tepper in helping students better their credit scores, clean up their credit reports, and secure private loans.

Q: If you're not granted any aid from Tepper during the first year, is it possible to receive any aid your second year?


There are a few academic awards available to returning second-year students that are based solely on academic performance, and the recipients are selected by faculty.

Q: Does Tepper assist incoming students with scholarship search?


We offer some resources to prospective students, while encouraging them to search independently. I've just created a new financial-aid library for our current students that is made up of scholarship books students can check out.

Any search engines [Google, AskJeeves] will be helpful, especially if you are broad in your search. If you drink Coca Cola, guess what? Coke has scholarships. If you take Tylenol for a headache, Tylenol has scholarships. But there's also Petersen, Fastweb, Finaid, and also a great [Web source of lists and information] created by a man named Isaac Black, called Blackexcel.org. If you attack [this search] with tenacity, there's money out there to be found.

Q: Does Tepper support work-study awards?


Typically, work-study equates to $2,000 per academic year. At Tepper we discourage our students from trying to work during the program's first year [because it's hard enough to juggle academics, recruiting, group work, and clubs]. However, we encourage our students to develop a rapport with their professors, and to look at their own areas of expertise, to secure teaching-assistant and grader positions at the end of their first year, so when they return they have the ability to be hired directly by the professor for their second year, and not through federal work-study.

Q: Would you suggest reducing the line of credit on a student's credit cards?


Anyone who has large amounts of available credit that they will never use should reduce it, because it will count against you. Secondly, having too much unsecured credit can hinder your chances of getting a private loan.

Q: What are the criteria for eligibility for government loans (Perkins, Stafford, etc.)?


All U.S. citizens and permanent residents who file the FAFSA are reviewed for Perkins and Stafford eligibility.

Q: I don't qualify for a federal Pell Grant because of a personal situation. What should I do?


First, no graduate student is eligible for a federal Pell Grant. Secondly, your EFC is typically used to determine subsidized eligibility. However, this will not prevent you from receiving the maximum $18,500 Stafford loan. I suggest you get in contact with the financial-aid office.

Q: What is the biggest mistake students make when applying for a loan?


Not communicating with their financial-aid office. Most schools will have preferred lenders, which offer borrowers benefits on the back end of the loan, as well as rate reduction. Never accept a direct-to-consumer loan product. Your rates will be higher, and you may have to start paying back while you're attending school.

Q: Are interest rates from the federal government loans lower than a private lender?


Yes. The order of acceptance with loans, providing you are eligible, would be Perkins, Stafford, then private. The government sets the rates on government loans. Institutions set their rates, and are therefore tied to prime rates, or LIBOR [London Inter-Bank Offer Rate, which is the rate banks charge each other for loans]. Therefore, they can change. Stafford rates change once a year. Bank rates can change monthly.

Q: Do you have advice on refinancing loans and keeping up with payments?


This year's graduating class should, in fact, consolidate its federal Stafford and Perkins loans. With the reauthorization of the Higher Education Act approaching, there's a good chance the rate on your consolidation loan will no longer be locked in. Secondly, if you're having difficulty making payments, your lenders can help you in numerous ways, such as unemployment or hardship deferments and forbearance. The key to this: Stay in contact with your lender.

Q: When should I start to apply for loans?


As soon as you've completed and filed your income tax return, you should request your PIN, and complete your FAFSA for the 2005-06 academic year. You should find out about your financial-aid office's timeline, and any supplemental information they require. Basically, it's never too early.

Q: I wouldn't qualify for need-based aid because of my income. In addition to the $18,500 for which I am eligible, what other loan products would benefit me?


Everyone thinks they don't qualify, when in fact they do. And you might, too. Secondly, you want to look at your school's preferred-lender list with regard to private loans.

I've called students into my office three and four times to encourage them to take the lower-costing federal loans first, then work on the private ones. I'm not doing my job if I let students borrow private loans when they're eligible for federal. Same goes for trying to put your tuition on a credit card simply to earn miles -- big no-no.

Q: My spouse plans to stay home and care for our new baby for at least one year while I attend business school. Will this be a problem?


Actually, everyone is leaving their job, and giving up an income, sometimes two. At Tepper, we allow an increase in student budgets to provide for dependents, as well as additional health-insurance costs.

Q: What are some of the budget-breakers that trap MBA students?


Poor planning and trying to maintain a standard of living as though they still have their salary. Practice living below your means.

Q: Do you have any tips on how international students can snag financial aid?


Each school's criteria are different, so contact the schools to which you are applying. I would also suggest searching for scholarships independently and being broad in your scope. Don't just look at your business, but also hobbies, areas of interest, etc. One lending institution, Access Group, allows students with favorable credit for at least 36 months' duration in the U.S. to borrow without a co-signer.

Typically, most lenders in the U.S. will require that an international student have a U.S. citizen or permanent resident as a co-signer, which is a great way for an international student to begin establishing in the U.S. All admitted students at Tepper are reviewed for merit scholarships, both domestic and international.

Q: Is it common for companies to pay for second-year tuition if students accept full-time offers following their internships?


Yes, this does occur, and students do negotiate the payment of tuition into their job offers.

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