Wednesday, February 03, 2016 at 6am

The MBA Loan and Financial Freedom

MBA loans

The first question most people ask when they get accepted into an MBA is, “How will I pay for it?” Coming up with $100,000 for a one-year MBA, and over $200,000 for a two-year MBA is very challenging, but for students looking at careers with a high MBA salary, this money is investment (on which one can expect an impressive return). There are different products available for students, from family loans, country-specific loans from banks, government loans, MBA scholarships and loan programs designed for international students. 

Over the past few years we have seen more and more students with family savings asking for loans for a simple reason: financial freedom and independence. With this financial freedom, however, comes responsibility.

Savings

Every MBA candidate should be thinking about saving for at least one or two years before they begin their MBA. Initial savings are needed not only to pay the initial deposit to the school, but also for living expenses. Most universities want their students to have some ‘skin in the game’, using savings to pay for some of their education. Most MBA loan providers will also ask for savings from the student as it shows a commitment to their education and the fact that they have thought about this decision for a long time.

Some students are lucky to get support from their family; but it seems more and more of them prefer not to, instead choosing to become independent.

Loans without the help of others

Until recently most MBA loans required some sort of collateral or a cosigner for a student loan. This often meant that a student had to put up their house in collateral for a loan. This would involve paying commissions for a guarantee and a review process of their house, lots of hours of paperwork and sometimes having to ask their parents to put up their house in collateral if they did not have one. 

In other cases, banks ask for someone with savings or a high salary to sign in the name of the student. This makes them, and not the student, financially responsible for the loan.

When Prodigy Finance started giving out MBA loans to students eight years ago, loans that did not require a cosigner or collateral were something new for students. Over the years since, students have started to value and take loans from Prodigy without asking for family money or cosigners so they can become financially independent.

Affordability, repayment and forbearance

Making a decision to invest US$200,000 in your education comes with a future financial obligation that everyone should be aware of regardless of anticipated MBA salary. With the freedom to get an MBA loan to pay for your education comes great responsibility. The first questions you should ask yourself are: “Will I be able to repay my MBA loan on a monthly basis?” “Will I be able to get a high-enough MBA salary to pay my loan?”


Affordability is a very important factor you should consider before you sign your loan agreement and start your MBA. If you are thinking about going into consulting or finance, you will probably be able to pay US$1000 per month on your loan repayments. But if you want to start your own company or work in an NGO, loan repayments may be much more challenging because of an uncertain MBA salary. This is something you’ll need to consider carefully.

Not paying your student loan can have serious consequences down the line, such as not being able to get a loan to buy a car, house, or personal loan. In many countries the government may even go after your future income, or you may not be able to get certain jobs. The question that should follow is: “Should I save for one more year to be able to have more savings?”

Most loans have a duration of somewhere between 5-20 years, with set monthly payments you need to make. These repayments normally vary depending on the variable interest rate. Look carefully at a loan agreement and read the fine print. When you have a loan of 20 years, monthly payments could look very small but overall you are going to be paying for 20 years and could end up paying two or three times the original amount you took out because of accruing interest. With a shorter duration comes larger monthly payments, but an overall total payment amount that is lower over the life of the loan. Please ask your loan provider about these details.

Another very important question you need to ask is: “What happens when I have a personal problem or family situation and am not able to pay?” “Will the bank help me out”? You would be surprised how many people lose their jobs, change jobs, change cities, have health problems or any other incident that could complicate paying their monthly amounts. In these cases it’s important to have a loan with flexibility that gives you a three-six month forbearance so you can get your finances organized again and continue paying after six months. Sometimes all you need to do is pay interest for these few months. Please ask your MBA loan provider and see if they understand the importance of these personal changes, and if they work with students on a one-on-one basis through their personal challenges after graduating.

What else to look for in a loan: Prepayment, and ease of payment

Other important clauses to look for are prepayment clauses. If you receive a bonus from your company for $10,000 you should try to use it to prepay your loan and decrease either the monthly payment, or the term of the loan. You need to make sure you are not charged a commission for this. Most student loan providers do not charge for any early repayment penalties, but many banks still do. There are students with a high enough MBA salary to pay off their student loan in two years, reducing their interest drastically.

For the globally-mobile MBA workforce, ease of payment of your student loan is critical to reduce wire fees and commissions. Take a look at all the options you have from your bank in order to make it very easy to pay on a monthly basis. You should look at local payments of your loan to avoid transfer fees, which can be as high as $50 to the bank.


Conclusion

Every student has different requests and needs when taking a student loan. This will be many people’s first loan, so don’t be shy about asking questions at your local bank and making sure the solution works for you. 

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Ricardo is Prodigy Finance's head of business development, working between Madrid, London, and New York. He was born in Madrid, but spent most of his life living abroad. After getting his MBA from INSEAD he worked in management consulting for 8 years with Accenture, BCG and KPMG. He then shifted his focus to consult for startup companies in the fintech space, and joined the Prodigy Finance team in 2014. Outside work, Ricardo like to spend time with this family, and enjoys travel, sports and adventure. He holds an MBA from INSEAD.

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Capital First MBA Scholarships 2018-20 invites applications from graduate students who are going to pursue an MBA degree program or equivalent in the academic year 2018-19. The scholarship aims to aid the persistence and access to higher education to students by providing them meaningful financial support.