The MBA Loan and Financial Freedom

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.

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.

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.

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.