If you’re considering business school, you’re probably aware of the substantial income boost an MBA can provide, particularly from a top program.
At the same time, that future return requires a substantial up-front investment, one that can be impractical (or impossible) to pay out-of-pocket. To help finance the MBA, candidates often look to student loans. And shopping for the right borrowing options can be tricky.
For US candidates, student loans tend to fall under two main umbrellas—loans from the U.S. government, which for MBA students consist of Federal Direct Unsubsidized Loans and Federal Direct Graduate PLUS Loans, and private education loans, including those from traditional brick-and-mortar banks, newer online-only lenders and state financing authorities. The decision comes down to whether you want to borrow federal loans, private loans or a combination of both.
If you are starting business school in the fall, and are in the process of making this decision, here are eight features of student loans to compare when choosing how to finance your MBA.
1. Credit Check: Just about every MBA candidate who is a US citizen or permanent resident and has not previously defaulted on a federal student loan can borrow a Federal Direct Unsubsidized Loan for up to $20,500 annually. All you need to do is complete a FAFSA, and there is no credit check required. If you need to borrow more than $20,500, you may consider supplementing your Unsubsidized Loan with another government loan, the Direct Graduate PLUS Loan. The Grad PLUS Loan is not quite as automatic as the Unsubsidized Loan, as it does require a credit check, but the credit check is relatively simple—just looking out for any significant negatives in your credit history in the past five years. A lack of credit will not prevent a student from borrowing a Grad PLUS Loan. Private loan credit checks tend to be more involved, looking at credit score and debt-to-income ratio. Students pursuing an MBA directly out of college, who haven’t developed a substantial credit history, are unlikely to be approved for a private loan on their own.
2. Co-Signer Requirement: And that brings us to subject of co-signers. Federal student loans (both Unsubsidized and Grad PLUS) are borrowed solely in the student’s name, whereas students without a significant credit history will likely require a co-signer on a private loan. One feature to look for in a private loan is a co-signer release option, which offers the possibility of removing a co-signer from your loan after usually two to four years of on-time payments.
3. Interest Rate: Federal loans offer fixed interest rates set each July 1. Rates for 2018/19 will be announced soon, but, for the 2017/18 school year, the Unsubsidized Loan interest rate was 6% and 7% for the Grad PLUS Loan. Private loan rates can be either fixed or variable, and I have recently seen interest rates ranging from around 4% to around 12%, dependent upon bank and credit history of the primary borrower and/or co-signer.
4. Fees: Borrowers of federal loans are charged an origination fee off the top of their loan (around 1% fee on the Unsubsidized Loan and 4% on the Grad PLUS Loan). Private loan fees can vary, though they commonly have no origination fees. Refer to a loan’s APR for an apple-to-apples comparison of costs, including the loans interest rate and any applicable fees. Be sure to also ask private lenders about prepayment or other penalties, which do not generally exist on federal loans.
5. Repayment Options: Federal student loans offer a number of repayment plans, ranging from 10 years to 25 years, including some income-based options, while private loan repayment options tend to be more limited.
6. Deferment Provisions: Federal student loans are automatically deferred while you are at least a half-time student (plus a 6-month grace period). They also offer deferment provisions during times of economic hardship and for other limited reasons. Private loans are also often deferrable while you are in school, but some will offer you an interest rate reduction if you choose to make payments while enrolled.
7. Forgiveness Possibilities: If you think you may enter the field of non-profit management or another public service career, note that the Federal Direct Loans are eligible for the Public Service Loan Forgiveness program, which offers the possibility of loan forgiveness after ten years of on-time payments, while private student loans do not qualify for this program.
8. Death/Disability Discharge: Federal student loans are also automatically discharged in the event of the death or permanent disability of the borrower. Private student loans may not be dischargeable, and, in fact, some private loans are called due upon the death of the co-signer. Be sure to ask a private lender about death/disability provisions before signing on the dotted line.
Like most aspects of the MBA application process, student loan borrowing decisions tend not to be black and white, and many factors must be weighed when choosing a loan to finance your degree. As usual, however, knowledge is power, so be an informed consumer: Make sure you understand the terms of any loan under consideration and get to know your alternative financing options.
Fortuna Admissions guest blog by Shannon Vasconcelos, Director of College Finance at College Coach. College Coach is the nation’s leading provider of educational advisory services to organizations and families.