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Mastering Your MBA Finances – The Real Cost of an MBA (Part 3)

Once you have been accepted to your target MBA program, things start to move very quickly, and you will need to begin planning for your transition to business school right away. Understanding the financial realities of your MBA education is an important first step, and we have created this comprehensive, five-part “Mastering Your MBA Finances” series to help you do so. In this third installment of the series, we examine the cost—the real cost—of a full-time MBA program. (Be sure to read Part 1 and Part 2 of this series if you have not done so already.)

For individualized advice, sign up for a free 30-minute budget planning session with an M7 Financial budgeting coach.

In the first two installments of this series, we explored the potential revenue sources/income you can expect during your MBA program. Although considering the revenue outlook is important, many applicants are accepted to business school before they ever contemplate the reality of the costs of their graduate education—a “first things first” approach that can lead to serious sticker shock later. We always advise our clients to enter the MBA admissions process with their eyes wide open and a full understanding of the overall expenses involved. So what does attending a typical full-time MBA program cost, anyway?

The schools usually state the average cost of attending their MBA program somewhere on their site, and at several top institutions, such as Wharton, Columbia Business School, and Harvard Business School, the grand total for a single person hovers at approximately $100,000 per nine-month academic year. Yes, that budget does not even cover a full calendar year. The following table presents several top schools’ projected costs for one academic year in their MBA program (in this case, 2015–2016). You will see that programs located in college towns tend to be less expensive than those in large cities.

Mastering Your MBA Finances – The Real Cost of an MBA (Part 3) - mbaMission

However, we have to question whether these numbers are even accurate. For example, take a look at the following budget for Wharton.

Mastering Your MBA Finances – The Real Cost of an MBA (Part 3) - mbaMission

Take a moment and consider some of the holes in this budget. Where does it go wrong? What has been overlooked? (We should note that we randomly picked Wharton for our example, but in fairness, virtually all schools propose budgets that are challenging to adhere to. And yes, that a business school would present a rather unrealistic budget for its prospective students is quite ironic.) Here we will break down some of the problems we see with Wharton’s suggested budget…

  • Nine-Month Time Frame (270 Days): The schools offer budgets that cover only a nine-month time period (270 days), because their academic year is just nine months long. However, your rent will very likely need to be paid for a 12-month term, not a nine-month one. And of course, you will also need to eat for all 12 months of the calendar year. This means you will have to make some adjustments to this budget immediately. Plus, if your internship is in a different city from your school, you may need to rent another apartment over the summer, so you should consider that in your budget as well.
  • Room and Board: At approximately $1,760 per month, the “rent” part of Wharton’s budget is fairly realistic (for just a nine-month period, however). It hews closely to the rents charged in Philadelphia’s Rittenhouse Square area, where many MBA students live (always check your target school’s rent projections against actual apartment listings in the area). However, most MBAs would have difficulty adhering to the “board” budget, which works out to just $17.69 per day  ($4,776/270 = $17.69). Maybe if you cooked all your meals at home, refrained from buying a cup of coffee each morning, and eschewed going out for drinks or meals with your new MBA friends (which is a big part of the business school experience), you could keep this expense in line with the projected budget—though we believe that less than $18 per day is probably still too conservative for the majority of MBA students.
  • Travel: You will likely encounter a number of different travel opportunities while you are in business school—to return home and see your family, with certain classes as part of the curriculum, around town or out of town for job interviews, and just plain for fun with friends as part of the MBA experience. Whatever your travel expenses may be, Wharton’s “transport” budget of $910—just $3.37 per day ($910/270 = $3.37)—seems too low to accommodate anything more than using public transportation within the city of Philadelphia. A single cab ride between Wharton and the airport, at approximately $40 with tip, would be enough to throw off this aspect of your budget considerably.
  • Moving: Do you already live in the same city or general area as your target MBA program? Although some MBA candidates do, many typically do not. You may therefore have to take moving expenses into account, and even if you plan to sell most or all of your existing furniture and possessions so that you will not have to move them with you, you will probably have to buy new items later to ensure you have everything you need for your time in business school. This Wharton budget does not even include a line for the costs associated with moving out or in.
  • “Capital Expenditures”: Has the time come to upgrade your computer? Do you need a new suit/outfit to ensure that you present yourself appropriately and professionally in interviews? None of these types of costs are included in the typical MBA student budget, and Wharton’s projected “personal” budget of just under $12.50 a day will not likely allow for much in this category. To get a truly accurate picture of the funds you will need to cover all aspects of your MBA experience, you will need to account for these sorts of purchases.
  • Loan Origination Fees: Many student loan companies charge loan origination fees—an extra cost you must pay for the “privilege” of taking out a loan from them. You will of course need to read the fine print on any loan(s) you consider for your MBA, but we cannot think of any reason to pursue a loan with such fees, which appear to currently range from 2.0% to more than 4.0%. One exception would be government loans, which can charge origination fees as high as 4.28% but come with the possibility of loan forgiveness in the future (if you are interested in less financially rewarding post-MBA work). Please note that the MBA student loans presented at M7 Financial (www.m7financial.com) have no origination or other fees. As we continue to construct a sample MBA budget in this newsletter series, we will assume that you will not be taking out a loan with such fees.

We have just examined the major discrepancies between a typical projected budget provided by a school and the reality of MBA expenses. Make adjustments to accommodate a 12- or 21-month calendar, increase your allowance for travel, include some moving expenses, adjust the “board” budget for the occasional night out with your colleagues, and add some funds to cover necessary technical or wardrobe purchases, and you will soon see that a conservative budget can still be significantly off the mark. We feel a prudent increase for discretionary expenses only (no increases for tuition, books, etc.) would be approximately 10% over the school’s projections.

Let us reiterate that our intention with this series is not to frighten you but to give you a more accurate and workable picture of the financial life of a business school student. You are pursuing your MBA not to accumulate expenses but to take control of your financial future, and that path starts here!

Check back next week, when we examine the opportunity cost of an MBA.  And if you are looking for even more strategies for funding your degree and minimizing your debt burden, download the free M7 Financial Student Loan (Reduction) Primer or sign up for a free, 30-minute, one-on-one budget planning session!




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