Moving right along in our multi-part series on financing your MBA, we’ll take a look today at some of the options prospective MBA students have for obtaining loans to finance their time at business school. For the purposes of this post, we will focus primarily on loan programs for U.S. students. International students, stay tuned for subsequent posts that will go into greater detail about loan programs tailored for your needs.
Of course, because loans must ultimately be repaid—unlike scholarship or fellowship aid—deciding how much you should borrow is as important as understanding how much you can borrow. To make an informed decision about the amount of student loan debt you can take on and reasonably expect to repay, you’ll need to consider your current finances and any loans or other debt you may already have, program costs, other potential sources of funding (scholarships, savings, etc.) and your anticipated salary increase upon graduation, as well as estimated loan repayments and interest and fees. (The Department of Education’s website for repayment plans features a range of online calculators to help you calculate loan payments based on the amount you plan to borrow and how quickly you are able to repay.)
Federal Loan Programs
For U.S. citizens and permanent residents, the most widely used loan programs are those provided through the U.S. government; these specifically include the Direct Loan Program, the Direct PLUS Loan Program and the Federal Perkins Loan Program. Through these programs, students can borrow the cost of attendance, as determined by the school, minus any financial aid packages they receive. In order to remain eligible for government loans, students must ensure that their total debt from subsidized and unsubsidized loans, including federal undergraduate loans, remains under $138,500.
The Direct Loan Program offers graduate students unsubsidized loans of up to $20,500 at an interest rate of 5.84 percent. There is an ordination fee of 1 percent of the loan deducted from each loan disbursement, and interest accrues throughout a student’s time in school and during deferment and grace periods. While graduate students were previously able to borrow up to $8,500 with interest delayed until after graduation, the Budget Control Act of 2011 eliminated Graduate Direct Subsidized Loans in July 2012.
Students with good credit histories may also consider applying for a Federal PLUS loan. The interest rate on these loans is fixed at 6.84 percent for the life of the loan. There is also a 4.2 percent ordination fee that is deducted from each loan disbursement.
Students with exceptional financial need, and who are matriculating at participating schools, may also apply through their school’s financial aid office for a Perkins Loan of up to $8,000 per year at a 5 percent interest rate. There are no other fees associated with this loan. Students should keep in mind, however, that their school determines who receives this loan, and participating schools do not necessarily reserve funds for their MBA students. Also, there is a $60,000 cap on how much you can borrow in total as a graduate student, which includes any amounts you may have borrowed as an undergraduate.
Fees and Interests Rates
When deciding whether to take out loans, students should be sure to take the costs of fees and interest rates into account. For example, if a student borrows $100,000 in federal loans her first year, she will owe $12,110 in interest alone, as well as the principle loan, by the time she enters the workplace.
How to Apply for Federal Loans
The Free Application for Federal Student Aid (FAFSA) is an online form that determines the loan eligibility of U.S. citizens and permanent residents. Available on January 1st each year, the FAFSA can be submitted online or mailed in by either downloading the PDF or requesting a paper-based copy. The U.S. Department of Education recommends submitting the form online to prevent any delays in processing the application.
While deadlines for submitting the FAFSA vary, most schools recommend completing the form as soon as possible in order to ensure applicants do not lose out on available funds. The FAFSA does require information about income from that year’s tax return—for example, the 2015 FAFSA asks for information from the 2014 tax return—but applicants can use the previous year’s tax return to approximate their income or use the FAFSA Income Estimator tool. After filing their taxes, applicants can then use the IRS Data Retrieval Tool to update their FAFSA.
Processing takes three to five days for electronically filed FAFSAs. Schools have access to a student’s completed FAFSA one day after it is finished processing.
To cover the rest of their expenses, students may wish to explore private loan options through a bank or other lender. Schools generally encourage students to exhaust all possible scholarship, fellowships and federal loan options before turning to alternative private loans given the typically higher interest rates these parties offer. However, applicants with excellent credit scores may be able to secure private loans that offer a better interest rate or lower ordination fee than federal loans.
Private loans have much stricter eligibility requirements than federal loans. Lenders can decline to issue a loan, require a co-signer or set higher interest rates for a number of different reasons, including a credit score. This score, which typically ranges from a “poor” 300 to a “strong” 850, is based on factors such as an applicant’s payment history, debt ratio, types of credit and length of credit history. Those with a history of late payments on credit cards or other loans, or who owe a significant amount of money compared to their credit limit, tend to have low credit scores, and these individuals may face higher interest rates on private loans as a result. In addition, applicants with little to no credit history or who are from outside the U.S. may need a co-signer, or someone who agrees to take on full financial responsibility for a loan should a borrower fail to pay it.
While schools generally do not endorse a preferred lender, citing conflict of interest, they do sometimes list reputable lenders their students have used in the past on their financial aid websites. Students can also reach out to their local banks or other lenders, or research national programs such as PNC, Wells Fargo, Sallie Mae, or Discover Card’s MBA loans.
Next up in our series, we’ll look more closely at loan opportunities for international students. Stay tuned!