Getting a Master of Business Administration (MBA) can open doors for your career. This is especially true if you graduated from one of the top-ranking business schools. The only problem is you shelled out $70,000 or more per year for tuition.
With numbers like these, it’s important to know the strategies for paying off MBA student loans. MBA student loan refinance is one way to deal with all of that debt, but you might be surprised to learn about your other options.
Amount of debt from MBA student loans
In a 2018 Bloomberg survey, half of the MBA grads from the best business schools were borrowing at least $100,000. The total debt carried by business administration students in 2017 was at $3.7 billion, according to the Wall Street Journal.
PayScale reports that the average MBA grad makes $86,000. It wouldn’t be accurate to take this number and address MBA debt payoff, as the career paths are too varied for this degree. For example, a financial analyst makes an average of $63,000 while a Chief Financial Officer (CFO) makes an average of $148,000.
Student loan refinancing for MBA loans might work for the CFO but not the financial analyst. Your student loan debt payoff strategy will need to be specific to your current salary and career goals.
When MBA student loan refinance is a good option
Refinancing student loans can be done online or at your local bank or credit union. The lender pays off your student loans and issues you a new private student loan. You then have one payment and new loan terms.
When refinancing, your strategy is to aggressively pay off your loans. This means you don’t really want to look for a lower monthly payment, as that only increases how much interest you’ll pay over time. Instead, you want a lower interest rate and shorter loan term to pay off the loans as soon as possible.
The hard part is deciding if refinancing MBA loans will actually work for your situation. If you have private student loans, then refinancing for a better rate is always something you want to investigate. But federal student loans are another story.
Pros and cons of federal MBA student loan refinance
With federal student loans, there are some general pros and cons of refinancing your student loans. The pros of refinancing your MBA loans are as follows:
- You can get a better interest rate. The Direct Unsubsidized Loan rates are 6.08%. PLUS Loan rates are higher at 7.08%. Refinancing your student loans could get you a much lower rate.
- You’ll have just one monthly payment to manage.
A better interest rate means more money in your pocket. One payment means it’s easier to deal with, but that doesn’t mean you won’t miss a few things. The cons of refinancing your MBA student loans are as follows:
- You’ll lose federal borrower protections, such as deferment and forbearance.
- You won’t be able to sign up for an income-driven repayment (IDR) plan.
- You need to have a good credit score and meet certain eligibility requirements.
From this general advice, it sounds like you still can save more money by refinancing your MBA loans. So what’s the reason to keep your federal student loans federal? A payment hack that could align better with your career goals.
Don’t refinance your MBA student loans until you review this hack
As mentioned above, MBA salaries vary significantly. It’s both your income and how much student loan debt you have that determine if refinancing is a good idea or not.
The hack is keeping your federal student loans and enrolling in the Revised Pay As You Earn (REPAYE) plan. REPAYE is one of the four IDR plans. The advantage of REPAYE is that the government actually helps with the interest.
If your monthly payment doesn’t cover the interest, the government will pay all your interest for up to three years on subsidized loans, then half for another three years. Under REPAYE, the government will also pay half of the interest due on your unsubsidized loans.
Let’s look at how this could play out for two different scenarios using the numbers mentioned above. If you left a top business school with $175,000 of student loan debt and became a financial analyst making $68,000 in your first year working, REPAYE is going to be the better choice. If your average federal interest rate is 7% and you’re single, your monthly payments would be around $415.
From here, you have two options moving forward:
- Go for student loan forgiveness: After 25 years, your remaining student loan balance will be forgiven through the IDR forgiveness program. You’ll need to pay taxes on the forgiven amount, so prepare for that.
- Refinance after earning more later: If you move up the pay scale in a few years, you can refinance your MBA loans then. Since half the interest is paid for, your loan balance won’t have grown as rapidly. With a higher income down the line, you may be able to aggressively pay your loans off. This can be a good option for a grad who is an entrepreneur or works at a startup.
If you go the traditional route with your MBA and land a career that pays six figures or more, it’s going to make more sense for your cash flow to refinance your student loans.
Let’s say you make as much as a CFO with a $146,000 starting salary and have the same student loan balance of $175,000. You can pay off your loans in 10 years and then reallocate those funds toward your future investments. By refinancing, you will pay off your debt faster and can put that cash flow somewhere else.
The general rule to follow for refinancing is this: If you owe less than 1.5 times your income, refinance and pay your loans off aggressively. But if you owe more than that, sign up for an IDR plan and leverage your federal student loans to keep more money in your pocket.
There’s also an exception to every rule. Most MBA grads work in the private sector, but if that’s not you, don’t refinance at all. If you work at a not-for-profit or government agency, you could qualify for total loan forgiveness through Public Service Loan Forgiveness after 10 years of payments on an IDR plan. If you qualify, this can be a better repayment strategy than refinancing or REPAYE.
Should you pursue MBA student loan refinance?
When you’re looking at refinancing your MBA federal student loans, you want to review your cash flow needs. Ask yourself what your career goals are: Will you move up in pay scale or move jobs?
If you need help deciding whether you should refinance your MBA student loans, reach out to a consultant on our team. Student Loan Planner specializes in helping people with over six figures of student loan debt. We can create a plan for you based on your individual situation and salary.