If you’re struggling to pay off your student loan, you’re not alone. According to the Project on Student Debt, the average debt for a graduate with a bachelor’s degree is $26,600, and for those with an MBA it’s $90,000. To make matters worse, the average monthly payment for student loans is $351, according to FinAid.org, and with a 10-year repayment period, your monthly student loan payment can quickly become a huge financial burden. But don’t panic! There are a few ways to reduce your student loan payment so you don’t have to give up your life to your loan.
It’s a well-known fact that student loans are a big part of the cost of getting a college degree. For some people, taking on a six-figure educational debt load is worth it for the knowledge and skills they’re learning while in school. But when it comes time to repay those loans, the numbers can start getting scary—and for some, it’s too much to handle. Fortunately, there are ways to pay off your MBA student loans. The key is to choose the repayment method that works best for you.
While Direct Unsubsidized Loans have an annual limit, MBA students can borrow up to 100% of tuition using Grad PLUS loans. And this unlimited source of government funding for tuition often leads MBA schools to charge high tuition fees and students to take on a lot of debt for their MBA.
About 200,000 people earned an MBA in 2018. According to a Bloomberg Businessweek survey, 18% of those surveyed have taken out student loans of more than $100,000. Most of them go to the top 25 business schools. Seventeen percent took loans between $50,000 and $100,000. Add in student loans, and many MBA graduates end up with six-figure student debt.
Unlike doctors, veterinarians or dentists, MBA graduates can choose from a range of career options. The Bureau of Labor Statistics lists 21 occupations in business and finance and their average salaries. But even such a long list is not complete. Entrepreneurship, business administration and many other career options, for example, are not included.
Since the MBA is the most versatile degree, the best repayment strategy may vary depending on the graduate’s chosen career path. Before discussing sound debt repayment strategies, it is important to point out the differences between student debt and other types of debt.
Student debt has two nuances that distinguish loan repayment from other unsecured debt. First, the interest rates for student loans are single interest rates. If the monthly payments don’t cover the interest on the loan, they just stack up in another basket. It doesn’t bend.
In other words, if you compare an investment with an expected return of 6% compound interest to paying off 6% of the student loan, then from a financial optimization perspective (without considering risk, of course), the compound interest investment would be the better option.
Just a quick note: There are a few things that can trigger interest capitalization, such as putting MBA loans on deferment, missing a payment, or changing your repayment schedule.
Second, student loans are tiered based on income, not debt amount, with taxable or nontaxable forgiveness at the end of the repayment period. Suppose two people work as financial analysts and earn the same income. But one has a $150,000 debt for an MBA and graduate studies, and the other has a $300,000 debt.
Their payments would be different if, for example, they had a plan where payments were based on the amount of debt. B. a standard, comprehensive, or multi-level plan. Someone with a $300,000 debt will have almost twice as many payments as someone with a $150,000 debt.
This is not the case if they both participate in an earnings-related scheme such as the Revised Pay As You Earn (REPAYE) scheme. The amount due is not relevant for the calculation of payments. The monthly payment depends on your income. In the example with two borrowers with different amounts, they would have the same monthly payments if they were in REPAYE mode.
It seems simple enough. You have a debt. Find the lender with the lowest interest rate and use leverage to maximize your return on investment, or pay off the loan quickly to maximize long-term cash flow. And for personal loans, this simple strategy is probably the best.
But paying off federal MBA student loan debt is a little more difficult because of the repayment options available for MBA debt repayment. At Student Loan Planner, we have completed over 5,000 consultations and advised on over $1.3 billion in student debt. In our experience, there are two best ways to repay student loans:
Aggressive payback. For people with debt of 1.5 times their income or less (for example, an MBA graduate earning $100,000 with loans of $150,000 or less), investing every dollar in paying off the loan as quickly as possible, over a period of no more than 10 years, is usually the best option. Income-based repayments are generally not taken into account.
Pay as little as possible. For those who owe more than double their income (e.g., an MBA graduate earning $60,000 who owes $120,000 or more), the goal is to obtain an income-driven repayment plan that guarantees low payments and maximizes forgiveness of taxable loans. This can be optimal because of low interest rates and the difference between paying off the debt completely and having 20 to 25 years to save and invest the taxable portion.
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Let’s look at two different scenarios: one where someone owes more than twice their income, and one where they owe less than 1.5 times their income.
In all of the following scenarios, we assume that 100% of student debt is due to federal loans. If you have a private student loan, you should ignore the advertising strategies below and start exploring refinancing options with private lenders.
Let’s say John is $200,000 in debt for his undergraduate degree and MBA program at an interest rate of 6.5%. He earns $70,000 a year and expects his income to increase by 5% over the next 10 years.
The PAYE system is the big winner in terms of power optimization. When you add up the projected payments of $168,387 over the next 20 years and the $116,645 tax bill owed over 20 years, it only costs John $20,000 more than refinancing. But it will be able to spread the cost over 20 years in the case of PAYE, compared to just 10 years in the case of refinancing.
This becomes even clearer when you consider the cost of repaying the loan or the net present value (NPV) for the PAYE. This is about 31% less than a refinancing with an assumed investment growth rate of 5% and an inflation rate of 3%.
Instead of monthly payments of $2,171 over 10 years, John would have been in a better equity position if he had switched to PAYE and invested in addition for a tax bill of $116,645. He could make payments, save $312 a month for a tax bill (at 5% annual growth) and still have money left over to invest another $1,400 a month.
Let’s say Janet has $90,000 in debt for her undergraduate degree and MBA program at 6.5%. She makes $70,000 a year and expects her income to increase by 5% over the next 10 years – just like John.
Janet’s scenario calls for aggressive refinancing and loan repayment. She can save $54,000 on her loan and be debt free in 10 years, not 20. A payment of $977 per month on a salary of $70,000 is much more acceptable than John’s $2,171.
And one more thing: Their PAYE payments will be the same – $435 per month for the first year – because their incomes are exactly the same. This is despite the fact that John has more than twice as many student loans as Janet.
These two scenarios are rather obvious. But what happens if someone starts out with a debt-to-income ratio of 2 to 1, but sees their income rise sharply? How do they deal with MBA debt when they can’t afford a big payoff, but will in the next two or three years?
Suppose Samantha has just graduated and has $200,000 in student loans at 6.8%. She is not currently working, but will begin working in two months and will earn $70,000. She expects her income to increase rapidly and expects to earn $150,000 in five years and $250,000 in ten years.
Refinancing is the best option in the long run, but right now she can’t afford the $2,171 payment.
If she chooses to wait for the full grace period and then opts for the PAYE system, she will have to pay six months of interest on her loan, or $6,800. His monthly payment would then be $435, or $5,220 over 12 months, based on an income of $70,000. After 12 months of salary, she will have to cough up another $8,380 for the loan ($13,600 in interest – $5,220 in installments).
So at the end of 18 months (the six month grace period plus 12 months PAYE) she should have accrued $15,180 in interest and repaid $5,220.
Here are some advanced techniques it can use to save money on loan repayments by keeping repayments low for two or three years and slowing down loan growth: Consolidate to waive the grace period, switch to a revised pay-as-you-earn (REPAYE) plan, and then refinance when it can make a payment over $2,000.
This is how it works.
First, let’s talk about the interest subsidies under the REPAYE programme: The simple explanation is that all interest charged on the loan is halved, thus halving the growth of the loan.
In other words, the $8,380 that would have accrued on the loan under PAYE would have been half the amount under REPAYE – $4,190. The government is subsidizing or reimbursing the remaining $4,190 that would have come on the loan.
Since Samantha will pay off her loan in full anyway, the interest subsidy will save her $4,190 just by choosing to pay off the loan.
But what if she waives the grace period, switches to REPAYE six months early and starts paying immediately?
Another big advantage in this case is that it’s not currently working. Since their income is $0, their REPAYE payments must be $0 for 12 months. In addition, the removal of the grace period for those switching to REPAYE means that the six months of interest that would have accrued on their loans during the grace period will also be reduced. She does not have to prove her income of $70,000 until recertification in 12 months.
That’s how much Samantha could have saved if she had followed this strategy for 18 months. Under the PAYE system, he has a full six-month grace period and then makes payments over a 12-month period. Under the REPAYE program, he waives the grace period and then makes 12 months of payments of $0 and six months of payments of $435:
Implementation of this strategy is expected to result in a halving of payments and a saving of $8,895 in accrued interest over this period, compared to the more traditional approach and transition to the PAYE system.
Guess where all that money is going instead of being used to pay back the loans? Your bank account.
This strategy is not appropriate for everyone, and consolidation should be considered if there are benefits associated with the loans, either taxable or utility debt forgiveness. But it works well for people in Samantha’s situation.
It’s not hard and will save you almost $10,000 in 18 months. Once she can easily afford the interest over 10 years, and as long as she doesn’t work for a non-profit or government agency, she should consider refinancing if she can get a lower interest rate.
These days, there are many online lenders that make it easy to request student loan refinance quotes without a credit check. You can also use lender marketplaces like Credible to check your rates with multiple private lenders in minutes.
When choosing a lender for a refinance, make sure that all reputable companies do not charge processing fees or early repayment penalties. Lenders generally offer different rates, and an excellent credit score is necessary to get the lowest rates.
As a rule, you have the choice of applying for a loan with a fixed or variable interest rate. However, at a time when interest rates are at historic lows, fixed interest rates are extremely attractive. Opting for a variable rate now can be riskier than usual. Note that you can further reduce your interest rate by signing up for automatic payments. An automatic payment discount of 0.25% is the most common in the industry.
In addition to the rates, you should also check whether the lender allows for deferral of tuition fees. In addition, depending on your credit score, you should also check whether each lender is able to guarantee and provide surety bonds. Compare student loan refinancing options here.
MBA graduates can find a clear path to repaying their student loans. This course can not only save them a lot of money, but also help them understand the steps needed to reach their goal.
Student Loan Planner has completed over 5,000 student loan consultations for clients with over $1.3 billion in student loans. We can help you determine the best route in just one hour.
Our team can help anyone, so don’t hesitate to choose the right advisor for your personal situation. Email me at [email protected] or order your student loan plan below.
A plan for a student loan
Refinance your student loan and receive a bonus in 2021.
BONUS of $1,000 for 100,000 or more. 200 for 50,000 to 99,999¹.
variable 1.99% – 5.64% APR1
fixed 2.98% – 5.79% APR1
1,250 BONUS2 For 250k+, tiered bonus from 300 to 500 for 50k-250k.2
1,275 BONUS3 For 150,000 and above. Multi-level bonus from 300 to 575 for 50k to 149k.3
variable 2.39% – 6.01% APR3
fixed 2.79% – 5.99% APR3
1,000 BONUS4 for $100,000 or more. 200 for $50,000 to $99,9994.
variable 2.25% – 6.43% APR4
fixed 2.99% – 6.88% APR4
1,050 BONUS5For 100k+. 300 bonus for 50k to 99k.5
1,250 BONUS6 for 100k+ or $350 for 5k to 100k.6
1,250 BONUS7 For $150,000 or more. Multi-level bonus from 100 to 400 for 25k to 149k.7
variable 1.91% – 7.69% APR7
fixed 2.95% – 8.49% APR7
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1Earnest: $1,000 for $100,000 or more, $200 for $50,000 to $99,999.99. For Earnest, if you refinance $100,000 or more through this site, $500 of the $1,000 cash bonus will be provided directly by Student Loan Planner. In the above price range, an additional discount of 0.25% is included for automatic paymentInformation on income. 2Laurierweg: If you refinance over $250,000 through our link and Student Loan Planner receives the loan, a $500 cash bonus will be paid directly to Student Loan Planner. If you are a member of a professional association, Laurel Road can offer you the choice of a reduced interest rate or the $300, $500 or $750 cash bonus mentioned above. The Laurel Road proposals cannot be combined. The above price range includes an additional 0.25% discount for automatic payment.
Laurel Road Disclosure.3Fairy If you refinance over $150,000 through this website, $500 of the above cash incentives will be provided directly by Student Loan Planner. Uncover Alfie. 4Sofi: If you refinance $100,000 or more through this website, $500 of the $1,000 cash bonus will be provided directly by Student Loan Planner. The above price range includes an additional 0.25% discount for automatic payment. Disclosure Sofi.5Plain Obligation If you refinance over $100,000 through this website, $500 of the above cash bonuses will be provided directly by Student Loan Planner. General Bond Disclosure. 6Valid: If you refinance over $100,000 through this website, $500 of the above cash bonuses will be provided directly by Student Loan Planner. Reliable dissemination of information.
7LendKey : If you refinance over $150,000 through this website, $500 of the above cash incentives will be provided directly by Student Loan Planner. The above price range includes an additional 0.25% discount for automatic payment.
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Frequently Asked Questions
What is the best repayment option for student loans?
Both federal and private student loans (and sometimes parent loans) require the borrower to sign a promissory note. This is a legal contract that insures the loan will be repaid. The promissory note outlines the terms of repayment, including the interest rate, the length of repayment, and how the borrower will make the payments. It also details what penalties will be imposed if the borrower misses a payment or fails to repay the loan by the end of the term.
The two most common repayment options available for student loans are the Standard Repayment Plan and Graduated Repayment Plan, but depending on your financial situation, you may be eligible for other repayment plans. The Standard Repayment Plan is the most common repayment plan for student loans and it pays off your student loans over 10 years. The Graduated Repayment Plan is the repayment plan that requires the smallest monthly payments in the beginning and increases your payments over time. (This is sometimes referred to as income-based repayment.)
How do I repay my MBA loan?
If you’ve been thinking about getting an MBA, you’ve likely heard that you should go for the degree as a way to pay off your student loans. After all, many schools offer loans to cover the cost of tuition and fees, and a lot of graduates take advantage of them. However, the truth is that you aren’t likely to get out of debt after you leave school. In fact, it’s usually the opposite: many students have to take out even bigger loans to pay for their degrees.
The MBA student loan forgiveness program is a government program that helps you reduce your student loan balance if you work in an eligible profession. If you are eligible for the program, the government will pay off a percentage of your loan balance, and you will be responsible for a reduced monthly payment amount.
Should I pay off highest balance or highest interest student loans?
The Internet is full of blogs and forums discussing the question “Should I pay off highest balance or highest interest student loans?”. It’s a common question, and an important one, because the decision you make can have a big impact on your financial future. Paying off a loan early can be a smart move, since it will save you money on interest charges. But, if you decide to pay off a loan with a higher balance first, you might be able to eliminate your debt more quickly. After all, the point of paying off a loan is to be debt-free.
When you’re left with a single loan, you’ll have to decide whether to continue making payments or to stop borrowing money. Do you have multiple student loans, and you want to know which loan you should pay off first? If you have multiple student loans with different interest rates and different balances, it may be tempting to just pay off the one with the highest interest or highest balance. However, you might be surprised if you add up the total savings if you paid off loans based on interest, versus paying off loans with the highest balance.