Investing in an MBA: The financial payoff

In contemplating the pursuit of the MBA graduate degree many questions come to mind. Do I attend a top tier business school? Are the benefits of a top MBA degree that much better than a degree from that of say a top 50 school? Should I attend a full-time or part-time program? What is the ultimate financial return on the MBA investment?

I came upon an older article, Investment Advice: Go for the MBA, discussing the ROI and investment benefits of completing an MBA degree through an AACSB accredited business school by the Graduate Management Admission Council (GMAC). GMAC conducted a study of MBA graduates during the years of 2001-2004. Although the article was published at the beginning of 2007 the article remains relevant in 2009.

http://www.aacsb.edu/publications/Archives/JanFeb07/p36-41.pdf

The authors of the article Investment Advice: Go for the MBA Holtom and Inderrieden report the following financial findings of worth to would be MBA students such as myself:

Mean ROI Salary Increase

Top Ten School 12% 56%

Non Top Ten School 18% 54%

Top Fifty School 17% 58%

Non Top Fifty 20% 45%

ROI by Program Salary Increase

Full-time 15% 59%

Part-time 68% 37%

Executive 35% 17%

Holtom and Inderrieden note that the full-time student forgoes employment and income to attend school while the part-time student does not factor this into the ROI equation. Not attending a top tier, full-time program is not as dire a situation as one might guess, in fact the benefits of being a part-time student at a non top ten business school are a sound investment.

ROI Example:

Professional earning $46,000 annually attends an AACSB accredited MBA program having a total tuition of $27,000. The program will take 2.5 years to complete as a part-time student (the student’s salary increase will not be seen until about three years from the starting the MBA program). The student finances the cost of the MBA program with unsubsidized Federal Stafford loans at the current 6.8% (capped at 8.25%, and $20,000 a year based on need and availability). The student will not need to start repaying the loan back until six months after graduation and the payment is not due in full but rather broken down in installments for the term of the loan, let’s say 10 years at $250 per month. The above GMAC study reports that our student’s starting salary will increase to about $78,287 as a graduate from a part-time program.

Note the following:

The student’s salary will increase by 41%! Payback is just under a year (0.89yr). With a discount rate of 7% (I/YR), a 3% rate of inflation for 10 years (N) the net present value (NPR) of the tuition investment would be about $157,696 with an internal rate of return (IRR) of 50%, much greater than the 6.8% cost of funds. From a financial investment standpoint the decision to pursue the MBA degree is a no brainer.

It is true then the best investment you’ll ever make is in yourself.

Good luck!