Have B-Schools become debtors’ prisons?

MBA grads are shouldering record levels of debt as tuition rates head skyward, making the degree a risky investment

In 2008, Brian Jenkins moved to Malibu, Calif., to start his MBA at Pepperdine University's Graziadio School of Business and Management. He had big ambitions for B-school, expecting the degree to help him land a six-figure-salary job in human resources at a top company.

Pepperdine seemed poised to deliver. When he was a mere applicant, the admissions director gave him a personal tour of the business school, which commands a stunning perch overlooking the Pacific. His student experience was "amazing," he says, handing top marks to his professors and classmates. The weather - "perfect every day" - was an added perk.

To pay for it all, Jenkins took out $120,000 in loans. But his six-figure-salary job never materialized. "The career services staff basically said, 'We'll help you edit your resume, good luck out there,'" he recalls. "A lot of [my classmates] found jobs paying $55,000 to $65,000 per year, and they were very excited that they had a job."

In fact, Jenkins' class earned a mean base salary of $69,167, according to Pepperdine's official stats. They also owed an average $66,242. When the economy was doing well, and there was upward mobility, MBAs made sense, Jenkins says. "People were able to manage their debt load."

Wallowing in a sea of B-school debt

MBAs like Jenkins are shouldering record levels of debt, approaching a tipping point that makes the degree - no matter how good the experience - a risky investment that isn't always being approached with financial caution and restraint. It's now common for many graduates to leave a top business school with six-figure debt, and in some cases, MBAs are graduating with more than $150,000 in loans that will take them 10 or more years to pay back.

At a few elite business schools, including Wharton and Columbia, the "average" debt burden is already six figures. Wharton grads left Philadelphia last year with loans that averaged $109,836 -- the most among all business schools. Overall, graduates from Poets&Quants' top-10 U.S. MBA programs owed an average $87,049 last year (MIT-Sloan did not release its debt figures).

Several business schools, including Stanford and Dartmouth College's Tuck School, expect these numbers to increase this year. The reason: Many students are starting their MBAs with diminished assets due to the Great Recession. They drained their bank accounts as the economy went south to maintain their lifestyles, so many of them will have to borrow more than their predecessors. And they're doing this at a time when starting salaries for MBAs have flattened overall.

"The numbers scare me," concedes Diane Bonin, director of financial aid at the Tuck School. "People coming in are making a little bit less and have much less in available savings." She expects the average debt burden of latest Tuck grads to rise to $98,500 for the class that just graduated from the record $96,292 last year.

Despite the alarming figures, members of the incoming class of 2013 have expressed little concern over taking on the debt. Like Jenkins at Pepperdine, they're betting that the degree will pay off in the long run, providing salaries and bonuses that will allow them to repay the loans. "No one says, 'How am I going to pay for this?'" says Rod Garcia, director of MBA admissions at MIT's Sloan School.

Still, some B-school deans are beginning to worry. Harvard Business School Dean Nitin Nohria is concerned that escalating debt burdens will put more pressure on MBAs to accept jobs they don't want. "You might take the highest paying job whether you are committed to that as a career or not because it's a way to pay off your debt," he says.

Tuition reaching skyward

There are many reasons for the debt binge, from the rising cost of attending an MBA program to the increased availability to borrow money. In the decade since 2001, the top 10 U.S. MBA programs lifted tuition by an average of 80% (not including fees) for their two-year programs. The nearly 6,000 students who make up the class of 2013 at the elite 10 will pay an average $105,923 in tuition next year, before grants or scholarships discount the price. (Pepperdine's incoming MBAs will pay about $80,000.)...

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