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Welcome to MBA Podcaster—the only source for cutting-edge information and advice on the MBA application process. With an MBA under your belt, higher salaries are likely to come your way. “The average salary, according to the 2005 Global MBA Graduate Survey that the council does, was $88,600.” But the challenge is how to come up with upwards of $40,000 a year to finance your way through business school so that you can get that higher salary. We’ll hear about the different funding options available out there from federal loans to private loans, scholarships to corporate sponsorships. And we’ll also find out if you can deduct your MBA expenses on your tax return. We’ll talk to a top business school’s director financial aid, an industry analyst, an MBA loan specialist, as well as a tax specialist to find out the best options available to you. You can also visit our website mbapodcaster.com for a list of loans and grants available.

Let’s break down financing to three chapters—life before an MBA, life during business school, and the aftermath with rewards but, likely, a lot of debt. Daphne Atkinson is Vice-President of Industry Analysis for the Graduate Management Admission Council. She says even before you embark on the path of getting an MBA, make sure you put your financial house in order. “And what do I mean by that? In particular for full-time students, because they will not be employed—they will not be working—they need to learn to live like a student before they become one. They should pay down existing consumer debt and avoid incurring major expenses. I’m thinking of new cars, a big, fancy vacation, and house purchases. They should also make arrangements for either deferring or paying off any outstanding undergraduate loans they might have. And if they are not already doing so, they need to create a budget and learn how to stick with it. For part-time students, they need to find out to what degree an employer reimburses for degree programs, and if there is a process at their company, how they go about qualifying for it. Public institutions and state institutions have in-state tuition and out-of-state tuition. And there’s often a differential between the two. Private institutions, particularly those that are acknowledged as top schools, have price tickets to go with it. But it doesn’t mean that everyone has to be out-of-pocket $75- or $100,000. Executive programs often cost way in excess of $100,000. But those are programs where, typically, the full cost of program attendance will be underwritten by an employer.”

Thomas Caleel is Director of MBA Admissions and Financial Aid at the Wharton School of the University of Pennsylvania. Wharton’s tuition is steep, but Caleel says all students admitted will be able to afford their education. “For Wharton, the tuition is close to $40,000 a year. Our two-year budget—and that includes rent, food, phone, books, fees, everything they would need to live for two years—comes out to roughly $130,000. We allow them to borrow up to approximately $130,000—which is more than enough to live for the two years—because you also have to understand that they’ll also be doing a summer internship. And they can make anywhere from $10- to $30- or $40,000 in that summer internship. One of the things that sets Wharton apart is that we are need-blind. We admit based on merit—based on their ability to be here and be successful. And we guarantee any admitted student financing. We have a program with Citibank. And that, essentially, means that as a U.S. student, you can borrow up to the $130,000 at prime. And international students without a co-signer—they don’t need a co-signer—their rate is prime plus 2%.”

Financial aid options vary at each school. So once you decide on which school you want to attend, your best bet is to visit the financial aid office or check out the school’s website. You have to provide tax documents and fill out various forms including a FAFSA—the free application for federal aid. You’ll typically get a quick response from the school on funding options available to you, and you’ll then work directly with a financial aid office to secure your loans. Sallie Mae is one lender that offers an MBA loan program that includes a combination of federal Stafford loans and private education loans. Cori McManus is Sallie Mae’s MBA loan specialist. She says students should look to apply for the federal Stafford loan first. “A Stafford loan is federally guaranteed and, generally, carries the lowest interest rates and best terms. However, there are limits to what students can borrow under the federal Stafford loan program, and that limit is $18,500 for graduate students.”

Federal loans can come in two forms—a subsidized and an unsubsidized loan. For subsidized loans, the government pays for the interest accrued until you get out of school and start repaying. An unsubsidized loan is similar to a standard loan where interest will accrue while you’re in school. But still, interest rates on federal Stafford loans are, generally, lower than private loans. And if you still need more money, Cori McManus says Sallie Mae approves more than 80% of students applying for a private loan, and interest rates are based on prime which she says is currently 7.5%. As Thomas Caleel said earlier, Wharton’s primary loan provider is Citibank. And even international student’s can borrow up to $130,000 without a co-signer. But for international students trying to get a loan through Sallie Mae, Cori McManus says it’ll be a little more challenging because you do need that co-signer. “It’s anybody who’s a U.S citizen or permanent resident. So it can be a relative. It can be even a friend or a spouse. It can be someone who simply is willing to do so. The actual relationship between the co-signer and the borrower doesn’t really matter to us as long as they have the appropriate INS documentation and the right citizenship status.”

But going into debt isn’t the only way to get your MBA. There are a host of scholarships, fellowships and TA-ships that are available. GMAC’s Daphne Atkinson says you can do a web search to see what kinds of scholarships are out there. You can also check out our website at mbapodcaser.com for a list of grants. But your best bet, again, is to check in with their financial aid office, says Atkinson. “Schools sometimes have a specific number of scholarships they mark as full tuition. They may have received them from donors who have very specific requirements as to whom those scholarships should be granted. There are other schools that have a policy of partial scholarships that may be anything from half-tuition to one-quarter tuition. It really depends on how the school has chosen to carve up its scholarship budget. And then, there are things like fellowships which, actually, may require a student to give back something in return for receiving scholarship money. And that may be some limited number of hours that they have to spend working at the school doing something specific—whether it’s being a research assistant, or a teaching assistant for a course, or working in an administrative office.”

Here are some examples of scholarships available at Wharton. Thomas Caleel: “We go out with over $6,000,000 a year in financial aid. There are grants—some of that is need-based, some of that is merit-based. For example, we have a large fellowship for students coming from Mexico interested in finance. We have loan forgiveness programs, for example, set up for students going into social impact management, not for profit or government. So there are many different ways that the students can get grants. I have one scholarship for a resident of Lackawanna, Pennsylvania; one for a finance major coming from Wisconsin. Some of them are just very, very specific. For example, our Howard E. Mitchell fellowship is a full-tuition fellowship for under-represented minorities. We have an emerging market fellowship that we award five students each year in the incoming class, and that’s $20,000 per year based strictly on need. There are opportunities to earn money while you’re in school. You can take a TA position. My office hires 65-70 second-year students every year to help us read applications and interview candidates. But, again, it’s important to think about the fact that you only have two years here. And you should really be focused on being prepared when you come in—not coming in and saying, ‘Well, I’ll also work, and I’ll try and pay my mortgage and do this.’ You’re coming here and making a substantial investment in your future and a large part of that is the academics and the networks and friendships that you build. And that’s really where you want to be focusing your attention—not making a couple of dollars at a part-time job.”

And to secure that financial aid, make sure you meet application deadlines, says Daphne Atkinson. “The timeline is going to be program and school specific. So the best piece of advice that I can give to perspective students that are looking for financing options is to use the school’s website, as well as the admissions and financial aid offices, to find out what the deadlines are for the various pieces of paperwork and documentation that are needed as part of the financial aid process. They need to make sure that, above all, they meet those deadlines because there are no exceptions. And if you miss them, you have missed an opportunity. So you really owe it to yourself, if necessary, to keep a very detailed calendar of what is due when and to whom. And make sure you stick with it. It varies from school to school. Some schools have a single point where they consider all of the financial aid, and it’s all granted, and people are all notified on a single date. Other schools have a rolling policy as far as notification. When you apply and you receive the decision, and if you’re accepted, you may also find out what your financial aid package may look like. It just depends. And students will need to really work closely with the school to understand what the timetable is.”

Once you’ve secured your loans, your main concern during school is proper debt management which means making intelligent spending habits, says Wharton’s Thomas Caleel. Once you graduate, you’ll soon have to start paying back those loans. And the payback options available vary, says GMAC’s Daphne Atkinson. “That depends on the loan type. There are a couple of federal programs that allow you up to 30 years to pay back. Federal Stafford loans, for example, are 10 years. Some students can even qualify for federal consolidation loans that can be paid back over 30 years. So there are ways for students to meet their loan obligations and also continue living.”

Here are some of Sallie Mae’s payback options. Cori McManus: “There is a standard repayment term of 10 years, where principle and interest payments are due each month during the loan repayment term. There’s a graduated repayment term, where payments are lowered at the beginning of repayment where they might need some financial help. And then, it steps up at specified periods and in specified amounts over the term of the loan and still gets paid off in the ten-year period. Then there’s an income-sensitive repayment option, where monthly payments are based on the percentage of the borrower’s monthly gross income. And then there’s extended repayment, where eligible borrowers get payment relief through a lengthened repayment term of up to 25 years. Students can also consolidate their loans, where federal consolidation loans allow borrowers to refinance one or more federal education loans and significantly lower their monthly payment by extending the payback period. The original loans are paid in full, and a new loan with combined balances is issued with new terms, including a low interest rate that is fixed for the life of the loan.”

Now let’s see if you can deduct your MBA-related costs. Under Section 162 of the IRS code, tax payers can deduct educational costs if the coursework maintains or improves skills required in their current job. But the education can’t be towards a new career. Kathy Burlison is Director of Tax Implementation at H&R Block. “So, someone who is clearly in a position where the course of study that they undertake for an MBA would improve the skills that they’re currently engaged in—perhaps a marketing executive who is already doing the work that they’re learning more about through the MBA program—and whose classes are improving their job skills in their current job would be allowed the expenses. On the other hand, someone who is not doing work—as in one case of an engineer— who might have been able to deduct education expenses to improve his or her engineering skills. But the MBA course that this engineer took wasn’t closely related to his job skills and job performance as an engineer; therefore, the MBA was not allowed for him.”

If you can take a deduction, you’ll be saving yourself a lot of money. And Burlison says there are probably a number of MBA students that are qualified, but aren’t aware of it. The IRS, in recent years, has been challenging these deductions. And often times, the court has ruled against the taxpayer. So Kathy Burlison says if you’re going to take the deduction, make sure you have the proper documentation. “It would be helpful to start with a job description. And if their current job description accurately explains what it is that they’re doing on the job—and I know that’s not true for a lot of people— make sure that that job description does accurately reflect what you’re doing on the job, and be able to look at the skills that are promised through the MBA program that you’re pursuing, and be able to match those up. It doesn’t have to be every single item matching up, but be able to say that your current job, for example, requires that you analyze the environment to determine risks and a threat to your organization in a particular area, and the MBA program provides courses that improve skills in identifying risks and opportunities. Then, you’ve got a pretty tight match. You have your job that’s requiring you to do this item and a course of study that’s improving your skills in doing that same item.”

What if you get audited and you had changed jobs after your MBA, but you feel that it’s along the lines of the law? “If you change jobs after getting the MBA and the new job required an MBA, then that, actually, weakens your case because that would show evidence that the MBA might have been acquired in order to meet the requirements of a new job or a new profession. If you’re going from one employer doing one type of work to another employer doing a similar type of work, and they both would benefit from the MBA course of study, then you’re probably going to be okay. So, it’s really going to be a case by case situation concerning what the differences are between the two jobs, and whether the MBA study or degree is more closely aligned with the old job or with the new job.”

With proper p