The ROI Of An MBA: Long Term Returns As Important As Salary To Debt Ratio

When you look at MBA as an investment, it becomes important to consider the costs and the return of investment (ROI) and this factor forces many a student to pack their bags and head for schools located in towns with cheaper cost of living balanced with prospects of earning a good placement and salary. Long term returns would also be as important as salary to debt ratio.

How does one calculate it while considering the cost of living, lost wages and potential debt along with a projected post-MBA salary of $100,000? One of the tools available is average salary after graduation compared with debt or salary-to-debt ratio.

Going by the data provided by U.S. News, Wisconsin School of Business had the highest annual salary-to-debt ratio for full-time MBA graduates who found jobs paying an average of more than $100,000 in salary and bonus within three months of earning their degree.

The students at Wisconsin School could expect a 7.4-to-1 salary and bonus-to-debt ratio. It translates into an average salary and bonus of $114,815 and $15,481, on average, in debt.

Of the other ranked business schools with graduates earning more than $100,000 in salary and bonuses, for the Class of 2015, the Marriott School of Management at Brigham Young University reported salary and bonus to debt ratio of 5.4-to-1, the Hough Graduate School of Business at the University of Florida at 3.6-to-1, the Michael G. Foster School of Business at the University of Washington at 3.4-to-1 and the Smeal College of Business at Pennsylvania State University—University Park at 3.1-to-1.

According to the data submitted by the schools, U.S.News said the average salary for all schools was $91,940. More than one-third of the 129 ranked schools that submitted salary data had an average starting salary and bonus of more than $100,000 for their 2015 graduates. 

A typical MBA student from the Class of 2015 finished his or her degree with $50,054 in debt. Compared to other professional degrees, such as law or medicine, the debt component may seem less. But then the fact that MBA programs are shorter in length should be taken into consideration.

Student loan experts advice prospective MBA students to look beyond salary-to-debt ratio to calculate ROI. Since most business schools publish employment records with average salaries for different industries, MBA aspirants could use these numbers to project future salaries.

Another factor is the salary forgone while attending the MBA program besides the accumulated interest on student loans over 10 years. To calculate ROI, current salary should be subtracted from the expected future salary and that number be divided by the total cost. Total cost should include debt, forgone income and accumulated interest on a loan for 10 years.

Thus, an MBA graduate who earned $65,000 before his or her degree and now makes $100,000 with $55,000 in student debt could expect to get a return of around $195,000.

Meanwhile, most new graduate MBA entrepreneurs would have lower salaries as beginners in a new venture or company. Thus, those Business Schools that have MBAs pursuing entrepreneurial program, such as Babson College, might have a lower salary-to-debt ratio, according to Dan Macklin, co-founder of SoFi, a San Francisco-based financial technology company.

But then, a bad salary-to-debt ratio need not necessarily mean poor investment as it could rise in the long run. Thus long-term salary projections should be taken into consideration. As a counterpoint, an MBA graduate from Columbia University might end up heavily in debt though drawing a salary much higher than $100,000 with a low salary-to-debt salary ratio diminishing over a longer period of time.

Thus, a graduate with a higher debt load who eventually earns $180,000 might come out ahead of someone with a lower debt burden and lower salary over a 10- to 20-year period.