Renata Arauz-DeStefano, a 27-year-old student at the University of Pennsylvania’s Wharton School of Business, decided to borrow specialized MBA loans over graduate PLUS loans to pay for school.
“Like a good MBA student, I made a spreadsheet of all the rates, and I found that CommonBond was much more competitive in student loans,” the second-year student says. “I think federal student loans are attractive if you need the income-repayment options or the loan forgiveness. But if you’re going into an MBA program, those student loans are less attractive.”
The current fixed rate for graduate PLUS loans for the 2016-2017 school year is 6.31 percent compared with 6.01 percent for a 10-year fixed-rate loan at New York-based CommonBond – a 30 percentage point difference. CommonBond’s fixed rate is just one rate, and it’s available to MBA students who are enrolled at certain b-schools. Arauz-DeStefano originally took out an MBA loan through Social Finance, Inc., – a San Francisco-based online lender commonly called SoFi – during her first year at Wharton, but switched to CommonBond during her second year after SoFi discontinued its product. Laurel Toney, a SoFi spokesperson, says the firm stopped offering its MBA student loans to focus on other financial products, such as mortgages and student loan refinance.
Both SoFi and CommonBond launched as lending startups that offered special rates to select MBA students. Arauz-DeStefano says she borrowed from both because she values their methodology of taking into account potential future earnings.
“I came in to school with an average salary of $40,000 to $45,000, so I’m sure I wasn’t an attractive candidate. But now I’m going into investment banking where my base salary is going to be $125,000,” she says about the MBA loan application process that both SoFi and CommonBond use. Experts say lenders feel more comfortable lending to in-school MBA students compared with other graduates because of their future earning potential. In fact, most MBA grads earn above the typical U.S. household income, which is nearly $52,000, according to the U.S. Census Bureau. U.S. News data show that the 113 ranked b-schools that submitted these data had an average starting salary and bonus of $105,038 for 2016 graduates. MBA loans are still relatively new in the lending space – a little more than five years old – and there are only a few lenders that offer these loans. For prospective and current MBA students, here are a couple facts to know about borrowing a specialized MBA product.
Some lenders only lend to MBA students at well-known b-schools: CommonBond is only available to students attending 29 b-schools, such as Harvard Business School, Wharton School of Business, Columbia Business School and the Ross School of Business at the University of Michigan—Ann Arbor.
“We’ve been doing this on a national scale for the last three years and already we’re the No.1 private lender at Columbia, Dartmouth and Yale. And that’s above Citizens Bank, Sallie Mae and Wells Fargo,” says David Klein, co-founder and CEO of CommonBond.
Klein said when the company’s lending platform launched nationally in 2013, the lender started by making its loans available for only 20 MBA programs to make investors comfortable. “The scope was limited to just 20 schools that frankly a lot of these investors had heard of before.”
The New York-based lender plans to expand beyond its 29 schools in the immediate future, he says. Similar to CommonBond, London-based Prodigy Finance offers its loan product to currently enrolled MBA students at certain well-known schools, such as the Anderson School of Management at the University of California—Los Angeles and the Kelley School of Business at the University of Indiana. The fintech company also lends to students who are studying graduate programs in law, engineering and public policy. Other private lenders offer specialized MBA loans. Citizens Bank and Discover Student Loans offer special interest rates to in-school business grad students, and their loan rates are based on an applicant’s credit and type of study. Both lenders also offer no origination fees on their MBA loans.
Citizens Bank currently offers fixed rates as low as 5.1 percent on a 10-year $10,000 loan to business students – that’s much lower than the lowest rate the financial institution offers graduate students who are not enrolled in a graduate law, medical or business program.
Chicago-based Discover Student Loans offers a Discover MBA Loan product to b-school students. Current variable rates on a 20-year $10,000 start at 3.74 percent with the lowest fixed rate available at 6.24 percent. But the company offers a 0.25 interest-rate deduction for enrolling in automatic payments.
“We continue to see a demand for this product,” Mike Boush, senior vice president of Discover Student Loans, said via email. But he still encourages students to look to other forms of financial aid to pay for b-school before taking out a loan. “Maximize scholarships, grants and other free financial aid before taking private loans.”