A Guest Post by Andrew Josuweit
Even with the help of scholarships, fellowships, MBA student loan assistance programs, and other financial aid, many business school graduates still struggle with mountains of debt. In fact, leaving an elite private MBA program with six-figure student debt is, unfortunately, pretty typical.
Dealing with student loan debt can be a huge obstacle to reaching your post-MBA goals. Whether you’re going after a high-paying management position or starting a business, student loans can limit your options and increase your exposure to risk.
I should know. I struggled with student loan debt – which ballooned to $107,000 at its peak – as I worked to build my own business. Still, I didn’t let my student loans hold me back from going for what I wanted.
By taking advantage of solutions such as student loan refinancing, it’s possible to get your debt under control. But is refinancing the right decision for you? Here’s a look at some of the pros and cons of refinancing MBA student loans.
Pros of Refinancing MBA Student Loans
1. Lower interest rates
Refinancing student loans can provide a gateway to lower interest rates, decreasing the total cost of your student loan debt.
The potential savings are especially significant for MBA graduates. Borrowing for graduate school through Grad PLUS loans or private student loans is usually more expensive than an undergraduate degree. Current Grad PLUS rates are at 6.31%, plus an upfront loan origination fee. But you could face rates at high as 7.90%, depending on when you took out your loans.
Take the McCombs School of Business at the University of Texas. A 2015 average McCombs graduate will have MBA student loans totaling $62,525, according to U.S. News. That’s the lowest level of indebtedness at a top-ranked business school.
Now let’s assume that $62,525 balance has an interest rate of 6.31% and a repayment term of 10 years. Refinancing to a lower rate of 4.99% saves a borrower just under $5,000 in interest. MBA graduates can save even more by refinancing if they have higher student loan balances or interest rates.
2. Higher chance of being approved
Of course, to save money with student loan refinancing, you’ll need to meet credit and income requirements to qualify. For business school graduates, doing so is often easier than for many other applicants.
Most MBA students have four or more years of work experience, according to U.S. News. Many have had time to build good credit necessary to get great refinancing rates. And with typical post-MBA salaries in the six figures, lenders are likely to view these applicants as safe bets and offer lower interest rates.
3. Greater control
If you’re overwhelmed by your student loan debt, it can be difficult to see any light at the end of the tunnel. One of the biggest selling points of refinancing is it puts control of your debt back in your hands.
With federal student loans, you don’t get to choose your loan term, monthly payments, or even your servicer. But refinancing student loans is an opportunity to choose a new loan option that best meets your financial situation and lifestyle.
4. Invest in yourself or your business
If you use refinancing to extend your repayment period, you’ll achieve lower monthly payments and free up cash flow.
This can be an effective way to increase your disposable capital that you can use to invest in yourself or start a business. And that’s a central goal for many business school graduates; in 2012, about one in five went on to establish their own business, according to the Financial Times.
5. Flexible options to meet your goals
Refinancing can be an even better fit if you can find and take advantage of loan programs that specifically target your needs.
Student loan refinancing company SoFi, for instance, offers a unique program aimed at helping entrepreneurs build their business while repaying student loans. The SoFi Entrepreneur Program features a sixth-month loan deferment period so you can go all-in on your startup. It also includes formal pitch opportunities, access to workshops and mentorships, and peer networking.
Many student loan refinancing lenders also have unemployment or hardship protections and will work with you should you hit a rough patch. That way you can focus on maximizing opportunities, not managing risk.
Cons of Refinancing Business School Debt
Despite the above benefits, refinancing is not always the best option for all MBA grads. Here are some drawbacks to refinancing you should consider.
1. You’ll lose federal student loan protections
Refinancing federal student loans with a private lender means those loans are no longer eligible for federal benefits and protections.
Federal student loans have a wide range of repayment options, including income-driven repayment plans, which can help you lower student loan payments if they become unaffordable. It’s also possible to put federal student loan payments on deferment or forbearance; with private loans, it’s up to the individual lender’s discretion whether these options are offered. Refinancing also means forfeiting federal forgiveness opportunities such as the Public Service Loan Forgiveness program.
If you are confident you will be able to afford your payments and aren’t planning to pursue forgiveness programs, refinancing could still be right for you. Just make sure you weigh these tradeoffs carefully.
2. Lower monthly payments could increase total costs
While the main goal of refinancing is often to lower interest rates, it’s possible that the total cost of your new loan could still be higher.
This would happen if you chose a significantly longer repayment period. You’d get lower monthly payments now, but with the drawback of paying more interest for more years.
Therefore, make sure you include total loan and interest costs in your student loan refinancing calculations. Choose the option that aligns with your needs and has acceptable tradeoffs.
3. Qualifying for refinancing can be tricky as an entrepreneur
Last but not least, some MBA graduates and entrepreneurs might be at a point in their career that could make it tricky to qualify for refinancing.
If you’re starting a business, you might have unstable income or a very low salary since you’re focused on investing funds into your business. Lenders might see this as a greater risk, and you might not get the best rates — or you might struggle to get approved altogether.
If you’re in this situation, you can still pursue refinancing. Try choosing a lender with a more flexible underwriting process. As you apply, contact the lender and make your case for why you’re a qualified borrower — even if your paychecks are unsteady.
As an MBA grad, you’re likely equipped with the knowledge and skill set to manage a business. When you apply those same skills to your student loans, you’ll see whether refinancing is the right move for you. You’ll also be able to create a strategy to get out of student debt quickly and start building real wealth faster.
About the Author:
Andrew Josuweit is the CEO and President of Student Loan Hero, a company that combines easy-to-use tools with financial education to help the millions of Americans living with student loan debt manage their student loans smarter. Student Loan Hero is helping 150,000+ borrowers manage and eliminate over $3 billion dollars in student loan debt.
Also published on Medium.