Dear Prep Professor — Is an MBA worth the investment?
I am glad you used the term investment because an MBA degree really is an investment in your future.
To answer your question it is necessary to compare the costs versus the benefits, and to forecast potential returns to determine if the investment in an MBA degree is worth making. Fortunately for us, in 2006, the Graduate Management Admission Council (GMAC) gathered the data and ran the numbers for us. They calculated the costs, benefits, and return on investment for a large sample of actual MBAs.
The Cost of an MBA
The first costs to consider are tuition, fees, and course materials. According to GMAC, at the time of their study, tuition and fees for a two-year MBA program ranged from $20,000 on average for programs outside of the top ten and $74,000 on average for the Top 10 Programs.
For most MBAs, however, the opportunity cost of lost wages is a more significant cost than tuition and fees. On average, MBA students who attended schools outside of the Top 10 gave up jobs that would have earned them $104,000 over two years. Their counterparts in the Top 10 programs sacrificed salaries of $124,000 for the two years they spent in a full-time MBA program.
Table 1: Average Financial Investment Required to Obtain an MBA
|Tuition, Fees, and Course Materials||$20,000 – $74,000 USD|
|Lost wages over two years||$104,000 – $124,000 USD|
|TOTAL INVESTMENT||$124,000 – $198,000 USD|
Source: Holtom, B.C., & Inderrieden, E.J. (2006). Examining the Value Added by Graduate Management Education (GMAC Research Report No. RR-06-16). McLean, VA: Graduate Management Admission Council.
Notice that there are additional costs that the GMAC study did not take into account, such as the incremental living expenses of going to business school. These could include higher rent, having to pay for your own health insurance, and needing to purchase your own computer and mobile phone.
Finally, be aware that your out-of-pocket travel expenses might increase for visits to family and friends, travel abroad, and for your job search. These incremental expenditures could easily total $40,000 over two years, so be sure to factor these into your budget.
Of course, you might be able to offset lost wages through summer employment and other expenses through scholarships and grants. Some employers may even sponsor education expenses in exchange for a promise to return to the company once your MBA is complete. Finally, in the United States at least, an MBA is tax deductible for some taxpayers.
Even putting aside these additional variables, we’re talking about a big investment, approaching $200,000 for an MBA from one of the Top 10 schools. This is a significant amount of money – so you need to be sure that the benefits make the investment worthwhile. It’s always more fun to talk about benefits. We’ll concentrate on the projected monetary benefits of an MBA.
The Monetary Benefits of an MBA
The monetary benefits come in the form of the salary bump you’ll get when you graduate and then going forward. According to the GMAC study, graduates from a Top 10 School increased their salary by almost $35,000 while those from non-Top 10 MBA Schools reported a $28,000 salary bump.
Figure 1: Base Salary Impact of Obtaining an MBA
Source: Holtom, B.C., & Inderrieden, E.J. (2006)
In addition to the increase in salary, other studies have found that MBAs also enjoy accelerated compensation growth and better employment prospects. One study estimated that MBAs earn about twice what non-MBAs earn over the course of their respective careers.
The Return on Investment on an MBA
As a final step, let’s compare the costs and quantitative benefits, and take a look at what the GMAC determined was the return on investment or “ROI” of an MBA degree.
The GMAC study calculated the return on investment of pursuing an MBA degree and concluded that an MBA degree from a Top 10 school has a 118% return on investment.
Graduates from a non-Top 10 program did even better. They enjoyed a 185% return on their investment. So, as it turns out, people who tell you it’s not worth going to business school unless you attend a Top 10 program need to check their calculators.
Table 3: Impact of Top 10 School Ranking on Future Salary Performance
|Variable||Top 10||Non Top 10|
|Total Cost||$198,321 USD||$123,712 USD|
|10 Year Gains from MBA||$432,348 USD||$352,103 USD|
|Return on Investment (ROI)||118%||185%|
|Payback Period||5.8 years||4.4 years|
Source: Holtom, B.C., & Inderrieden, E.J. (2006)
A Bonus Question
Here’s a bonus question that might also help you decide if an MBA is right for you: Did the preceding discussion about costs, benefits, and ROIs get you excited – or are you struggling to keep your eyes open? If you were terminally bored by this kind of analysis, you don’t need an ROI calculation to determine if an MBA is right for you because you’re going to be expected to run lots of numbers in an MBA program.
So the numbers tell us that an MBA is worth the investment. One important caveat is that the economic landscape and the job prospects for an MBA have changed since 2006. These figures are a helpful starting point but only reflect averages. You should run the numbers for yourself based on the tuition for the schools you’re targeting, how long you’ll be out of the workforce, and the value of the paychecks you’ll be foregoing. Taking your career goals into consideration, you can also find salary data in the industry that you plan to work in following your MBA. Your personal ROI forecast might be better or worse than the average. Certainly, running the numbers is a great way to decide if an MBA will be a worthwhile investment for you.