Your MBA degree will come at a high price tag and may sometimes put you into an avoidable debt trap if you do not judiciously decide on quantum of loan and its price to be paid by you in form of interest payment. Taking a loan is probably less difficult than repaying it regularly for a long time. The longer the period, more will be the total amount of interest you would be paying to the bank.
Your MBA degree needs a good amount of financial investment unless you get substantial scholarship to compensate your fee structure which may run anywhere in the range of Rs 8 lacs to Rs 20 lacs. Even with the admission offer in hand, it’s difficult to decide whether to pursue MBA degree or better to think about it later. This situation is more difficult when you are already working and drawing good salary. You suffer on both counts- loss of job as well as incurring the expenses till you get the job again after MBA.
The options to fund your MBA fee and avail the study loan are many and can be exercised with private or public sector banks depending upon their prevailing schemes. However, one important thing we need to remember is - when the amount is more, higher EMI is to be paid and when the income is low it becomes very difficult to find out the ways and means how to make regular repayment without causing financial crunch. In case you choose not to pay the amount regularly, the small concession of 0.5 to 1% on interest that could otherwise be available to you on regular repayment may no longer be given to you by the financial institution/Bank.
Your Prospective Income: Key to decide your loan amount
Assuming that the fee structure of the MBA programme requires an amount of Rs.10 lacs to complete the 2 years’ programme, let us discuss what amount would be feasible in different prospective income scenarios
Case-1- Expected Annual Gross Salary: Rs.7.20 lacs.
Net (in hand) salary: Rs.5.76 lacs
(After allowing 20% for various components like Medical Insurance, HRA, PF,)
Maximum recommended education loan amount: Rs 10 lacs @ 11% pa
Maximum recommended EMI: 30% of net in hand salary
-Net per month salary: Rs 48,000/-
-EMI of Rs.10 lacs for 10 years: Rs 13700/-
-Total repayment in 10 years: Rs. 16,53,000/-
-Proportion of repayment to net salary: 28.5%
-Total interest paid on loan: Rs.6,53,000/-
Case-2- Expected Annual Gross Salary: 4.8 lacs.
Net (in hand) salary: Rs.3.84 lacs
(After allowing 20% for various components like Medical Insurance, HRA, PF,)
Maximum recommended education loan amount: Rs 7 lacs @ 11% pa
Maximum recommended EMI: 30% of net in hand salary
-Net per month salary: Rs 32,000/-
-EMI of Rs.7 lacs for 10 years: Rs 9600/-
-Total repayment in 10 years: Rs. 11,57,00/-
-Proportion of repayment to net salary: 30%
-Total interest paid on loan: Rs.4,57,000/-
Case 3- Expected annual Gross salary: Rs. 3.6 lacs
Net (In hand) salary: Rs.3 lacs
(After allowing 20% for various components like Medical Insurance, HRA, PF,)
Maximum recommended education loan amount: Rs 5 lacs @ 11% pa
Maximum recommended EMI: 30% of net in hand salary
-Net per month salary: Rs 25,000/-
-EMI of 5 lacs for 10 years: Rs 6900/-
-Total repayment in 10 years: Rs. 828,000/-
-Proportion of repayment to net salary: 28%
-Total interest paid on loan: Rs.328,000
If you wish to pursue your MBA with Bank loan and expect this much of salary after 2 years. You are advised not to go beyond this amount of education loan. It will be better to arrange from other sources, instead of going to borrow from Banks. Understand the Bank’s repayment schedule and avoid unnecessary financial crunch
How to decide the total loan amount
Split the situation on the basis of following 4 factors-
- 2 years funds requirement
- Prospective job market after 2 years
- EMI on repayment based on interest rate and period of repayment
- amount needed to live a non luxurious life
Post MBA Expenses
Most the times it is not necessary that you would get the job in the city of your choice, so you may have to be in some other city than your native place in the first phase of your career. The expenses like rentals, conveyance, food, medical are also to be included. Assuming that you are single and living in a sharing apartment you may have to shell out an amount of not less than 10-12K from your pocket. In case you go for any other loan like that of a 2 wheeler, consumables like TV/Fridge/ other appliances, as everything is available on EMI, will this quantum of study loan amount suit your requirement, think twice before proceeding for it.
Don’t forget the Income Tax
Another issue is income tax. You will have to either pay the tax or invest some amount to the extent the tax is saved. You will again need funds for the purpose.
Don’t cross the advised limit
It is advisable to remain within the suggested loan limit. If you cross it, it is likely that you may fall into the debt trap as you have seen that only the interest part is huge enough to repay. In case of requirement of more, decide judiciously since the average job market at present is of this nature only. Unnecessary financial burden will create problems in future.
Shorter the repayment period, lesser the interest burden
Think on reducing the repayment period. Banks have tactfully revised and extended the same. The burden of interest in a longer period will be more. For example on the above cited loan amount at the given interest rate if you repay in 10 years, you will end up paying the interest amount of more than Rs.6.5 lacs. On the other hand if you repay in 7 years, the amount of total interest would be around Rs.4.35 lacs.
Repay interest regularly during course period
Try to repay the amount of simple interest applied on your study loan amount. It would reduce the interest burden when compounding of interest begins after 1 year of completion of course.
Check for MBA Scholarship at the B-school
If you can get the scholarship during the course of studying MBA, you may not need that much amount of study loan. It will be better to explore the opportunity.
Many B-schools have started foreign study tour to various foreign institutes or have engaged in international exchange programme. While some of them mention fee with or without foreign tour or international exchange, many are gradually clubbing it to the fee structure. The fee for foreign tour or international exchange programme runs in lakhs. You can weigh pros & cons of such foreign tour and utility of such short international exchange programme. If you do not propose to avail the facility., the fee required for foreign tour can be reduced. This will further reduce your financial burden of doing MBA.
MBA colleges including many top B-schools have kept their admission process flexible with number of fee concessions available to compete and grow in MBA education market. Once you try and understand the process, you may get pleasant surprises in your favour than you expected.
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