Funding your MBA expenses: How to calculate the loan amount before applying; know the right approach

It is not only MBA fee but other expenses are also there to be considered before applying for any education loan to pursue your MBA. It is not easy to arrange for the required funding to pursue MBA from an IIM or other top B-school where fee structure alone goes above Rs. 12 or 15 lakhs. But the excellent career prospects and easy availability of funds from Banks and other financial institutions are increasing the charm of this 2 year post-graduate programme ever than before.

An important point before applying for loan to pursue MBA at IIM or other B-school is to understand well the amount of financial investment that you need to make during 2 years of your education. Unless you get substantial scholarship to compensate your fee & other expenses which may run anywhere in the range of Rs 8 lacs to Rs 30 lacs, it is difficult to decide whether to pursue MBA degree or better to think about it later even after getting the admission offer in hand, This situation further worsens when you are already working and drawing handsome salary. You suffer on both counts- loss of job as well as incurring the expenses till you get the job again after MBA.

Repaying loan is more difficult The options to avail the study loan are plenty and can be exercised with private or public sector banks depending upon their prevailing schemes. Taking a loan is probably less difficult than repaying it regularly for a long time. In fact longer the repayment period, more will be the amount you would be paying to the bank.

On the top of it, when the loan 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 tiny concession of 0.5 to 1 % that could have otherwise been available to you on regular repayment no longer exists.

How to decide We may 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 during the course

Other Expenses: Apart from seeking funding for tuition Fee you have to think of Lodging & Boarding expenses, Computer, stationery, books, clothing among others. Taken together all these expenses may be very high. But you would incur them it is for sure.

Visualize the job market The expenses like rentals, conveyance, food, medical are also to be incurred once you pass out and join the job. 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.

Income scenario 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

Example-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. 16,44,000/- -Proportion of repayment to net salary: 28.5% -Total interest paid on loan: Rs.6,44,000/-

Example-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. 11,52,000/- -Proportion of repayment to net salary: 30% -Total interest paid on loan: Rs.4,52,000/-

Example 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 repayment schedule and avoid financial crunch

Be in 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.

Opt for shorter repayment period 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.6.4 lacs. On the other hand if you repay in 7 years, the amount of total interest would be around Rs.4.35 lacs.

Check for Scholarship options 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.

Repay interest 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.