Optimal Strategies for MBA Student Loans

My name is Nikhil Agarwal. I graduated from Harvard Business School in 2020 and have helped thousands of students get the best deals on more than $500 million in student loans over the last three years through Juno, a startup that negotiates lower rates for MBA student loans. 

When you’re choosing an MBA student loan, you can customize the following:

1. The loan term (generally five to 20 years)
2. The repayment plan (how much you want to pay while you’re in school)
3. The type of interest rate (fixed versus variable)

The interest rate you receive depends on the choices you make. This guide will help you understand what your options are and how to make the best decisions for your budget.

The Loan Term

The standard repayment plan for federal student loans is 10 years, but private student loans give you a variety of options to choose from. Most repayment terms for private loans range from five to 20 years. 

Generally speaking, the shorter the repayment period, the lower the interest rate. However, you’ll have a higher monthly payment. 

Sometimes we see an exception for seven- or eight-year loan terms. A few lenders will offer a seven- or eight-year option that has a lower interest rate than a five-year loan term. That’s why it pays to compare terms before you choose one.

I’m often asked, “What’s the most popular option among borrowers?” Usually the answer is 10 years. Here’s the historical data that Juno has compiled:

Note: This data is for fixed-rate loans. The pattern is very different for variable-rate loans. I do not show that data here because I believe variable-rate loans will be less popular for the 2022-23 academic year as rate hikes abound.

How to Choose a Loan Term

If you are trying to minimize interest costs, you likely want to select a loan term that is as short as possible while keeping the monthly payment manageable. If you’re a first-year MBA student, remember that you’ll have to take out an additional loan for your second year.

If you invest and find that the student loan interest rate is lower than what you may earn through the returns on your own investments, then you may want to choose a longer loan term so you can invest more money. 

Repayment Plan

Federal student loans offer a fully deferred repayment plan, which means you don’t have to make any payments until six months after you graduate. Note that interest will accrue during this time.

Private student lenders usually offer several repayment options while you’re in school:

Fully Deferred Repayment Plan

Payments are not required until six or nine months after graduation, similar to federal student loans. 

Fixed Payment Repayment Plan

You’ll pay either $25 or $50 each month until six to nine months after graduation. In exchange, the lender typically offers a slightly lower interest rate compared to the fully deferred repayment plan. 

Interest-Only Repayment Plan

You’ll pay off the interest that accrues each month. You start making principal payments six to nine months after graduation. The interest rate offered is usually slightly less than the rate offered for the fixed payment repayment plan.

For borrowers with smaller loan amounts (such as $30,000 or less), the interest-only plan may actually have a lower monthly payment than the fixed payment plan. In that example, it’s better to opt for the interest-only plan versus the fixed payment plan.

Immediate Repayment Plan

You’ll start making principal and interest payments right away. There isn’t any difference between the monthly payment you make while you’re in school and the monthly payment you make after graduation. Borrowers qualify for the lowest interest rate with this repayment plan.

Relatively few people select this option because you usually need to have a steady source of income or a spouse who is working to afford this repayment plan.

What’s popular?

Among Juno members, the fixed payment plan is the most popular. 

Outside Juno members, I believe the fully deferred repayment plan tends to be the most popular, but my belief is based on anecdotal evidence.

Why I Recommend the Fixed Payment Plan Instead of the Fully Deferred Plan

Almost all lenders offer an autopay discount, which drops your interest rate by an additional 0.25% to 0.50%. When you choose the fully deferred repayment plan, you won’t receive this benefit until you start making payments, usually six to nine months after graduation.

Therefore, I generally recommend the fixed payment repayment plan instead of the fully deferred repayment plan because you’ll get the autopay discount. It’s a small difference that usually results in a better outcome.

Interest Rates

When thinking about the loan interest rate, a common question is how to choose between fixed or variable rates. We’ve got a full explainer here but wanted to provide you with the summary in this article. 

Fixed interest rates are more popular, especially now due to expectations of rate hikes. Variable interest rates can make sense in certain situations. If I were taking out a student loan right now, I’d probably get a fixed rate loan – this is not advice, just context. 

Repayment Strategies

Here are two sample scenarios that can help you decide which one is best for you:

Strategy 1: Keep It Simple

In this strategy, we’ll select the terms that minimize loan costs and make it easy to manage payments while you’re in school.

Loan Selection

Rate Type: Fixed interest rate

Loan Term: 10 years

Repayment Plan: Fixed ($25 or $50) per month during school

Rationale 

We see full-time MBAs from the top business schools borrow around $120,000 total. With the above repayment plan, you’d likely have a monthly payment that’s between $1,200 and $1,300 a month once you’ve graduated and are working. 

These payments are manageable for most MBA grads from top business schools because they often have $150,000 incomes after graduation. More often than not, borrowers can pay back the loan several years ahead of schedule.

That works out for MBAs from other programs as well because their debt loads are often lower. Even though their base salaries are not as high, their monthly payments are still manageable.

Finally, the fixed interest rate gives you peace of mind that your loan payments won’t increase due to overall market interest rates changing.

Strategy 2: Maximize Your Long-Term Net Worth and Repayment Flexibility

Rate Type: Fixed interest rate

Loan Term: Maximum offered (15 or 20 years)

Repayment Plan: Fixed ($25 of $50) per month during school

There are two reasons for choosing this strategy:

Rationale 1

Using this strategy, you can minimize the required monthly payments after graduation. You can still choose to make larger payments and pay off your loan faster. However, you also have the flexibility to make smaller payments if you have a cash flow crunch.

Rationale 2

You can invest the money that you are not putting toward the loan. Assuming your interest rate is lower than the annual return on your investment, you are maximizing your long-term net worth in this case.

Strategy 3: Minimize Interest in School, Refinance at Graduation

This strategy was quite popular in 2020 and 2021. I expect it to become less popular for the class entering in 2022 because interest rates are expected to rise, and if they do rise quickly, this strategy doesn’t work as well.

Loan Selection

Rate Type: Variable interest rate

Loan Term: 5 years

Repayment Plan: Fixed ($25 or $50) per month during school

Rationale

This strategy relies on the idea that borrowers, especially MBA students with high incomes, can often refinance their student loans at very low interest rates around graduation. 

Therefore, the goal of this term is to minimize the interest that accrues until the point that the borrower can refinance. 

Borrowers who choose this option don’t really worry about their monthly payment after graduation because they’ll never need to make that monthly payment. When they refinance, they can select a new loan term. 

They also don’t worry too much about interest rates rising in the later years of the loan because they will have refinanced before then into a fixed interest rate loan. That said, they do care about interest rates rising in the first few years of the loan since that could impact their ability to refinance into an attractive loan.

In the end, borrowers who pursue this strategy are likely to save money compared to the first strategy, except in the scenario where the borrower isn’t able to qualify for refinancing at a good rate. That may be because the market has changed or because the borrower doesn’t have a good income or credit history. 

The downside is that you’ll be making larger monthly payments, such as $2,200 for a $120,000 loan balance. These payments may not be manageable and could affect your lifestyle and other financial goals if you don’t have a sufficiently high income.

Conclusion

I hope this article showed you how to select the appropriate term, repayment plan and type of interest rate when customizing your private student loan. If you’d like to chat about your specific situation one-on-one, I’m happy to do so. You can find me by emailing hello@joinjuno.com.