MBA Degree Stampede 2008: A Questionable Financial Strategy

August 28, 2008 by  
Filed under Debt and Credit, Spending

Will all the colleges who have not yet started an MBA program please raise their hands?

Will all unemployed or underemployed college grads who are not considering getting an MBA degree please raise your hands?

Mr. ToughMoneyLove is not seeing a lot of hands yet.  But, I have another question that might work.

Will all MBA grads who are working in jobs for which an MBA degree is not required please raise their hands?  There we go – now I’m seeing some activity.  Why is that?  Let’s get to the hard truth about whether pursuing an MBA is a smart financial planning strategy.

MBA Program Applications are Way Up

The Graduate Management Admissions Council (GMAC) is the organization that administers the GMAT, the standardized business school entrance exam.  On August 26, the GMAC reported that 77% of its member business schools reported an increase in application volume in 2008, a big jump over 2007.  It’s the biggest increase in five years.  Some of the largest application volume increases (25% to 40%) were for MBA programs at middle-tier schools.  This is an important statistic as I will explain in a minute.

The admissions officers at the various MBA programs acknowledge that the bad economy is a major factor in this increase.  When recent college graduates can’t find work they like (or if they can’t hold a decent job) they say to themselves “what the heck, college was fun, I’ll just go to back to school.”  Living off student loans has become an entirely new lifestyle category brought on by easy money and by education “experts” who have decided that everyone should go to college.  Why?  So that these education experts can remain fully employed.  (If they lost their job, they might be forced to go get an MBA.)  

By the way, it’s not just low income students that are capturing the student loan money.   The College Board reported last October that between 1992-93 and 2003-04, the percentage of full-time dependent students taking out student loans increased most rapidly in the upper half of the income distribution.  This seems to coincide with other floods of students to MBA programs.

Of course, when these young adults pull out their undergraduate transcripts, they may see mostly B’s,  C’s, and maybe some grade-inflated A’s.  (They may also see lots of beer stains.)   They become aware that most graduate and professional schools aren’t going to be opening their doors to them, at least not as students.  What to do?   Apply to an MBA program!  So many of these programs have opened up in recent years that all you need is a degree, a pulse, tuition money or loans, and your in. 

I know of several colleges in my area that have no graduate programs of any kind except an MBA program.  Why is that?  Can you say “cash cow?”  Colleges are businesses.  They know that there is a high level of demand (driven by wishful thinking) from students who don’t know what else to do to better themselves.  So they default to an MBA program.  There is lots of money to be made from these folks.   On the other hand, there may not be lots of return on investment (ROI) for most of these students.

The Return on Investment in an MBA Degree May Not be What You’ve Been Told 

Let’s look at some of the data, starting with the folks at the BNET Business Network.  They published their own “hard truth” about MBA programs as follows:

Hard Truth No. 1: The ROI isn’t what it used to be.

Hard Truth No. 2: The training has become too theoretical.

Hard Truth No. 3: Some of the people skills needed to be a manager today can’t be taught in the business school environment.

Hard Truth No. 4: MBA programs propagate management fads.

Hard Truth No. 5: The pressure to succeed inside MBA programs has weakened safeguards against cheating.

I want to focus on Hard Truth No. 1 – ROI.  I know I am likely to receive some anecdotal comments about how much more money someone is making now because of their MBA degree.  There is no question that for some grads in some MBA programs, it is a good investment.  But anecdotal data is not persuasive.  (You did learn that in your MBA statistics class didn’t you?)  Every MBA dean and admissions officer will tell you about average ROI for MBA grads.  But in a famous study published by the Academy of Management Education and Learning, the authors reported these interesting conclusions:

Although there was an effect of having the graduate MBA degree on starting salary, there was no effect of having an MBA on current salary, except for students from lower socioeconomic status backgrounds.

Those who had graduated from business school had higher earnings than those who had either never attended business school or who had started a program but did not finish.  But the benefits accrued mostly to graduates of the more prestigious programs. Individuals coming from unaccredited or less competitive schools earned amounts that were more similar to people who either did not attend business school at all or who did not graduate. These findings echo those of others who have observed there are almost no economic gains from an MBA degree unless one graduates from a top-ranked program.

Note that the highlighted conclusion ties back to the GMAC data I reported above, indicating the the biggest surge in MBA school applications is to the middle-tier schools.  Those are the students who are least likely to have a positive ROI from entering an MBA program.

I want to make two more points about the MBA degree and ROI.  The first point comes to us again from the GMAC, and its 2007 survey of MBA alums:

Among respondents, there was a significant negative correlation between return on investment and the cost of graduate business education. This indicates that the higher the education cost, the less return respondents had received by the time of the survey.

This tells us that the more you spend on your MBA, the lower your ROI.  This seems intuitive.  On the other hand, there are plenty of students who delude themselves with this logic:  Yes, this private MBA program is expensive but with my prestigious degree, I will experience a high return on my investment.”  Not exactly.  Combining the data cited above regarding top tier and middle tier MBA schools, it’s like “heads I win, tails you lose.”

Don’t Overlook the Opportunity Costs of Returning to School

The second point I want to make about ROI on the MBA degree is this:  All of the ROI calculations I have seen published by MBA schools themselves include only direct costs, i.e., actual education expenses compared to pre- and post-degree salaries.  Often they forget that most MBA students will borrow money to attend and will have loan expenses over and above the tuition costs.  These loan amounts will often exceed the actual tuition costs.  More important, the ROI calculations completely ignore the opportunity costs, that is, the salary and benefits that are lost if the student quits his or her job and goes to school full time.  If you quit your $35.000/year job to attend a private college MBA program that will cost you $80,000 to attend, you are experiencing actual costs and opportunity costs in excess of $150,000.  That omission makes the ROI calculation biased in favor of the degree.

A More Practical Alternative

If you are underemployed and/or want to improve your career prospects through education. Mr. ToughMoneyLove has another suggestion. Obtain a certificate in financial planning and become a Certified Financial Planner.   In an MBA program, you will learn (and soon forget) exciting things like “leadership” and “management”, all of which are better learned on the job.  As a CFP, you will learn practical financial skills that you can apply for the benefit of others and for yourself.  I can assure you that with all of the baby boomers looking to retire (including yours truly), the demand for skilled, fee-based financial planners and retirement planning is and will be huge.  Moreover, you can do the CFP certificate thing on-line, meaning no opportunity costs.  In fact, if you already have the right undergraduate degree, your additional educational investment as a CFP will be minimal.  Check it out at  Just another option to consider.

Mr. ToughMoneyLove recommends that all of you who are considering enrolling in an MBA degree program give careful consideration to its true economic cost, value, and return on investment.  Get some objective data, not from the MBA program itself.  They want you, they want your tuition, and they won’t let a little fudged economic data get in the way.

Update 2009:  The outlook for new MBA grads in 2009 is reportedly dismal. Find something more productive to do with your spare time.

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6 Responses to “MBA Degree Stampede 2008: A Questionable Financial Strategy”
  1. MasterPo says:

    I don’t think you can quantify an education that way. Having a degree, especially a graduate degree, encompasses much more than just pay tution today, earn more tomorrow (maybe).

    Besides the personal accomplishment (maybe you’re the first person in your family to get a Masters level degree), you don’t know where the twists and turns of life will take you. Having a Masters in a business field can totally make the difference between just being able to apply for certain jobs or even promotions/alternate positions or not.

    As you point out the costs of going back to school, if you had a Masters outright you’d already be a leg up on the competition.

    Life isn’t always as cut&dry as an ROI computation.

  2. MasterPo – I agree with your sentiments. On the other hand, too many people look at an MBA program as a pure money play.

    Regarding job qualifications, indeed there are some jobs out there for which an MBA is a pre-requisite. However, the supply of MBA grads greatly exceeds the numbers of those jobs.

  3. Curt says:

    I agree – MBA program are no longer a good ROI. Your points are right on.

    I took it a step further with an article I wrote a few weeks ago explaining how College is no longer a good investment.

    Becoming a CFP is a good option and I think as the economic continues into recession and more jobs are lost and it becomes harder to get financial aid and student loans, college enrollment will drop. The need for alternatives will grow. I think this trend will lead to an opportunity for new employment training options like the CFP. On the job training programs will become common. Intern programs will grow.

  4. Curt – I sincerely hope that your predictions about an increase in non-college training options is accurate. We have way too many folks in college who are unprepared going in and come out with no better job skills than when they started.

  5. MasterPo says:

    Curt – I wouldn’t go to a CFP who didn’t have some kind of business related college degree. That would be like taking your car to a mechanic who doesn’t have a driver’s license. Or taking SCUBA lessons from someone who is afraid of water!

  6. Great article…Agree on the ROI comment…I am a huge fan of getting your employer to pay for your education, this is one of the best finance decisions you can make…I am currently in grad school and my employer pays 100% of the bill…it is an awesome perk…

    Enjoyed the site, any interest in exchanging links?

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