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Here’s why an MBA is so expensive and what you can do about it

MBA Why so expensive

Industrialization in the 19th century was the harbinger of the need for leaders who could manage organizations. These professionals could understand the relationship between various specializations and labor forces within a company.

So, came business education for managers with the establishment of business schools – Wharton, Haas and Tuck, as far back as the late 19th century, and later the first formal MBA degree at Harvard in early 20th century.

Though MBA did not quite enjoy the prestige offered by law or medical schools, to begin with, the changing world with corporations replacing old school aristocracy brought it to much prominence by the middle of the 20th century.

MBAs began to be revered as essential to the success of businesses and hence economies. Graduates from top schools were sought after.

An MBA degree began to be recognized as often being able to transform ones’ career towards key leadership and management roles. A fact that is still supported by the high employability and salary offered to fresh MBA grads trending positive for decades.
 

How high is the MBA tuition?

The MBA degree has built a solid reputation and along with it a rather hefty cost of education to support its quality and demand.

The average cost of any two-year MBA degree, mostly in the North American format, can cost over $200,000 sometimes not counting the cost of living – renting, transportation, food, etc.

Comparing that to any other Master’s degree program, like basic sciences and humanities, there is a difference of over $100,000 or more.

Every year too, a majority of business schools adjust their tuition fees at a rate much higher than the average rate of inflation. According to Poets & Quants, MBA tuitions are often accused of being overpriced with business schools increasing average annual tuition at the rate of 4.5%.

This is significantly higher than the increase in starting compensations for fresh MBA graduates annually. In fact, stalwart schools like Dartmouth, Haas, Michigan Ross, UCLA Anderson, and MIT Sloan, showed a three-year climb (2017 to 2019) of 10% to 18%.

Only recently, have business schools taken to freezing tuition to encourage MBA applications fearing a drop, in them. Even schools like Harvard Business School, Stanford, Yale have decided to keep tuition increases at bay.

In fact, Harvard MBA tuition has been maintaining its $73,440 annual tuition running 5 years now. This is a welcome shift from its climb from $58,000 in 2015 to $72,000 in 2017.

The collective decision of many b-schools to pause or even sometimes slash (Simon Rochester) prices are driven from the fact that MBA applications have been experiencing a trending decline of 4% to 8% even among the top b-schools.

The pandemic has reshaped this trend with a GMAC survey reporting an increase of MBA intake in more than 70% US b-schools in 2019-20.

With the flexibility of admissions deadlines, option of deferred MBA, and increased waivers for GMAT & GRE tests, plus the global chaotic circumstances pushing applicants to assess their long-term career plans, has made MBA a viable choice.

However, going forward, b-schools are definitely re-evaluating their business model – reigning in the steep rise of annual tuitions and focusing on better and more effective fundraising methods.

That begs the question. Why? Why indeed do business schools need so much money to run a degree program? Granted it is an MBA and unlike other degree programs, an MBA from a reputed b-school can assure career success (>90% employed in three months of graduation), but what exactly makes MBA so expensive? Let’s explore.
 

Why are business schools so expensive?

 

Professor Salaries

One of the biggest contributors to the high expense associated with an MBA degree is the salary business school professors receive annually. [Read How much top business school professors get paid]

Unlike tenure-track professors in other fields with recorded median salaries under $150,000 (Source: College and University Professional Association for Human Resources), full-time professors teaching finance are paid an annual average salary of over $180,000. Some of the new hires in business faculty are also known to make well over $200,000 (Source: AACSB).

That being said, these averages sound pale in comparison to some of the faculties who enjoy a celebrity status, as well as lifestyle, with salaries in the millions – Yale’s Dean with a salary of $2.6 million, Professor Emeritus William E. Fruhan Jr. of HBS ($1.2 million), Duke’s Professor Emeritus Laughhunn ($1 million), Berkeley Hass’ Andrew M. Isaacs ($700,000) – you get the picture.

A lot of these faculty members serve as directors at various corporations, as experts advising businesses and author books. They are learned men and women with expertize that is prized and heavily compensated for by business schools.

These are the kind of faculty members that train some of the best business and leadership minds of the future. And business schools make no compromises bidding against competition to have them in their community.

Sometimes the visiting faculty positions are sought among prominent business leaders who are obviously well compensated for their time and effort.

Why are business school professors paid so much, you may ask? The answer, with some blanket digging, shows the overall lack of business researchers and PhD graduates.

Even less so among business PhDs with active corporate experience. Below is a table provided on NSF’s National Center for Science and Engineering Statistics (NCSES) page for number of doctoral recipients by field of study over recent years.

As you can see, the average percentage of PhD graduates in fields like Life Sciences, Engineering, Humanities, Education, and every other field except Business Management, is over 10%.

Whereas, less than 3% of all doctorates received each recorded year are Business PhD holders. In numbers, that makes only about 1,500 PhD graduates among the 55k plus total.

Compare that to MBA graduates and you will find that this falls severely short when measured against MBA programs with hundreds of students each year.

Since business school accreditation requires tenure track faculty who need to have doctoral degrees, this shortage spells incredibly high demands for extremely qualified, highly capable, research and active business valued individuals. And one of the main ways to attract talent is by paying them the big bucks.

Fields of Study Doctoral Recipients in 2005
(Number of PhD/ %)
Doctoral Recipients in 2010
(Number of PhD/ %)
Doctoral Recipients in 2015
(Number of PhD/ %)
Doctoral Recipients in 2020
(Number of PhD/ %)
All Fields 43,385 (100%) 48,028 (100%) 54,886 (100%) 55,283 (100%)
Life Sciences 9,310 (21.5%) 11,319 (23.6%) 12,493 (22.8%) 12,561 (22.7%)
Physical Sciences and Earth Sciences 4,359 (10.0%) 4,995 (10.4%) 5,916 (10.8%) 6,247 (11.3%)
Mathematics and Computer Sciences 2,334 (5.4%) 3,223 (6.7%) 3,818 (7.0%) 4,392 (7.9%)
Psychology and Social Sciences 7,149 (16.5%) 7,882 (16.4%) 9,073 (16.5%) 8,946 (16.2%)
Engineering 6,426 (14.8%) 7,578 (15.8%) 9,875 (18.0%) 10,476 (18.9%)
Education 6,227 (14.4%) 5,287 (11.0%) 5,098 (9.3%) 4,716 (8.5%)
Humanities and Arts 5,187 (12.0%) 5,015 (10.4%) 5,594 (10.2%) 4,939 (8.9%)
Business Management and Administration 1,171 (2.7%) 1,366 (2.8%) 1,582 (2.9%) 1,466 (2.7%)

Source: NSCES Survey of Earned Doctorates
 

Learning Environment

MBA requires active and involved learning with the opportunity to nurture business concepts and ideas. Take for instance the startup environment.

Many startup ideas never make it to fruition owing to the many nitty-gritty details that fall within the birth of the concept and implementation.

Business schools are known to provide that support through startup labs where students get expert help – from building a brand to the supporting technology – in developing new ideas and pitching those ideas to investors.

Business schools often pay handsomely for expertise from business leaders, building network contacts, designing workshops and providing workspaces for students, and often also aiding in seed funds.

Most business schools are also located in prime cities close major business hubs. Cost of real estate is naturally higher in these locations and the added expense of organizing networking events, maintaining infrastructural resources – technological aid, workshops, student clubs, international trips, health insurance, etc. – are big contributors to b-school expenditure.

Business schools also have highly functional and effective divisions that manage career fairs and work endlessly to build recruiter relationships.

MBA programs are a brand of their own. Much of the program efficacy is determined by the employment statistics of its student body – how well they perform post-MBA.

ROI is a big component of that brand and the MBA learning environment helps to enhance the investment students make in their education and guarantee career success.

In doing so, b-schools have to maintain not just a high standard of student body through a highly competitive admission process but also the infrastructure and resources that spell success for them.
 

What can you do about it?

Despite the apparent cost of getting an MBA degree, the ROI is considerably high especially for some of the big name schools. Precisely why students continue to halt their employment and with that the opportunity cost (with the exception of the EMBA) to invest in an MBA degree.

But what can you do about the escalating fees charged by the top business schools? How would you pay for that expensive MBA degree?

Financing thus becomes a commonly visited topic of discussion and we have covered the same at length in various articles here under – MBA financing.

The top MBA financing options are as follows:

– Education loans from either banks or private lenders.

– Company sponsored MBA is also a good resource for those who can avail it. Even crowdfunding in the recent years is turning out to be a useful alley for those looking for financial aid.

– The other option is to look at MBA programs in Europe that are significantly cheaper (in most cases) with the added benefit of being usually one-year programs instead of the two-year expense at North American b-schools.

– Scholarships and Fellowships offered by the business school or independent private or government funding groups that provide aid to particular categories of applicants like women’s scholarship, scholarship for African students, sports scholarships, and many others.

This last option (scholarships) is what most MBA Crystal Ball clients rely on.

For more details, read our scholarship success stories here: MBA Scholarships.

Higher education is expensive. Not just the money but the time and commitment it demands with the promise of a transformed future. A decision to get into one of the costliest master’s programs like MBA needs information, introspection, research and a sound understanding of the expenses.

If an MBA seems indispensable for your ambitious career plans, and you need professional help with the steps in between, reach out to us: info[at]mbacrystalball[dot]com

Bona Fortuna! (Random shift to Latin for intellectual merit)

Sources: 1, 2, 3, 4, 5


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Sameer Kamat
About Sameer Kamat
Founder of MBA Crystal Ball. Author of Beyond The MBA Hype & Business Doctors. Here's more about me. Follow me on: Instagram | Linkedin | Youtube

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