How to Determine Your MBA’s Payback Period

Is It Worthwhile To Go Back To School And Get Your MBA? Here's What To Consider.

According to many reports, MBAs are the most likely graduate degrees to pay for themselves. But how quickly and is it worthwhile? When deciding whether to get your MBA, the best decision is to consider your payback period. However, don't overlook the emotional aspect of the decision.

The length of time it will take to repay a financial investment is known as the payback period. It's used by businesses to determine whether or not they should commit big money on capital-intensive projects, but you may also use it to evaluate if going back to school is worthwhile.

You'll need to consider how much more you'll be able to make after your MBA versus how much it will cost. Let's try an example; here's the equation: Consider how much more you'd be able to earn than before your MBA and whether the expense of your MBA is worth it. Here is a word problem with multiple solutions:

Say you make $100,000 pre-tax at your current position before going to business school. That's a nice sum of money, but you're confident that you can improve it.

You do some research and discover that you may make at least $180,000 after-tax, post-MBA.  The difference between your pre- and post-MBA income is $80,000.

Divide the difference of $80,000 by the cost of your degree, including all those pesky fees and loan interest. If your MBA costs $250,000, it'll take you 3 years and 1½ months to pay off (250,000 ÷ 80,000). According to the University of Illinois, the average payback period for MBA programs worldwide is about 4.5 years.

To put it another way, if you use every penny of your $80,000 pay raise to pay off your MBA debt, it'll only take you roughly 3 years to be debt free. All the money you earn after that is pure profit!

But there are a few factors that aren't considered: the opportunity cost, or the income you would give up by going back to school full-time, is one. It also ignores the time value of money.

From a nonfinancial standpoint, payback periods don't take into account the pride and reputation that comes with an MBA, as well as the types of employment opportunities accessible after earning it. If you want it, go get it! Keep pushing paper if you don't need it.

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