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.
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When you’re choosing an MBA student loan, you can customize the following:
- The loan term (generally five to 20 years)
- The repayment plan (how much you want to pay while you’re in school)
- 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:
Loan Term |
% of Borrowers |
5 Years |
20% |
7 or 8 Years |
14% |
10 Years |
53% |
12 or 15 Years |
12% |
20 Years |
1% |
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, the fixed payment plan is the most popular.
Repayment Plan |
% of Borrowers |
Fully Deferred |
28% |
Fixed |
55% |
Interest Only |
11% |
Immediate |
6% |
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.