How Can Anyone Afford B-School Now?

Affording B-School

In recent years a master of business administration degree has become a powerful accessory, if not an absolute essential, for anyone aiming to reach the top in the corporate world. It has also proven its worth in helping to break the monopoly of traditional establishment types in board rooms around the globe, as ambitious managers and professionals from developing nations have used the b-school experience to break through the traditional glass ceiling. But future international business leaders who want to go to business school today are typically not earning enough to be able to afford it, and borrowing the money for tuition has become paralyzingly difficult. Is the credit crunch threatening to stop up the talent pipeline?

Until major banks went from lending to practically anyone to lending to almost no one, prospective MBAs had little difficulty financing their studies. As recently as last year, foreign students heading for a top business school in the U.S. could rely on the CitiAssist program for a loan of up to $150,000, without a U.S. co-signatory. Now, with Citigroup shored up by government money, that program, along with the great majority of its counterparts, has gone the way of the dinosaur, and candidates from outside the U.S. are having a harder and harder time finding funding. (Homegrown students, though generally pinched, have far more loan options than foreigners.)

Several of the leading American schools have reacted quickly to try to address the fix international applicants are in. Harvard Business School and the University of Michigan, have created finance packages by partnering with credit unions; New York University and Chicago have turned to banks like JP Morgan Chase that were less badly hurt by the credit crisis than their competitors. Duke-Fuqua has gone a step beyond by putting its money where its mouth is. In an impressive display of faith in the long-term value of its MBA program, Duke-Fuqua has agreed to underwrite overseas student loans itself and pay off any defaults that may arise.

However, while no one can accuse U.S. schools of failing to respond to the student credit crisis, their European counterparts have come up with the most innovative ways of funding tomorrow’s business leaders. Those innovative approaches are certainly needed: Research shows that 60% of potential applicants to schools on the continent are now experiencing financing problems. Keen to tackle that challenge, INSEAD in France, and Vlerick Leuven Gent Management School in Belgium, have adopted a radical new MBA loan scheme devised by a British company, Prodigy Finance.

One of Prodigy’s founders, Cameron Stevens, had to struggle to finance his own MBA. He had worked extensively in the Far East, so he had no credit record with banks in his native South Africa, yet because he wasn’t a citizen of Malaysia, where his office was based, he couldn’t get a loan from local banks. Out of this double-bind grew the idea of turning the standard MBA funding model on its head and allowing international candidates to obtain loans regardless of their background or nationality, based on their future earning potential rather than their financial history. Prodigy doesn’t rely on blind faith in the future earning power of business school graduates; rather it attempts to quantify it more scientifically with the use of a proprietary scorecard. The scorecard combines earnings statistics from past graduates with numbers for current and predicted economic circumstances such as geographical differences in pay and the need for particular skill sets, to gauge whether loans are safe. Over 35 nationalities were included in a pilot at INSEAD, and the scheme has so far generated more than $5 million in loans, with a 100% repayment rate.

For its next trick, Prodigy has come up with another new financing vehicle, a $70 million “community education bond” for INSEAD. The five-year bond is being sold to the school’s alumni and corporations it has relationships with, allowing them to help fund the next generation of students while earning a decent return. INSEAD will also be investing its own endowment in the issue, the first of the top schools to enter into such an arrangement. This call to alumni and partners to invest in their own community seems to be working. Prodigy’s challenge now is to expand it to other major institutions. Executives of the company say they are already in advanced talks with other top schools and their alumni groups.

Necessity is once again the mother of invention. These new ways to plug the MBA funding gap left by the banking community may change the way students finance their business education for good. It’s possible that when the banks finally do decide they want to move back into business school student loans, they won’t find nearly as eager or appreciative an audience as they had before.

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