Should You Get an MBA? What About a JD or a PhD?

(Me on graduation day from my MBA program at the University of Florida in 2003.)

Here's the analysis of getting an MBA for someone making $50,000/year:

• the total cost of an MBA = tuition + expenses + opportunity cost
• total costs from a leading institution, like Stanford, is: $76k
• For two years = $160k (let’s round it out)
• opportunity cots = $100k (lost income)
• total costs = $260,000

Now, we’re treating this like a business decision. Let’s use this bank calculator. At 6% over 15 years, you need to earn an extra $2,190 per month. In other words, you need increase your before tax monthly income by this amount to justify the MBA. That’s about $25,000 *extra* per year.

This actually overstates the cost of education a bit. Living expenses would be approximately the same whether you're in school or working so they shouldn't factor into the analysis. That would make the total cost of an MBA = $210,000 meaning you need to earn an extra $1,772 per month or about $21,000 extra per year. Still, the point is valid and well made.

Here’s the subtle part, graduates from leading MBA programs can easily make this amount. Many make back some of it during summer internships. However, few graduates from the bulk of lower ranked business schools will get this huge pay boost (50% in this hypothetical case).

Ultimately, you should get an MBA if:

• you are going to a highly ranked program which channels you into highly paid management positions (usually top 20 or 30 programs),
• you are making very little salary now, so opportunity costs are low
• somebody else will pay for your tuition/expenses, like your current company
• the program is lower priced (Haas is only $50k a year)

Otherwise, I’d think very carefully before signing up for more education.

Good advice, indeed! I scored well on the GMAT, but could never convince myself that an MBA program would be cost-effective enough to justify going into deep debt in a full-time program. Instead, I decided to get my MBA in the University of Florida's part-time MBA program. I was able to keep working (earning an income and gaining experience) and my company paid for over 70% of the degree. My total cost for my MBA was only around $7,500. (Versus $210,000 for a full-time program.) As long as I make an extra $63/month for 15 years, it was worth it.

Here's how the analysis would work out for a three-year law school program:

• the total cost of a JD = tuition + expenses (books and fees) + opportunity cost
• total tuition plus books and fees from a leading institution, like Stanford, is $41k + $4k = $45k
• For three years = $135k (let’s round it out)
• opportunity cots = $150k (lost income)
• total costs = $285,000

Using the same bank calculator used above, this comes out to an extra $2.400/month in extra salary required to justify getting a JD. That's an extra $29,000 per year. Unless you can get into a top 14 program, either go part-time, attend a lower-priced program that offers scholarships, or else stay out of law school.

I'm afraid to do the calculation, but here's how the analysis for a five-year PhD program:

• the total cost of a PhD = tuition + expenses + opportunity cost
• total books and fees from a leading institution, like Stanford, is: $4k (assuming full-funding (zero tuition) for all five years)
• For five years = $20k (let’s round it out)
• opportunity cots = $250k (lost income) minus $75k (five years of fellowship/assistantship support at $15,000/year) = $175k
• total costs = $195,000

Using the same bank calculator used above, this comes out to an extra $1,645/month in extra salary required to financially justify getting a PhD. That's an extra $20,000 per year. The difference here is that unlike many business and law students I know, most doctoral students don't go to into PhD programs with the goal or delusion that it will enhance their wealth.

Unfortunately, this analysis works out even worse for me as I was making a good salary as an engineer before I came back to get my PhD, raising my opportunity cost. (To help compensate, I worked as a resident advisor my first year (giving me free rent), was able to get extra funding in GMU's law and economics JD/PhD program, and had a nice summer internship at the Federal Trade Commission.) Fortunately, I am like most PhD students and wealth maximization was not my goal for entering the program. (Although I chose economics in part because career prospects seem good and I hope not to take too much of a long-run financial hit.)

Obviously, finances shouldn't be the only factor in deciding whether or not to get an advanced education, but they shouldn't be ignored -- particularly if your reason for going is to boost your salary. If you do decide to go back to school, try to get into the best school possible or else get into a cost-effective (or better yet -- part-time) program. Above all, try to keep debt low so you don't handicap your financial future.

Ultimately, I am glad I decided to come back to school to get my PhD. But I also increasingly realize how good I had it as an engineer down in Orlando. School can be a ton of fun, but it's all too often not a good way to make extra money. Choose a good undergraduate major and chances are you won't need to go to grad school to make a decent living and will probably end up financially better off.