An unexpected B-school arms race for top students by John A. Byrne @FortuneMagazine December 12, 2011, 2:04 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons University of Southern California's Marshall School hands out the highest average MBA scholarships in the nation at $35,490 a clip. (Poets&Quants) — You may know that MBA applications at most schools have been down for two years running and that the cost of attending a two-year MBA program is nearly out of reach for many applicants. But what you may not know is that competition for the best and brightest students has never been more intense among the leading business schools. Last year, Harvard Business School, arguably the institution least in need of passing out cash to applicants or students, doled out a whopping $28 million on scholarships to its MBA candidates. And at the University of Southern California’s Marshall School, the average scholarship award for an MBA is now a record $35,490 a year, up from $33,650 a year earlier. “It is an arms race,” says Alison Davis-Blake, dean of the University of Michigan’s Ross School of Business. “The race has gotten so hot, so fast that schools are using operating money to pay for a lot of these scholarships. No one had ever, ever done that in MBA land. Almost everybody is doing it now.” Among the top 20 MBA programs in the U.S., at least four schools — Yale, Harvard, Northwestern, and UCLA — have increased their average scholarship payouts to students by more than 100% since the 2004-2005 academic year. Yale upped its average scholarship by 150% to $25,000 last year from $10,000 in 2005, while Harvard increased its average scholarships to MBA candidates by 146% to $28,410 from $11,543 five years ago. “We have all collectively started a very dangerous game,” says Trip Davis, a senior associate dean at the University of Virginia’s Darden School and the president of the Darden School Foundation. “A new standard has been set and there are some, like us, who have set a priority to fund that in perpetuity.” Buying top-notch applicants, at what price? Some schools are literally buying applicants with high GMAT scores, partly because deans are under pressure to perform well in MBA rankings that measure the quality of incoming students. Some schools are simply trying to stay competitive in a business where growth has slowed, particularly in the U.S., as more business schools have emerged in Europe and Asia. At the University of Chicago’s Booth School of Business, scholarship money played a critical role in the school’s rise to greater prominence in recent years. Under former Dean Edward “Ted” Snyder, scholarship assistance more than tripled. Stacey Kole, deputy dean for Booth’s full-time MBA program, says that in the past, scholarship awards were often given to applicants who would have come to Chicago anyway. To improve the quality of incoming classes, Booth shifted its policy, giving money to highly desirable students who might otherwise have gone elsewhere. Booth does not disclose how much scholarship money it gives out annually or the size of its average grant. Harvard is one of the very few business schools that is open about its student financial aid. The school says that half of its MBA candidates, roughly 901 students, receive the average need-based fellowship award. That would bring Harvard’s annual need-based scholarship payouts to some $25.6 million a year. A Harvard spokesman adds, however, that additional fellowship programs, including the McArthur Canadian Fellowships and loan assistance, bring the total to $28 million annually. Put into perspective, each year Harvard Business School is giving its students a sum of money that is nearly equal to the entire $31.5 million endowment of the London Business School. Why would the school with the most desirable MBA program in the world deploy that much cash to help students attend? Above all else, the school wants to ensure that it gets the best and brightest candidates in the applicant pool each year. And it wants to make sure Harvard students graduate without a crippling amount of debt that would constrain their career choices. At several business schools, including Wharton, Columbia, and NYU, graduating MBAs are leaving their schools with average debt loads in excess of $100,000. At Harvard, by contrast, MBA debt burdens are nearly a third less: $77,880 on average. A game of scholarship one-upmanship The war has become so cutthroat that some talented applicants are leveraging their scholarship offers to get even better deals from schools, say several admission officials. “Certainly, they’re trying to get the best deal,” says Sara Neher, assistant dean of MBA admissions at Darden. “Every year, we lose good people because of scholarships.” In response, Darden’s Dean Bob Bruner has made raising student fellowship and financial aid the school’s number one philanthropic priority. In the past five years, Darden’s average annual scholarship has risen by 96.3% to $28,243, the third highest average among the top 20 U.S. business schools, from $14,440 during the 2004-2005 academic year. According to a recent publication for donors to Darden, Bruner invested the school’s reserves to fund student fellowships during the economic downturn to maintain Darden’s ability to attract the best possible applicants. “As business school tuition has continued to rise, we are trying to make the net cost lower for those who we think would be the best fit for our school,” says Neher. But she insists that Darden has a strict policy against negotiating with applicants. “There are schools that do negotiate, but the answer for us is ‘no,’” she adds. At UNC’s Kenan-Flagler Business School, which has the second-highest average scholarships reported, $31,565 a year, a group of so-called “Premier Fellowships” that pile one gift on top of another tends to inflate the total, according to Sherry Wallace, who heads up the school’s admissions office. A stipend called the “Falls Prize,” for example is given to up to six students per year who have already been awarded a scholarship. It is a $25,000 total stipend paid in $12,500 increments per year, per recipient. Most of the Falls Prize recipients have already received one of the school’s so-called “Premier Fellowships” that cover tuition and provide $5,000 stipends per year on top of that. Schools that can’t afford to keep up, such as Columbia Business School, appear at a major competitive disadvantage. Columbia’s average scholarships, for example, are $10,000 — a third or less of what MBA students get at Harvard, Darden, or the University of North Carolina’s Kenan-Flagler Business School. In the past five years, Columbia managed to increase its average scholarships by 38.5%, a much smaller jump than its competitors. Columbia lags far behind not only its peer schools, but schools that would rarely be considered in the same competitive set. What’s behind the race? Some rationalize the flood of scholarship money pouring into the MBA market, viewing it as little more than an offset to annual tuition increases that have outstripped inflation for more than a decade. Others believe the widespread discounting of tuition sticker prices is similar to the flexible pricing of airline tickets. The only difference: Instead of price being a function of airplane seat inventory, the actual price tag of an MBA program is discounted based on the level of skill and talent of an applicant in the market. Like airline passengers, they sit side by side but each has paid a different price for admission. The money takes two forms: pure scholarships and financial aid, a package of loans, assistantships, and scholarships. While USC’s Marshall School is handing out the highest average MBA scholarships in the nation, MIT Sloan now offers the biggest financial aid packages of any business school that publicly reports these numbers. Last year, Sloan’s average annual package for MBA students was $67,288. As the scholarship race has intensified, several of the most prominent business schools, including Wharton, the University of Chicago’s Booth School, and Duke’s Fuqua School of Business, no longer disclose their average scholarship grants, and even fewer want to discuss the topic. A spokesperson for the University of Southern California’s Marshall School, which hands out the highest average scholarships in the nation at $35,490 a clip, declined comment for the story. As Michigan’s Davis-Blake puts it, “Nobody wants to talk about it because it is such a sensitive, competitive issue.” More from Poets&Quants: Poets&Quants’ Ranking of the Top 100 MBA Programs in the U.S. Handicapping Your Odds of Getting Into A Prestige MBA Program $1 Million for a Wharton MBA? Not so.