Are you considering graduate school? If you’re like most American graduate students, you’re probably going to borrow at least a portion of your tuition and other costs. The student loan debt from graduate school piled on top of undergraduate loans can be intimidating. According to researchfrom the New America Foundation, the median debt for graduate students is $57,600, with one in four borrowers owing about $100,000 or more.
What are the consequences of borrowing that much?
“I won’t know what it’s like to earn a full paycheck until my 50s and that’s discouraging, because by then I’m sure I’ll have other debt to pay off (mortgage, etc),” said a younger co-worker who is frustrated by her graduate and undergraduate debt. I struggled to pay off my own undergraduate student loan debt (the equivalent of about $35,000 in today’s dollars), so I hesitated on borrowing for graduate school. Both my sisters have graduate degrees, so I’m the odd duck. I waited until I could pay my fees myself and chose to pursue professional designations instead of a university program. My former employer reimbursed me for obtaining my CFP® and ChFC® designations, and I paid for my CFA® courses myself.
My youngest sister, Caitlin Bauer, who has worked in multiple higher education institutions — and who is paying off her own graduate student loans – likes the idea of working for a company with a tuition benefit. “On a personal level, I’ve often advised acquaintances with whom I’ve spoken about grad school to maybe not go directly from undergrad unless absolutely necessary, but to try to find a job with an employer who will offer tuition benefits or even with a university where they could take at least part of their program for free or reduced cost,” Caitlin observed. She reminded me that, “going to school full-time while working a full-time job is often not possible or practical, but it can be a more financially-savvy option.”
How graduate school loans affects life milestones
Caitlin still has six figures of student loan debt, and most of it is from graduate school. “Unfortunately, the interest rates for direct loans were sky-high when I attended.” She can’t refinance them for a lower rate because she is on an income-based repayment plan and pursuing public service loan forgiveness as she works in the public sector, so she needs to keep her debt in the federal program. “I feel very much held hostage by my loan debt. Buying my own home is out of the question at this point in time, and I’m unable to contribute as much to my retirement savings as I would otherwise.”
But there’s generally a salary boost
Graduate school, if done right, can help you substantially increase your income over time. According to this article in the Financial Times, the financial rewards of an MBA are rising but so are the tuition fees. In 2018, over two-thirds of MBA cohorts doubled their salaries within three years after completing their degree, the article reported. Across all disciplines, Bureau of Labor Statistics data show that Americans with a master’s degree earn 19% more than those with a bachelor’s degree only, and those with professional degrees earn 57% more.
Borrowing for graduate school is common
For a substantial number of students, borrowing to pay for graduate school is inevitable, explained Caitlin. For many that is true, but flexibility can be helpful. (See Erik Carter’s story on how he earned two degrees without student loans). According to the New America report, the average MBA graduate student borrowed $42,000 in 2012, which resulted in a typical monthly payment of $354 just for graduate school loans. For an expensive degree like law school, the numbers are staggering: law school students borrowed an average of $140,616, with a monthly payment of $1,187.
Figure out your ROI
A useful guideline is to limit total student loan debt to no more than the average salary for your field for someone with a similar degree. If the average salary of a lawyer in your state is $120,000 per year, then that’s the absolute max you should borrow, inclusive of your undergraduate school loans. That means if you’re thinking about getting a masters in social work, where the program costs $70,000 and the average social worker’s salary is $46,000 and you have $30,000 in undergraduate loans, your return on investment is going to be negative if you borrow the entire cost of school. Not sure how to begin? Use this graduate school ROI calculator.
Think of graduate school like home ownership
I propose that you think of it like buying a house. It’s such an expensive investment, few people can afford to pay for it in cash. Using the law school example, at today’s mortgage rates, that monthly payment of $1,187 is like paying a mortgage of around $227,000. No wonder it’s an investment most people must finance.
You’d also never pay more for a house than comparable neighborhood prices suggested it was worth. “There are a lot of factors to consider when even choosing where to go for graduate school, so it’s important to do the homework and find a program that’s a good match in terms of what you want to get out of it,” cautioned Caitlin. “Otherwise, what are you paying for? Make sure your program is reputable, because you are making an investment.”
Avoid private student loans if possible
I frequently talk to employees on our Financial Helpline who are struggling with student loans, often because they took higher interest private student loans only to later find out that they can’t get a break from paying them during a period of unemployment. “There can be very little wiggle room or willingness to negotiate smaller payments for private loans,” explained Caitlin. If you can, avoid private loans. Generally, private loans are more expense and a lot less flexible than a federal subsidized or unsubsidized student loan and are not eligible for income-based repayment, forbearance, deferral or loan forgiveness.
If you have private loans which you are already repaying and have a good credit score, you may want to look into loan refinancing with one of the new crop of student loan refinancing sites such as SoFi, Earnest or Common Bond. Do your homework and compare terms and risks before you choose. It’s generally not a good idea to include your federal student loans though, as the flexibility of repayment plans can be useful in the event of a financial upheaval, such as a layoff or illness.
Borrow only what you need
Students can get themselves in hot water later by borrowing what’s offered, instead of only taking what’s needed. The goal is to graduate with the absolute minimum in student loan debt. While it’s tempting to borrow for all living expenses, remember that you’re borrowing against your post-graduate quality of life.
“When you do borrow, never borrow beyond what you absolutely need,” warned Caitlin. “Budget carefully! I wish I’d done this better.”
Pay interest early
“Try and pay even a little on the interest if possible while in school (it’s not always possible – wasn’t for me) because it’ll a) help keep it down and b) it’s a tax deduction!” said Caitlin. Most student loans don’t require repayment until you’ve been out of school for six months. If you are working full or part time while you’re studying, pay as much as you can afford on your highest interest rate unsubsidized loan. Remember, unsubsidized loans accrue interest while you’re studying. For a success story on how one MBA student did this, see this article.
Work while you’re in school
I asked another family member, who has her PhD and masters, whether she had paid off her student loans yet. “My loans were reasonable because I worked during graduate school,” she explained. She taught at her university, and at secondary school, so she was able to borrow less and repay the loans more quickly. As long as you can keep up with the school workload, the way work helps you structure your day might even help you get better grades, according to this study. That’s not always a practical solution, however, for an intense professional degree such as medical school.
“It’s a balancing act,” said Caitlin. “I always worked part time throughout grad school, and when I coupled that with a full-time internship and full-time classes for even just part of one semester, I came pretty close to experiencing burnout. I would advise working part time if possible. It can help pay for rent, groceries, and other expenses that are necessary to having a decent quality of life, even if that income doesn’t make a huge dent in your tuition — which it likely won’t” she added.
“Plus, it always looks good to have something to add to your resume. You never know where it could lead you! The part time job I started my first semester in graduate school led me to discover what I wanted to do for my career after I graduated.”
What if you go to graduate school and find out you don’t like your field?
I recently spoke to a couple who had borrowed extensively for expensive professional degrees at private schools, only to find out after graduation that they were happier working in lower-paying non-profit jobs. Their loans were the cause of enormous financial stress. I asked Caitlin for her guidance, as she works in a different sector than she originally intended.
“For some people, this is harder if their graduate degree is more specialized. I am not working in the exact field my master’s degree is in, but I still apply things I learned in the program to my job. Also, having a master’s is becoming more and more necessary to be competitive in the job market today. Having completed any graduate degree is a significant accomplishment and becoming increasingly important to employers in some areas.”
The bottom line: make an informed decision
Graduate school isn’t something to be entered into lightly because you’re not sure of what career to pursue or your parents are pushing you towards a certain profession. It’s an investment. Like any investment, you will benefit from carefully weighing the costs, the risks and potential rewards.