Going to Graduate School: Is it a good idea? How do you pay for it?

By Joe Messinger, CFP®

July 17, 2020

4 min READ

Every year, college graduates leave their home of the past four or five years and consider the road ahead of them. Most start their careers, but some consider continuing their studies and embarking on graduate school. This year, we are faced with a new dilemma–the job market is suffering. Many are wondering if now is a good time to go back to school and pursue a graduate degree.

To make an informed decision about graduate school, you need to understand how to pay for it and whether or not it is worth it. The key is weighing the cost of attendance versus the benefit in salary boost and/or potential job prospects.

The government sees a grad student as independent.

Even if mom and dad are still going to be paying part of the grad school bill, the student is now considered independent. This means that financial aid filings no longer take the parents’ finances into account. (Yes, you still need to be friends with the FAFSA.) The FAFSA will now focus on the financial numbers (tax filings, savings, etc.) of the adult student and a spouse if the student is married.

Pell Grants for financial need are not available for graduate school (except in the case of postsecondary teaching certificate students). Some state aid may be available, but most federal aid comes in the form of loans. While we don’t see loans as “aid” (you have to pay it back!), federal loans are qualified as “aid.”

Tax considerations as an independent filer

If a grad student is no longer claimed as a dependent on their parent’s tax returns, they should investigate whether they can claim the Lifetime Learning Tax Credit (covered in our blog). This $2,000 credit, or 20% of the first $10,000 spent in a year, can be used by grad students who already have four years of college credits earned.

Types of loans available to grad students

Graduate students can borrow up to $20,500 per year under the federal direct loan program. The maximum amount a grad student can borrow in their lifetime is $138,500. This lifetime limit includes any amounts borrowed as an undergrad.

Because these direct loans are unsubsidized, interest accrues while in school. Payments will begin six months after graduation. The current interest rate (as of 7/1/21) is 5.28%, and a loan fee also applies (subject to change from year to year).

If a student needs to borrow more than $20,500 in one-year, Graduate PLUS loans are available. To be eligible for a PLUS loan, a student needs to not have an adverse credit history and be enrolled at least half-time. (An adverse credit history may be overcome with a co-signer or approval from the Department of Education.)

The maximum amount a grad student can borrow under the PLUS loan is the total cost of attendance. The fixed interest rate currently (as of 7/1/21) is 6.28%. Interest will accrue while in school, and payments will begin six months after the program is completed or the student drops below half-time enrollment.

Private loans are also an option. Carefully weigh the rates and terms to see which would be the best “deal.” A loan calculator like this one is helpful to compare future payments.

Other sources of funding

Universities may provide scholarships or fellowships to grad students based on merit. These amounts vary by school and department. A student will probably have to talk with the graduate school itself as opposed to the financial aid office to find out about availability and qualifications.

In addition, grad students can work in college through research and teaching assistantships. Assistantships will generally pay part of the tuition and perhaps pay a stipend as well. Like scholarships, assistantships are provided by the grad school department—not the financial aid office.

Private scholarships are available as well; however, the number of scholarships available for grad school is significantly less than those available for undergraduates. Searching sites like FastWeb and Career One Stop may be helpful in finding graduate scholarships.

Many employers also offer tuition reimbursement for advanced degrees. As you are looking for positions after your undergrad, check with the employer to see what types of programs they have available for furthering your education. Often times these programs have a requirement to work for the employer for a certain period of time before you are eligible. They also may require a certain period of employment once you complete the program to ensure that they get the most out of their investment in you. This is an important consideration as you assess the compensation package at different employers.

So how much does it cost?

The truth is like every other cost associated with higher education, the cost of a master’s degree is increasing rapidly and can run anywhere from $30,000 or $40,000 to $100,000 or more. An MBA student can expect to pay between $70,000 and $200,000+ over the course of their two or more years.

Is it worth it?

• When weighing the value of having a masters degree, look at the difference in average salaries in your field.
• Evaluate the starting salary and the average salary for an advanced degree in your field.
• Know that after graduating with an advanced degree, it will take several years of “catch up” to pay back loans.
• Consider the value of having the degree outside of the financial cost. Will the advanced degree open up employment opportunities?
• Don’t get in over your head!
• Research the college you choose—some firms only hire students from certain schools.

Our general rule of thumb still applies for graduate school. Total loans taken out to acquire the degree should not exceed your potential starting salary in your chosen field. However, the long term income potential should be taken into consideration in the case of graduate school as many positions you are aiming for may require the advanced degree to even be considered for advancement. Pursuing a masters or advanced degree can certainly pay off in certain fields. Carefully consider the costs involved and evaluate the value/benefit you’ll receive when making the decision to go back to school.

Two more things to consider…

While a student is in graduate school at least half-time, the student loans they acquired during their undergrad years can be deferred. They do not have to be paid yet. Sometimes, students forget these loans exist. Federal unsubsidized loans are actually accumulating interest during this period of deferment. (Subsidized loans stay the same.)

If possible, you might consider making some payments on these loans while in grad school. We get it. Grad school students probably don’t have a ton of money lying around! But remember, compound interest is at play here. You may be shocked by your loan balance when all your schooling is done. Maybe a few sacrifices now will be worth it later?

Finally, grad school, law school, MBA…for many students, planning for how to pay for graduate school and additional education after their bachelor’s degree needs to be part of the discussion BEFORE starting those first four years. Several bachelor degrees (psychology, sociology, law) will require extra college study in order to get a job. How will families pay for it?

Originally posted 3/2018

Updated 6/2021