Every year, a new class walks the stage in cap in gown to mark the completion of their undergraduate studies. Most start their careers, but some consider continuing their education. This year, we are faced with a new dilemma — an especially challenging job market. Companies have paused their recruiting, and the service jobs so many recent graduates rely on while searching for a first step in their new careers aren’t as widely available. This has a lot of young professionals thinking, “should I go to graduate school?”
To make an informed decision about graduate school, your clients and their students 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 your clients are still going to be paying part of the grad school bill, their 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 your client’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 7/1/20) is 4.3%, and a loan fee of 1.059% 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 7/1/20) is 5.3%, and the loan fee is 4.236%. 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. Companies like Sallie Mae and Credible are common lenders for graduates looking to compare rates and terms against the PLUS loan. 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 scholarships available for grad school are significantly less abundant 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 your client’s students are looking for positions out of undergrad, they should ask the employer what types of programs they have available for furthering their education. Often times these programs have a requirement to work for the employer for a certain period of time before the student is eligible. They also may require a certain period of employment once the student completes the program to ensure that they get the most out of their investment in a student and employee. This is an important consideration as your client’s students 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 a chosen field.
- Evaluate the starting salary and the average salary for an advanced degree in the student’s 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? What opportunities are available to the young professional if they don’t continue their education?
- Be sure your client’s student doesn’t get in over their head!
- Research the college your client’s students 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 client’s students’ potential starting salary in their chosen field. However, the current employment prospects and long-term income potential should be taken into consideration in the case of graduate school as many positions they 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 they’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, your clients and their students should 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. They may be shocked by their loan balance when all their schooling is done. Maybe a few sacrifices now will be worth it later?
Finally, grad school, law school, MBA…for many clients, planning for how to pay for graduate school and additional education after a 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