To Grad School or Not to Grad School?

I’d be graduating this May – if I hadn’t taken time off last year – and so many of my friends are seniors, frantically working on their theses or job hunting or filling out applications for graduate school. And while the jokes are flying around (Marge Simpson: “Don’t make fun of grad students, they made a poor life choice!”), grad school is a serious choice that may not be so easy to make.

In fact, yesterday I received an email from a friend of mine:

Here’s a finance question for you.
Two fold.
One: Should I go to grad school? It requires getting about $100,000 in loans.
Two: If I go to said graduate school, what loans do you recommend?

It’s also about time I got to thinking about what I should do after graduation, so this is a pretty timely question.

Common sense tells us that more school = higher salaries. But we have to be leery of falling into the trap of thinking that more school is ALWAYS going to be better – after all, I’m still not entirely sure that going to film school was a great idea.

A report by the College Board titled “Education Pays: The Benefits of Higher Education for Individuals and Society” [PDF] lists the median salaries for different degree holders. A Bachelor’s degree can get around $49,900 a year, while a Master’s Degree bumps it up to $59,500. A professional degree has a whopping median of $95,700.

But it’s important to keep in mind that those numbers are medians, meaning that half of degree holders earn more than that, but the other half earn less. A higher degree is no guarantee of increased earnings, although it is a good indicator.

Kiplinger.com has a great article called The Back-to-School Decision, with some insights on how to go about deciding whether grad school is a smart bet. The first piece of advice: examine your motivation. The article offers up some examples of good, bad, and middle-ground motivations:

• Your firm won’t promote you to the position you want unless you have an advanced degree: right reason.
• You’re waiting for the job market to improve: wrong reason.
• You want to pursue a different field of study: maybe the right reason.
• You want to buy time because you aren’t sure what you want to do with your life or you don’t feel ready for the working world: wrong reason.

If you’re considering grad school for any of the wrong reasons, hold off and spend some time working first. The most important takeaway here? You can always go back to school later.

But come on, you guys aren’t asking me because you want hear any of that – you’re here to find out the answer to the money question. Is grad school a good idea financially?

Loans: Ya Gotta Pay Em Back

What it all comes down to, from the hard numbers side, is whether you’re going to be able to comfortably make the payments on your grad school loans. The first, most important, thing here is to look at your whole picture – that is, the total of your grad and undergrad loans. They may seem different to you now, but you’ve got to pay them all back, so use the whole number when you calculate.

A study conducted by student loan lender Nellie May (College on Credit: How Borrowers Perceive their Education Debt [PDF]) found that stress about student loan repayment was directly related to the percentage of monthly income that borrowers were required to pay toward their loans. That sentence was kinda a mouthful, so let me put it bluntly: The more you have to pay back per month, the more stressed out you will be.

Borrowers who have to pay less than 7% of their monthly income toward student loans generally do not feel stressed about their debt. Those who pay 7-11% of their monthly gross income feel a mild amount of stress. People who pay 12-16% report feeling overwhelmed by their debt, and those paying 17%+… well, you can pretty much guess that they’re going out of their minds.

There’s a great Loan Repayment Calculator over at FinAid that can tell you what income you’ll need to be making in order to keep your loan payments less than 10% of your monthly gross income.

If you run my friend’s estimate of $100,000 in loans through the calculator, you’ll find that she’ll need a yearly salary of at least $138,096 in order to keep her loan payments under 10% of her monthly gross. This means that every year she doesn’t make at least that much, she’ll be feeling the pain of her loans in a very big way.

And that’s assuming she doesn’t have any undergraduate debt, which is something I’m simply not sure of.

Not All Doom and Gloom

I hate feeling like I’m the bad guy, pointing out the big numbers involved in borrowing to go to grad school. So, I want to end on the high note here: finding free money to help pay for school, to help cut down on the amount of loans you need, is what will make up the difference.

The Kiplinger’s article suggests checking out the three “ships”: Assistanships, Fellowships, and Scholarships. If these aren’t enough to bring the amount you need to borrow down to an acceptable level, you may have to hold off for a little while. (Yes, this is that “you can always go back to school later” thing.)

However, if the “ships” do bring your necessary debt down enough, then you can start shopping for loans. Kiplinger’s also has a great article on Paying for Grad School that describes the federal loans available to you – always, always, always exhaust the federal loans before getting private loans!

If the numbers are too high, and it looks like grad school isn’t for you right now… don’t lose hope yet – during your job search, try and find work with an employer that offers tuition reimbursement benefits. Getting your employer to foot part of the bill can also make a huge difference, and the extra work experience might give you a leg up in the application process!

The Takeaway

More than anything, I would just like to see people stop and think and run the numbers before diving into grad school. Just like I dove headfirst into film school, thinking that I would just pay for it however was necessary and it would all be fine and dandy… that didn’t work out too well for me, and it seems like the stakes are even higher with a graduate degree.

Just run the numbers – please? Do it for me, but more importantly – do it for yourself. No one is going to pay back those loans but future-you. And believe me, there’s no one you want pissed off at you less than future-you!