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Does Graduate School Make Financial Sense?

My niece recently asked me my opinion on the benefits of attending graduate school.  Of course more education is a good thing, I told her, but it’s equally important to fully understand the cost implications before making the investment.  You need to understand the cost of your undergraduate degree in conjunction with the additional cost of grad school, and the potential implications of the added debt.  The important questions being; what will my potential earnings be, and can I afford it?

Do you plan on focusing solely on your career and building wealth over the next 20 years?  Do you plan to take time off to travel or have children?  Or do you plan to go into low paying but highly rewarding work?  I know these are heavy questions, but if you know the cost of your education, and the direction you plan to take after graduation you will make smart informed decisions.  There is nothing worse than being saddled with large amounts of education debt at a young age.  It distracts you from the real goal, which is the pursuit of a fulfilling career and lifestyle.

Most people I know have to fund some or all of their education through student loans.  I looked at Stafford & Perkins, which tracks the most common undergraduate student loans, and found there is a big difference in interest rates and rules covering payment and deferrals between unsubsidized and subsidized loans.

Subsidized Unsubsidized
2010 – 11 4.50% 6.80%
2011 – 12 3.40% 6.80%
2012 – 13 6.80% 6.80%

Subsidized loans are based on financial need and offer a sweeter deal; lower interest rates and the ability to defer payments and not accrue interest during deferrals.  Otherwise you are thrown into the unsubsidized bucket, with higher rates and no deferrals on interest, even if you defer payments.  Both loans offer up to 3 years for deferrals. Unfortunately unsubsidized loans start accruing interest 6 months after graduation, even if the student goes onto grad school, which results in staggering interest accruals.


First let’s examine the undergraduate cost.  I looked at top-notch private institutions with a yearly cost of approximately $50k annually ($200,000 total).  Most students don’t understand how compound interest works and often underestimate their final total debt load.  Depending on repayment period, interest paid can vary wildly, so let’s make a few assumptions:

  • Graduate will earn an average of $50K annual salary averaged over a few years after graduation (average starting salaries range from $30K – $50K)
  • Student is subsidizing entire loan amount of $200K (this number includes tuition, fees and living expenses)
  • Average monthly payment of $1700 – payments will start lower and increase as compensation goes up
  • Payoff period: 16 years
  • Loan is unsubsidized

Under that scenario the total cost of this private education is a whopping $330,516.  Certainly monthly payments could be increased for lower total interest, but with current salary realities, you need to be practical about what you can afford.  This is why so many recent graduates live at home after college and or work additional jobs to pay down their student loans.

Student Loan Payoff Calculator
Student Loans ($)           $200,000.00
Annual Interest Rate                            6.80%
Monthly Payment ($/month)                           $1,700.00
Calculator Results
Student Loan Payoff Period (months)                194
Total Student Loan Payments ($)            $330,516.63
Total Interest Paid ($)            $130,516.63

Source: http://www.money-zine.com/Calculators/Loan-Calculators/Student-Loan-Payoff-Calculator/

Now let’s layer on additional costs for a two year graduate school.  Based on the following assumptions; $25K per year private institution, $500 per month additional loan payment, *unsubsidized loan at same interest rate.  That’s an additional $73,995 in student loans ($23,995 in interest) to be paid off in a 13- 15 year timeframe with total cost of undergraduate and graduate education of $404,512.  To put that in perspective, the average cost of a house in the US today is $156,000.


With the same approach, I looked at my Alma Mata, University of Massachusetts at Amherst for an undergraduate degree of approximately $24,000 per year ($96,000 total).  With interest that number raises to $116,026 ($20,026 in interest) paid off over 6 year timeframe.

Undergraduate Student Loan Calculator
Student Loans ($)                 $96,000
Annual Interest Rate             6.80%
Monthly Payment ($/month)                    $1700
Calculator Results
Student Loan Payoff Period (months)                 68
Total Student Loan Payments ($)        $116,026.25
Total Interest Paid ($)           $20,026.25

Consider layering on a two year graduate school with the following assumptions; $14K per year public institution, $500 per month additional loan payment, *unsubsidized loan at same interest rate.  Cost of graduate school would be $33,779 ($5,779 in interest).

The total estimated cost of both public undergraduate and graduate education is $149,805 ($25,805 in interest) – to be paid off over a 6 – 8 year timeframe.  While much more affordable than a private institution, this is still a huge debt load and should be considered wisely.

I’ve seen some students choose public education for their undergraduate degree and splurge on a pricey private institution for their graduate degree.  This allows for a more cost efficient undergraduate experience while still having an impressive private school education to brag about.

Whether you choose private or public education, they both potentially produce large debts, so you need to understand the numbers and try not to fully subsidize your education with only student loans.  That means finding any and all contributions including part-time work, savings, employer contribution, scholarships and grants to keep your loan amounts to the lowest possible amount.

The bottom line; when making the decision to invest in a graduate school education, not only does your undergraduate and graduate school debt need to be considered, but also; will your advanced degree provide you with more earning potential to offset the additional cost of that degree?  There are many fields this is the case (like law, medicine and finance), but many more that do not.

*Unsubsidized Stafford Graduate Loans start accruing interest immediately, at time of disbursement.  They also have limitations on how much can be lent in one annual period, so many grad students’ need to take out additional private loans at higher interest rates to cover the full cost of tuition.






Other reading:

Help, My Degree Is Underwater – http://www.slate.com/id/2215830/

Will Grad School Pay Off?  – http://www.freemoneyfinance.com/2008/08/will-grad-schoo.html

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One Response to Does Graduate School Make Financial Sense?

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