How to pay for grad school by Suze Orman

I am all for high school graduates continuing with their education. Getting an associate’s degree or a bachelor’s degree can be an important credential to compete in our economy. 

Taking the next step to get an advanced degree is not such an obvious call in my opinion. For starters, outside of fields that demand an advanced degree—medical doctors, lawyers—the first question you need to ask yourself is if you really need this extra credential. I said need, not want.

Even if the advanced degree is necessary to pursue a given career, I am not ready to give you a green light. Emerging with a graduate degree that leaves you with crushing debt earns an F in my book.

And that’s exactly what you could be heading into.

According to educationdata.org, six in 10 people who get a master’s degree need to borrow, and the average debt for master’s borrowers increased nearly 75% between 2000 and 2016.  

The average among borrowers for an MBA has doubled since 2000 to around $65,000. For an M.A. it’s more than $70,000. Borrowing for a law degree is in the vicinity of $145,000, and for a medical degree it’s more than $240,000.

Then there is the financial sink-hole for Ph.Ds. The average borrower who got a Ph.D. in Philosophy or Education recently had an average debt of more than $100,000.

Here’s my crash course on how to pay for grad school without ruining your financial life for years.

Do you really, truly need the degree?  

The notion that an advanced degree would be helpful is not good enough. You better have a clear data-driven argument that the only way to pursue a given field is to have an advanced degree. And don’t presume that you must have an advanced degree to earn more. Research from the Center for Education and Workforce at Georgetown University points out that one in four workers with a bachelor’s degree earn more than half of workers with a master’s or a doctoral degree. That boils down to a rock star with “only” a bachelor’s degree can outshine a less productive colleague with an advanced degree.

Between LinkedIn, payscale.com, glassdoor.com and other online job resources, you can easily do some research on what level of education is needed for the field you are interested in.

Leave parents out of it

If you truly love your parents, you will not expect them to help you pay for a graduate degree. It is the rare 50 and 60 something parent(s) who isn’t concerned about whether they have saved enough for retirement. That must be their financial focus right now. Not your graduate degree. Not just for their security, but yours as well. If they aren’t able to save enough now, it is going to fall to you to help them financially in their retirement.

Save first

There’s no rule that you must move straight from a bachelor’s degree to a graduate program. I would rather you work for a few years first. Not only to get some general work experience, but ideally to get a sense of a field you are most interested in. At the same time, if you live well below your means—making smart lifestyle choices—you will be able to save money to help pay for grad school if you ultimately decide to go that route.

If you envision pursuing a grad degree while still working, you might want to set yourself up at a job that offers a tuition reimbursement benefit. Federal tax law allows you to receive up to $5,250 a year from your employer to help pay for tuition, without that money counting as taxable income.  Not all employers offer this perk.

Research first-year salaries for graduates of schools you are interested in

Mark Kantrowitz, an expert in college financing suggests you limit all your college borrowing—undergrad combined with graduate school debt—to no more than what you can expect to earn in your first year after grad school. Mark has crunched the numbers and finds that if you use this borrowing guardrail you should be able to repay your debt within 10 years.

If you expect you will need to borrow to attend grad school, an early bit of research is to contact schools that you expect you have a good chance of being accepted to, and ask for the average starting salary of recent graduates. Please don’t look at general statistics. It’s important to understand what is realistic based on where you might go to school.

Take the lowest average salary among the schools you research and use this as your upper limit on what you would consider borrowing.

Understand a school’s likely aid package

There are two types of special aid for graduate students: fellowship and assistantship. A fellowship is typically merit-based, and it does not require you work to receive the aid. More common are deals where grad students receive aid for work, they perform, such as a teaching assistant or a research assistant.

Once you have a shortlist of grad schools in mind, you want to drill down on the specific aid you may qualify for. This is a stand in the truth moment my friend. It is far better to focus on a school that is so eager to have you that it will offer a generous aid package, rather than choose a school that will require you to overborrow.

Educate yourself on the differences between federal and private graduate-school loans 

I think federal loans can be the safer choice. I want you to have the intention to pay off your loans ASAP, but it’s important to know that only federal loans offer different types of repayment plans pegged to your income.

Another important protection is that all federal grad school loans are forgiven if the borrower dies.  Your parent, spouse or another person you appoint will need to submit proof of death to your loan servicer. Private loans typically don’t have different types of repayment plans, and not all offer to forgive the debt if the borrower dies.

It’s also important to understand that federal graduate school loans do not require a credit check or a sterling credit score, but private loans do. While private graduate loans advertise low fixed rates, you may not qualify for that based on your credit score. And you are not going to ask Mom and/or Dad to cosign, right? Because that puts them at financial risk.

You can learn more about federal graduate school loans at the studentaid.gov website. The general rule is that you can borrow up to $20,500 a year from a standard federal graduate loan.  The maximum federal loan amount you can ring up—combined for undergrad and graduate school—is $138,500.  All federal loans are fixed-rate, but that rate is higher than what the government charges for undergrad students.

There is an additional federal loan program, call Grad PLUS loans. There is no limit on how much you can borrow with a Grad PLUS loan. And that makes them dangerous in my opinion. I can’t stress enough that the key to paying for grad school is to not emerge with too much debt.

Please be on alert for any aid package that lists Grad PLUS loans. They are not aid. They are a loan you will be responsible for. Their increasing popularity is worrisome: In 2014 there were 900,000 borrowers with a Grad Plus loan and total outstanding balances of $37.8 billion. Last year there were 1.6 million borrowers with total outstanding debt of $90.7 billion.

Get ready to pay more for a federal graduate loan

The interest rate charged on all federal student loans changes each year, based on the general rate trend in the economy. And grad loans cost more. The2021-2022 academic year, an undergrad student loan has a 3.73% interest rate. A federal graduate school loan has a 5.28% interest rate. A Graduate PLUS loan has a fixed rate of 6.28%, and all PLUS loans tack on an origination fee of 4.228%.

Be extra careful with private loans

I would not recommend taking out a private loan with an adjustable rate. Yes, the initial rate will likely be lower than a fixed-rate loan, but you are taking on the risk that interest rates in general won’t be rising in the coming years. Given that today’s interest rates are very very low, that’s a risky bet in my opinion.

And I want to repeat what I mentioned before because it is so important: If you are laid off or have to scale back work for any reason, you may be able to change your repayment plan, and possibly suspend it for a period if you have a federal loan. Those options typically do not exist with a private loan.

Thinking about your financial future while you weigh the cost of paying for grad school is important. To get a customized step-by-step plan for your overall financial priorities at this stage in your life, I encourage you to take my free action plan. You will get a clear understanding of where you are financially right now, where you need to go, and hopefully help to further guide your decision on how best to pay for grad school. 

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Check out these other blog articles from Suze Orman

• Your best money moves in 2022 by Suze Orman

• Are you making the most of your retirement benefits? By Suze Orman

• How (much) to pay for college by Suze Orman

Suze Orman is the author of 10 consecutive New York Times bestsellers, a two-time Emmy award winner, and your go-to for honest answers on everything finance. She is the most recognized personal finance expert in America today and host of the Women & Money (and Everyone Smart Enough to Listen) podcast. Suze is excited to be a contributor for Money Mentor.

Suze and Alliant teamed up to help Alliant members make the most of their life by teaching them to make the most of their money. New Alliant members are also eligible for The Ultimate Opportunity Savings Account.