Should You Take Out Student Loans to Pay for Graduate School?

A graduate degree can help you stand out in the job market and increase your earning potential. But is it worth taking on additional student loans so that you can continue your higher education journey? 

Graduate programs account for 40% of total federal student debt, which has reached more than $1.5 trillion. Although a graduate degree may benefit your career, the decision to take out student loans for grad school should not be taken lightly. 

Read on to find answers to some common questions about graduate student loans. 

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What graduate student loan options are available?

Graduate students no longer qualify for subsidized federal loans where the government covers loan interest for certain periods of time like during your grace period or deferment. But you still have other federal and private loan options to explore.

Federal student loans for graduate school

Direct unsubsidized loans: Any student can access an unsubsidized loan, since they do not require proof of financial need. The borrower is responsible for paying interest on the loan straight out of the gate, which may or may not be feasible, depending on your financial circumstances. 

You can apply for loan deferment or forbearance while you are in school, but this will mean that your interest will be capitalized when you move back into a repayment period. This means any accrued interest will be added to the principal balance of your loan.

Direct PLUS loans: The maximum amount you can receive from a direct PLUS loan is the difference between the cost of your program and any other financial aid you receive. To qualify for a Direct PLUS loan, you need to have a good credit history or be able to provide an endorser (or cosigner) with good credit who will repay the loan if you fail to do so. 

However, you may still qualify if you are able to document extenuating circumstances related to your adverse credit history, such as showing that a delinquent credit account has been paid in full or a repayment arrangement has been set in motion with six months of on-time, full monthly payments.

Private student loans for graduate school

Graduate students can also finance their education by taking out private loans with banks or credit unions. Private loans tend to be more expensive than federal loans and require an established credit history or cosigner, so students should maximize their federal loans before resorting to private student loans.

Always do thorough research to compare the private student loans available to you. You want to find the lowest interest rate available and explore any additional benefits. Keep in mind that many private loans require payments be made while you are still in school and may come with limited repayment options compared to federal student loans. 

How much can I take out in student loans for graduate school?

There are maximum annual loan limits in place regarding how much you can take out in federal student loans. Graduate students cap out at $20,500 in unsubsidized federal student loans each academic year. There is also an aggregate loan limit that factors in all federal student loans received from both undergraduate and graduate study. The graduate aggregate loan limit maxes out at $138,500. 

There is no limit to how much you can take out in private student loans. Also, there are exceptions to federal student loan limits for graduate students enrolled in certain health professions. If you are enrolled in a graduate health profession program, reach out to your school's financial aid office to determine if you qualify for additional federal student loan amounts.

How can I pay for graduate school without loans?

Before you even think about taking a student loan, make sure you have exhausted the other ways of financing your higher education goals. If you implement smart financial strategies and pursue outside sources of funding, you can make your education and career dreams come true without necessarily taking on a large amount of student loan debt.

• Save money first: If you currently have a good job, consider working for a few more years to save money for tuition. You can also evaluate your budget to cut back on expenses and dedicate more money to your savings account.
• Employers: Your employer may be willing to help fund your graduate degree if it's relevant to your job or future position. More employers are offering tuition reimbursement as part of their benefits package.
• Scholarships and grants: Scholarships and grants are essentially free money that can be used toward associated education costs. Some are very competitive, but you'd be surprised at how many don't receive any applications at all. Use online search engines like Scholarship Monkey and your school's financial aid office to locate additional opportunities.
• Fellowships: Your program likely has fellowships up for grabs. These are typically stipends awarded to students with promising potential based on their past achievements. Fellowships can range anywhere from $500 to the full cost of tuition.
• Consider going abroad: Universities are cheaper almost everywhere else in the world, but be aware that if you leave the U.S., you might not qualify for federal aid. Don't forget to factor in the cost of relocating overseas and explore job prospects ahead of time if you are planning on supporting yourself while abroad.
• Teaching assistantship: Depending on your financial need, you might be able to score a teaching assistantship that may include teaching a limited number of undergraduate classes, grading papers, or overseeing other administrative tasks. Depending on the school, you may be paid directly, or it could be applied straight toward your tuition. 

What's the average student loan for a graduate degree?

A big part of deciding whether or not to take out graduate student loans is figuring out how much debt you'd accrue. Your potential student loan debt will largely depend on the type of degree you're pursuing. Below you'll find the average student loan debt for graduate school graduates by degree.

Source: U.S. Department of Education, National Center for Education Statistics, 2015–16

Your debt also depends on the type of school you attend. The cost varies widely depending on whether you choose to attend a public, nonprofit, or private university, as does the availability of scholarships and financial aid that might ease your debt burden. In most cases, students from private for-profit colleges graduate with the most debt.

Source: U.S. Department of Education, National Center for Education Statistics, 2015–16

What is the ROI on graduate school degrees?

Cost is only one side of the equation. You also have to consider the increase in your future earnings, or the return you'll get from your degree. As you saw above, medical students graduate with the most debt. However, they also often have the highest salaries when compared to other professions, so they're able to pay off that debt more quickly and earn more money in the long-run. 

Go through the following steps to determine the return-on-investment (ROI) of the graduate degree you're interested in.

1. Determine your overall loan burden

The cost of attendance varies by school and program, so you need a firm understanding of exactly what your costs are going to be, including any fees and living costs. Often, the financial aid office at the school you're applying to can help you estimate what your actual costs will look like. Subtract any secured financial assistance and any income you may be expecting from employment while you're in school to estimate how much you'll need in student loans. 

You'll want to estimate your interest rates as well. The U.S. Department of Education publishes interest rates on federal student loans each year -- for the 2019-2020 school year, the interest rate on unsubsidized loans is 6.08%. If you'll need to withdraw private student loans, many private student loan lenders have tools that estimate your rates without impacting your credit score. After that, you can use a student loan repayment calculator to figure out how much you'll pay over the life of the loan, including interest.

2. Estimate your increase in lifetime earnings

Research potential future employers and figure out what people are earning in roles related to your degree. Conservatively estimate your future annual salary after graduation based on your experience and education, and take note of raises and promotions. You can use sites like PayScale and Glassdoor to find realistic matches. Compare this with your current salary, or the salary of the job you hope to get without going to graduate school.

Eventually you want to arrive at a figure that roughly estimates how much additional money you'll make over the course of your lifetime with the degree you're pursuing. For example, maybe entry-level salaries for your expected career pay $5,000 more per year than what you're making now. When you look into mid-career salaries, they pay $10,000 more, and late-career salaries are about $15,000 more. It's safe to estimate an average salary increase of $10,000 per year. If you plan to work another 30 years, that's a $300,000 increase in overall lifetime earnings.

3. Use simple math: Increase in lifetime earnings divided by overall loan cost

Finally, divide the increase in lifetime earnings by the overall cost of your loans, interest included, to arrive at a rough ROI on the investment of graduate school. This number should be greater than 1.0, otherwise you'll experience negative returns.

Other common guidelines for figuring out if student loans are worth it include being able to repay your student loan debt at least 10 years or before you retire, depending on where you are at in your career.

If the numbers don't add up, it might be time to consider a different degree or career path. Or, if you are set on pursuing a career, but it won't pay off in a monetary sense, look for alternative ways to pay for your graduate degree -- ones that don't involve such a high debt burden.

What are the graduate degrees with the highest and lowest ROI?

A graduate degree can open the door to new career opportunities and higher pay, but it isn't guaranteed. Here are some general examples of graduate degrees with the highest and lowest ROI.

Degrees with the highest ROI

Both MBA and Master of Science degrees present some of the lowest student loan burdens of any graduate degree and open the door to careers with annual salaries exceeding $100,000. Degrees in finance and economics have a median pay of $134,000, and mathematics and statistics pay out at $129,000 per year. Many CEOs use their general MBA degrees to achieve salaries upwards of $180,000. A number of engineering careers, including telecommunications, electrical, biomedical, and computer engineering, top the list of best-paying masters degrees as well. 

Dental and medical professionals incur more debt than master's graduates but stand to easily recoup that cost with median salaries in the $150,000–$200,000 range or even higher. Nurse anesthetists can expect a median annual salary of $165,000 and will likely graduate with less debt as they're only required to complete a master's degree.

Degrees with the lowest ROI

While the jobs associated with certain graduate degrees are meaningful and certainly needed, they tend to limit earning potential. A human services degree that is used in the nonprofit realm brings in an average $46,600, while a degree in childhood education has a median pay of $49,200. Degrees focused on fields like library science and museum studies hover around $50,000 per year. 

Many of these degrees end up being the most costly, as well -- while Master of Education graduates take on less debt, on average, than others, Master of Arts graduates leave school with more student loan debt than any other master's degree.

Is taking out loans for graduate school worth it?

There are many factors to consider when deciding if is worth taking on student loan debt to pursue your graduate degree. You should evaluate the overall cost of your degree and the expected ROI. Factor in how much your monthly loan payment will be compared to your projected salary. Does this number make sense given your other monthly financial obligations? 

Look at how long it will take to completely pay off your debt as well. This could be only a few years or it could be a long-term commitment going well into retirement. Be conservative in making your projections because a degree doesn't guarantee you a job or a salary.

You also be sure you have a clear career path that your desired degree can help you with. At this stage, you should know exactly how your degree will benefit you and the steps needed to succeed in your ultimate career. 

Most importantly, you need to be sure you are truly passionate about the career you will be pursuing after you graduate. If you aren't passionate, now is the time to jump ship before you sign up for a massive loan burden as well as a career path that won't satisfy you in the long-run. 

On the other hand, if you feel compelled toward a career path that requires a graduate degree but isn't necessarily lucrative, don't give up too fast. Passion might not be money, but it does have value. Look for solutions to make your dream work financially, like the ones described above.

Ultimately, there are many ways to fund your graduate degree, and student loans should be your last resort. If you do choose to take out student loans, exhaust your federal loans before taking on private student loans. Student loan debt is a serious commitment, and you should be fully prepared to carry the weight of your decision before diving in.