Paying for Graduate School

Graduate school represents one of the largest financial commitments a family can make. The total cost varies dramatically by program: MBA programs typically run $100,000 to $200,000, law school costs $150,000 to $250,000, and medical school ranges from $200,000 to $350,000. Before committing to these expenses, you need a clear understanding of funding sources, loan terms, and whether the investment makes financial sense for your specific situation.

Understanding the True Cost

Graduate school costs extend beyond tuition. You need to account for:

• Tuition and fees: The largest expense, varying by program and institution
• Living expenses: Housing, food, transportation, and health insurance
• Books and materials: Often $1,000 to $3,000 per year
• Opportunity cost: Income you forgo while in school

A two-year MBA program with $80,000 annual tuition means $160,000 in tuition alone. Add $25,000 per year for living expenses, and the direct costs reach $210,000. If you were earning $75,000 annually, the opportunity cost adds another $150,000, bringing the total economic cost to $360,000.

Funding Sources

Employer Tuition Reimbursement

Many employers offer tuition assistance programs. Under current tax law, employers can provide up to $5,250 per year in tax-free educational assistance. Some companies offer more, though amounts above $5,250 count as taxable income.

Employer programs often come with conditions:

• You must remain employed for a specified period after graduation (typically 1-3 years)
• The degree must be relevant to your current role or career path
• You may need to maintain a minimum GPA

If your employer offers $5,250 annually for a four-year part-time MBA, that covers $21,000 of program costs tax-free.

Assistantships and Fellowships

Graduate assistantships provide tuition waivers plus a modest stipend in exchange for work. Teaching assistants lead discussion sections or grade papers. Research assistants support faculty research projects.

Typical arrangements include:

• Full or partial tuition waiver
• Stipend of $15,000 to $30,000 annually
• Health insurance coverage
• Work commitment of 15-20 hours per week

Assistantships are competitive and more common in PhD programs than professional programs like MBA or law school.

Scholarships and Grants

Merit-based scholarships reduce the amount you need to borrow. When comparing offers from different schools, focus on the net cost after scholarships rather than the sticker price.

A $150,000 program offering a $50,000 scholarship costs less out-of-pocket than a $120,000 program with no scholarship.

Federal Student Loans

Direct Unsubsidized Loans

Graduate students can borrow up to $20,500 per year in Direct Unsubsidized Loans. Interest accrues from disbursement, including while you're in school. The current interest rate for 2024-25 is 8.08%.

Grad PLUS Loans

Grad PLUS loans cover the remaining cost of attendance minus other financial aid. There's no annual limit beyond the cost of attendance. The 2024-25 interest rate is 9.08%, and there's a loan fee of approximately 4% deducted from each disbursement.

For a $50,000 Grad PLUS loan, the 4% fee means you receive about $48,000 while owing $50,000.

Repayment Options

Federal loans offer several repayment plans:

• Standard: Fixed payments over 10 years
• Graduated: Lower initial payments that increase over time
• Income-driven: Payments based on discretionary income (10-20% of income above 150% of poverty level)

Income-driven plans extend repayment to 20-25 years, with remaining balances forgiven (though forgiveness may be taxable).

Public Service Loan Forgiveness

If you work for a qualifying nonprofit or government employer and make 120 qualifying payments on an income-driven plan, remaining federal loan balances are forgiven tax-free. This can significantly change the calculus for careers in public interest law, academic medicine, or government.

Private Student Loans

Private loans may offer lower interest rates than federal loans for borrowers with excellent credit. However, they lack federal protections like income-driven repayment and forgiveness programs.

Compare these factors when considering private loans:

• Interest rate (fixed vs variable)
• Repayment terms
• Deferment options during school
• Cosigner release provisions

Calculating Return on Investment

Graduate school makes financial sense when the increased lifetime earnings exceed the total cost, adjusted for the time value of money.

Basic ROI Calculation

ROI = (Salary Increase x Working Years) - Total Cost / Total Cost

A more accurate approach uses net present value (NPV), which accounts for the timing of costs and benefits.

Factors Affecting ROI

• Pre-graduate school salary: Higher starting salaries mean larger opportunity costs
• Post-graduate school salary increase: The bigger the jump, the faster the payback
• Career length: Younger graduates have more years to benefit from higher earnings
• Industry and location: Salary premiums vary significantly by field and geography

Worked Example: Financing a $120,000 MBA

Sarah, age 28, earns $65,000 as a marketing coordinator. She's been accepted to a two-year MBA program costing $120,000 total ($60,000 per year). Her employer offers tuition reimbursement.

Funding Plan

Loan Details

Direct Unsubsidized Loans: $41,000 at 8.08%

• Monthly payment (10-year standard): $499
• Total interest paid: $18,900

Grad PLUS Loans: $44,000 at 9.08%

• Loan fee (4%): $1,760 (receives $42,240)
• Monthly payment (10-year standard): $559
• Total interest paid: $23,080

Combined monthly payment: $1,058 Total repayment: $126,980 on $85,000 borrowed

ROI Analysis

Sarah expects to earn $95,000 after graduating, a $30,000 annual increase. Over a 30-year career, that's $900,000 in additional lifetime earnings (not discounted).

Her total cost:

• Tuition: $120,000
• Living expenses (covered by employer during part-time program): $0
• Interest paid: $41,980
• Total cost: $161,980

Simple payback period: $161,980 / $30,000 = 5.4 years

After 5.4 years, the MBA has paid for itself. The remaining 24+ years of higher earnings represent the net benefit.

Sensitivity Analysis

If Sarah's salary increase is only $20,000:

• Payback period: 8.1 years
• Still financially beneficial, but less compelling

If her salary increase is $45,000:

• Payback period: 3.6 years
• Strong financial case for the MBA

Timeline for Planning

12-18 months before enrollment:

• Research programs and costs
• Explore employer reimbursement options
• Begin saving aggressively

6-12 months before enrollment:

• Submit applications
• File FAFSA (opens October 1)
• Compare financial aid packages

3-6 months before enrollment:

• Accept admission and financial aid
• Apply for additional loans if needed
• Budget for living expenses

Decision Checklist

Before committing to graduate school, confirm you've addressed each item:

• Calculated total program cost including living expenses and opportunity cost
• Explored employer tuition reimbursement and understood any conditions
• Applied for scholarships and assistantships
• Compared federal and private loan options
• Estimated post-graduation salary based on program placement data
• Calculated payback period and lifetime ROI
• Considered Public Service Loan Forgiveness if entering qualifying employment
• Reviewed repayment options and monthly payment amounts
• Built emergency fund to cover unexpected expenses during school
• Discussed timing and financial impact with family members