Paying for graduate school

In short

A friend of mine once told me she signed her graduate loan papers in ten minutes and spent ten years wishing she had taken an hour. You are probably weighing a degree right now, and that is a good sign, because it means you care how this ends. Start by writing down the full cost of the program, including rent, books, and the income you will give up while you study. Then look at what people in your field earn, and see whether a loan payment fits inside that pay. Gifts such as grants, fellowships, and work offers cost you nothing to repay, so learn what your school and your field offer before you sign for a loan. Federal loans come with protections that private loans may not offer, so read the terms of both. Add up what you would owe, and set it beside what you expect to earn in your first year after you finish.

The whole of it

What it is

I once watched a neighbor of mine pay for a master's degree the way some folks pay for a barn, one board at a time, with cash from odd jobs and a little help from his church. Most of us cannot do it that way, and there is no shame in that. Paying for graduate school means putting together money from several places to cover tuition, fees, and living costs while you study. Some of that money never has to be repaid. Some of it does, with interest, which is the fee a lender charges you for borrowing.

The free money comes in a few forms. A grant is a gift based on need or merit. A fellowship is a gift, often tied to research or a field of study. A scholarship works much the same way. An assistantship pays you, often with a tuition break, in return for teaching or research work. Then come the loans. Federal loans come from the government, and private loans come from banks and other lenders. Gifts stay with you. Loans do not.

How it works

If you are holding an acceptance letter, the first form to know about is the Free Application for Federal Student Aid, which most people call the FAFSA. It is free, and the official place to file it is StudentAid.gov, run by the Federal Student Aid office of the U.S. Department of Education. Do not pay a website to do it for you. Your school then sends an aid offer that lists what it can give you and what it expects you to borrow.

A friend of mine once added up her aid offer and felt relieved, until she saw that half of it was loans. Read your offer slowly, because it often mixes gifts and loans together, and the total at the bottom can look friendlier than it is. Pull out the loans and look at them by themselves.

For graduate students, the federal government offers Direct Unsubsidized Loans and Grad PLUS loans, as described on StudentAid.gov. Unsubsidized means interest starts building the day the money is paid out, even while you are in class. You can pay that interest as it comes, or you can let it pile up. If you let it pile up, it gets added to your balance when repayment starts, and from then on you owe interest on that larger balance. That is called capitalization, and it makes a debt grow faster than a lot of folks expect.

Federal loans also offer income driven repayment plans, where your monthly bill is tied to your income, plus options to pause payments in hard times. The details change, so check StudentAid.gov for the current rules. Private lenders may offer a lower rate to a borrower with strong credit, but they set their own terms, and they may not offer the same relief if your life takes a turn.

The numbers, and where to find yours

You will want a few figures in front of you. The first is your cost of attendance, which is on your aid offer and should include tuition, fees, books, housing, and food. The second is the interest rate on federal graduate loans. Congress sets the formula, and the rate resets each year for new loans. For a new Direct Unsubsidized Loan for graduate students, the fixed rate for the current award year is the current figure, which the official source publishes each year. Grad PLUS loans carry a different rate, which is the current figure, which the official source publishes each year.

There is also a fee taken off the top of each federal loan. The origination fee for a Direct Unsubsidized Loan is the current figure, which the official source publishes each year. So if you borrow a set amount, you actually receive a little less than that amount. Your aid offer should show the fee, and StudentAid.gov lists it too.

There are yearly and lifetime borrowing caps on federal loans for graduate study. Those limits are set by law and they change, so look at the current figure, which the official source publishes each year for the yearly limit and the current figure, which the official source publishes each year for the total across your career as a student. Your own numbers live in your loan account on StudentAid.gov. Log in there to see every federal loan you already hold.

A worked example

Let me tell you about Marcus, a nurse who wants a master's degree to become a nurse practitioner. He earns 52,000 dollars a year now. The program costs 30,000 dollars in tuition and fees, and he plans to keep working part time, so his job covers his living costs. He wins a scholarship of 6,000 dollars from a nursing group. That leaves 24,000 dollars to cover.

Marcus takes a loan of 24,000 dollars at an interest rate of 8 percent, a plain figure chosen for this example. Assume, to keep the arithmetic simple, that he takes the whole amount on day one and that the interest is added to his balance once a year. He is in school for two years and pays nothing during that time.

After year one, the interest is 24,000 times 0.08, which is 1,920 dollars. His balance is now 24,000 plus 1,920, or 25,920 dollars. In year two, the interest is 25,920 times 0.08, which is 2,073.60 dollars. His balance at graduation is 25,920 plus 2,073.60, or 27,993.60 dollars. Compare that with plain interest on the original 24,000 dollars, which would be 3,840 dollars. The real interest is 3,993.60 dollars, because year two charged interest on year one's interest. Real loans may add interest monthly or daily, which changes the figure a little, so your servicer's statement is the one to trust.

Now suppose he repays about 27,994 dollars over ten years, or 120 months, at 8 percent. The standard payment formula is the balance times the monthly rate, divided by one minus the monthly rate plus one, raised to the power of negative 120. The monthly rate is 0.08 divided by 12, or 0.006667. That works out to about 339.65 dollars a month. Over 120 months he pays 339.65 times 120, which is 40,758 dollars. The extra cost of borrowing is 40,758 minus 24,000, or 16,758 dollars.

Now picture Marcus paying the interest while he studies. In year one he pays 1,920 dollars, which is 160 dollars a month. His balance stays at 24,000 dollars, and the same is true in year two. He pays 3,840 dollars in all during school. Then he repays 24,000 dollars over 120 months at 8 percent. That payment is 24,000 times 0.006667, divided by one minus 1.006667 to the power of negative 120, which is about 291.20 dollars a month. Over 120 months he pays 291.20 times 120, which is 34,944 dollars. Add the 3,840 he paid during school, and the total is 38,784 dollars.

Set the two paths side by side. Waiting costs 40,758 dollars. Paying along the way costs 38,784 dollars. The gap is 1,974 dollars, and the monthly bill after school is about 48 dollars lower on the second path.

He also has to compare the payment to his pay. If his new job pays 95,000 dollars a year, a 340 dollar payment is a small slice. If it paid 60,000 dollars, it would sting more. The math is his to check, and it is yours to check for your own program.

Where it goes wrong

I have seen good people stumble here, and it is rarely from carelessness. It is usually from hope. The first stumble is borrowing for a degree without checking what it pays. A program can be worthy and still cost more than the job it leads to will support. Ask the school for the salaries of its graduates, then confirm them with an outside source you trust.

The second stumble is ignoring interest while you are in school. The balance grows quietly, and the bill that arrives at graduation is bigger than the sum you signed for. The third is taking the full amount the school offers just because it is offered. You may only need part of it. The fourth is leaning on private loans first, which can mean giving up federal protections you might have needed later. The fifth is losing track of your servicer, which is the company that collects your payments. Missed mail and missed payments can hurt your credit.

There is one more. A neighbor of mine skipped the free money because the applications felt like homework. Do the homework. Grants and fellowships never have to be repaid, so the hours you spend on applications are hours spent lowering what you may have to borrow.

Questions to answer before you leave this page

Have you added up the full cost of the program, including the pay you will not earn while you study? Do you know what people in your field really make, and where you found that number? Have you filed the FAFSA at StudentAid.gov, and have you asked your school about assistantships, fellowships, and grants? Have you pulled the loans apart from the gifts on your aid offer and looked at each one alone? Can you name the interest rate, the fee, and the monthly payment for every loan on the table? Will you pay the interest while you study, or let it build, and do you know what each choice costs? Could you still make your payments if your first job paid less than you hoped?