Many people consider going to graduate school, but fewer actually do so. Daunted by the variety of options for funding graduate education, they become overwhelmed, or they start to doubt whether a higher degree is worth the cost. However, if you follow a simple process for researching and weighing your options, you can devise a suitable funding plan.
A graduate degree has many benefits, including intangible ones. And more employers are seeking candidates with master’s and PhDs; jobs that require these degrees are expected to grow by 18 percent and 16 percent respectively this decade. A wide variety of funding options are available, such as scholarships, merit-based fellowships, teaching and research assistantships, and loans (or loan forgiveness programs). (For a list of the kinds of aid, see this post by CFP Board Senior Ambassador Jill Schlesinger).
Here are four steps to help walk you through the process.
Step #1: Research the application process on your chosen university’s website.
- Chances are you’ve settled on one, or at most a few schools. Experts recommend applying as your first step. Submit the applications well in advance of the deadline to optimize your chances of receiving financial aid. Remember, deadlines for scholarships may be before the required application date. Determine if any grants, fellowships, or scholarships require separate applications. Organize letters of recommendation, and contact the school’s financial aid office to express your interest and to introduce yourself to the financial aid administrator. Ask about options for employment at the school.
Step #2: Estimate your costs accurately.
- Estimate your total costs, including tuition and fees, textbooks, transportation, family expenses, health insurance, and rent.
- Once you complete your application, the institution will tell you how much financial assistance to expect. Subtract that amount from institutional grants, fellowships, and assistantships.
- Employ this net figure as your estimated costs.
Step #3: Determine how you will cover your net costs.
- Consider federal financial aid. Start by completing the FAFSA application at www.fafsfa.gov. Grants and scholarships, loans, work-study jobs, and aid for military families are available for graduate and professional degrees. Grants and scholarships provide free money, while work-study provides part-time income. Federal loans usually offer better terms than private loans. The federal government also provides Loan Forgiveness/Loan Repayment Assistance Programs (LRAPs), which include the Income Based Repayment (IBR), Pay as You Earn (PAYE), Income-Contingent Repayment (ICR), and Public Service Loan Forgiveness.
- Use savings plans when available. 529 Plan distributions are tax-free when used to pay for qualified education expenses, which include tuition, fees, room, and board. A relative or friend can possibly rename you as a beneficiary to an unused plan, because the owner retains the right to change the beneficiary. If you have a traditional or Roth IRA, considering using one or both. Withdrawals from traditional IRAs and Roth IRAs are exempt from penalties if withdrawals pay for qualified education expenses. Another option is a cash value life insurance policy. Based upon certain limitations, you can take either a tax-free withdrawal or a low-interest loan. Finally, you can consider your 401(k) plan balance. Weigh this option carefully. While 401(k) plans have loan provisions, withdrawals impede tax-deferred growth; and the loan could create a taxable event.
- Many companies provide Employer Assistance Programs. Contact your human resources department to see what is available.
- Take advantage of education tax incentives. You can receive up to $5,250 of your employer assistance benefit tax-free. If your education expenses are not being reimbursed by your employer, you may be able to deduct them, up to $4,000. Check the IRS website for a primer. The Lifetime Learning Credit allows you to claim 20 percent of the first $10,000 of qualified education expenses as a deduction. You may be able to take a student loan interest deduction up to $2,500. Phase-outs and reductions apply, so check the limitations. Consider reviewing these education tax incentives with an accountant and getting advice about how you should file your tax return.
Step #4: Evaluate the return on your investment. Ask the hard question: “Is graduate school necessary?”
- After determining your net costs, how much debt you might acquire, and how much of your savings you will consume, you can do a cost-benefit analysis. Compare your net costs to your projected increase in earnings. For example, your degree costs $60,000, and you expect your annual salary to increase $15,000. Assuming no interest, you could pay off your costs in four years. LearnVest’s Grad School calculator provides a way to calculate your future earnings. If you take a loan, your total debt payments should not exceed 36 percent of your annual gross income.
- Remember to consider the salary and retirement savings you will forego.
- Request job placement statistics and salaries from your prospective graduate schools. Verify their data.
- Compare the value of years of solid job experience to the cost of your graduate education. In some cases, experience may be more important (e.g., journalism, teaching, etc.) than an advanced degree.
Developing a plan to fund graduate school is complicated because of the many options available. Consider working with a CFP® professional to help you make prudent decisions about how to pay for school now while bolstering your long-term financial health.
Before investing, the investor should consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan.
Registered Representative offering Securities and Investment Advisory Services offered through Cetera Advisor Networks LLC, member FINRA/SIPC. Reid Financial and Cetera Advisor Networks are not affiliated.