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How Much Should You Borrow for Your Degree?

After months, perhaps even years of preparation, you’ve finally received it: an acceptance letter to the graduate program of your dreams. But whether you’re pursuing an MBA or heading off to law school, there is one common thread amongst nearly all graduate degrees: the hefty price tag.

Ideally, you have already established the ROI of your degree. Now figuring out how to pay for graduate school is an equally important step.

Depending on the degree type graduate students could take on anywhere from $52,000 to nearly $200,000 on average, according to Earnest data.

But that amount doesn’t necessarily add up to what’s right for you. How do you decide how much to borrow for your degree?

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Calculating the true cost of grad school

Don’t make the mistake of assuming that tuition is all you need to worry about; there are books, fees, living expenses, health insurance, and other essential costs of living.

All schools are required to provide their best estimate of these costs listed as the Cost of Attendance (COA) through their financial aid office.

But then you need to factor in your own reality to this number. The COA does not typically include other “extras” such as trips with your fellow students over vacation or travel costs if your family lives far away.

For example, Harvard Law School estimates the cost of tuition alone for the 2015-2016 year to be $57,200 annually. On top of that, the school also prepares prospective students to spend an additional $28,380 on living expenses, books, and other incidentals. Are you married? Tack on an extra $15,360 for your spouse’s living expenses. Have kids? There’s another $7,800 a year for each one. You’re up to $85,580 if you’re single and have no children and over $116,000 if you’re married with two kids. These numbers are important as you may be eligible to use federal loans for everything within a school’s cost of attendance estimate.

Luckily, many universities offer grants to subsidize a large portion of these costs. Harvard Law, for example, states that its average grant covers half of tuition, or $28,600.

How to pay for your Graduate education

Want more info on how to pay for your graduate education?

Download our new guide to get the information you need.

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Regardless of whether or not you qualify for grants, scholarships, or fellowships, you’ll likely also need to consider taking out student loans to finance an advanced degree. But how much you actually borrow depends on two things: your financial past and your projected future.

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Estimating your debt load

You can’t think about your potential student loans without considering your entire financial picture. After you complete the FAFSA you’ll know how much you’re eligible to borrow with federal loans. However, deciding on how much you should (or need to) borrow depends on where you’ve already been, financially speaking, and how you prioritize your long-term goals.

Get started by asking yourself a few questions.

Are you planning to work in public service? In recent years, this has become more attractive to graduates because of the government’s loan forgiveness program. Graduates working in public service can enter an income-based repayment program for 10 years, after which the remaining balance may be forgiven. The catch is that graduates may not have the career and income mobility they want.

What is your projected monthly income upon graduating? Make sure your monthly payments are reasonable and affordable in comparison to your expected salary. If your total amount borrowed is $75,000 at an interest rate of 6.8%, the monthly payment for a standard 10-year term will be more than $860 after your graduate. Do you think you will be able to afford that with your new projected salary?

How is your current credit? While rates on federal loans are not determined by your financial profile, rates on private loans are. If you have poor credit or a limited credit history, be prepared for loan offers with higher interest rates. This will increase your monthly payments and the total interest you pay right off the bat.

How much student loan debt do you already carry? When considering federal loans, some programs limit the cumulative amount you may borrow for your undergraduate and graduate degrees. For example, you cannot take more than $138,500 total in Stafford loans across both undergraduate and graduate studies.

What are your long-term goals beyond graduate school? Remember your debt-to-income (DTI) ratio when it comes time for a major future purchase like a house. Most lenders require a DTI of 43% or less, meaning you won’t be approved for a mortgage if your monthly debt payments exceed 43% of your monthly gross income.

Rules of thumb

In addition to these personal questions, financial experts also like to sling around more generalized rules of thumb to consider.

Some recommend borrowing no more than your anticipated first-year salary (or more conservatively, no more than half). Others say that your annual student loan payments should not exceed 8% of your future projected salary.

You will need to play around with the numbers to see where your anticipated loan amount falls within these guidelines. When you do, don’t forget to include the amount of interest you’ll pay throughout the loan term.

Remember, the interest rates you get on your loans when you originate your loans may be higher than the one you can get if you refinance after you graduate.

Balancing your yearning and earning

In an ideal world, your graduate degree would entail little debt and huge earning potential.

Realistically, you’ll probably have a fair amount of both.

However, an honest look at where you stand financially and a willingness to prioritize your personal and professional goals can help you fund your in education in a way that is manageable.

From there you’ll be able to maximize your earning potential without being bogged down by excessive student loan payments, all while pursuing an exciting new career path and still achieving life goals like buying a house or opening a private practice.

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Earnest is a technology company using software automation, smart design, and exceptional service to restore trust in the lending industry and help clients take control of their finances.