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How to Prepare Your Personal Finances Before Graduate School

You’re a college graduate who’s been in the working world for a few years, and now you have decided you want to continue your education in graduate school. But there’s just one thing … money.

It’s one thing to look for and find the money you do not have so that you can pay for graduate school. It’s another thing to prepare that money you do have so you can optimize your experience once back in school.

Here are a few things to consider to help put all your financial ducks in a row before hitting the books again.

prepare personal finances before graduate school

Understand the ROI of grad school

First things first: Is going to grad school a smart financial move for you?

Would-be students should consider the return on investment of a particular graduate degree, says Barbara Schelhorn, senior director at financial planning firm Sullivan, Bruyette, Speros & Blayney in McLean, VA.

Take time to make a realistic assessment of your career path, potential income, and total educational cost.

You can read more on determining the ROI for your degree here.

Use a 529 plan

Once you have determined that grad school is the right move, start planning ahead financially as soon as you can.

If you have any money left over in a 529 plan following undergraduate expenses, you can use that for your graduate studies as well.

If you don’t have a 529 plan, it still pays to open one even if your time horizon is only a year or two away for grad school, Schelhorn says.

When you’re opening a new 529 plan to save for school in the near future, choose an extremely low-risk investment that’s as close to cash as possible, she says. You may get a state income tax deduction for the 529 contributions, and any growth is tax-free.

Remember, even if you don’t end up going to graduate school, you can always transfer that money, tax-free, to another 529 plan for your children or spouse.

Plan for a Roth conversion

If future grad students need to leave their job to focus completely on school, they should strongly consider rolling their 401(k) funds or traditional IRA into a rollover Roth, says Steve Williams, vice president, national head of financial planning at BMO Private Bank in Chicago.

The rationale? Your low tax bracket in grad school can help you save on income taxes in the future.

Schelhorn says would-be students should consider a Roth conversion if they meet both these criteria:

  1. You have a traditional IRA or a qualified retirement plan with a former employer.
  2. You are or will be in a low marginal income tax rate.

If you’re considering this move, you should prepare a current year income tax estimate before any Roth conversion to estimate income taxes, and then “re-run” the tax estimate adding all or a portion of retirement account to taxable income, she says.

You should then convert only that amount that will keep you in the same or a slightly higher tax bracket.

“You never want to pre-pay income taxes unless it is at a very low tax rate,” Schelhorn says.

You can read more about a Roth conversion here.

Consider working part-time through school

Another option for would-be graduate students is to check if their current employer offers a tuition reimbursement program. Some employers will pick up some education expenses even for part-time employees, Williams says.

“That way you wouldn’t lose your paycheck or your 401(k) plan,” Williams says. “A caveat is that if you left the company before the set period of time you need to commit to working, you may have to repay the tuition cost.”

Estimate your new budget

If you’re going from a lifestyle that costs $60,000 a year down to a graduate student budget, downsizing can be tricky.

“Cut down on extras,” Williams says. “It can be psychologically hard to go from earning a paycheck and then going back to living off macaroni and cheese and Ramen noodles when all of your working buddies are going out.”

Items such as tuition, rent, income taxes, and insurance are predictable and easy to budget for, whereas discretionary expenses are where you’ll need to exercise more control.

“To avoid overspending, a grad student can use a savings and a checking account, transferring only the budgeted amount into checking each month, while keeping cash reserves in savings,” Schelhorn suggests.

Planning ahead with a cosigner

If you are taking out private student loans with a cosigner, make sure that person is protected in the event of a tragedy.

First, check the lender and to see if they have a provision for death discharge; this will release your cosigner from payments in the event of your death.

Alternatively, term life insurance could be considered in cases where your spouse or parent could be liable for student loans.

The goal here is to make sure you get the upside of using a cosigner (lower rates or approved loans) without putting your cosigner into financial danger if something happens down the road.

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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