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.
Choose Your Grad School Wisely
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. You should also carefully select the school that you would be hoping to attend for this selected degree.
The cost of graduate programs at different schools will help you decide what is affordable and cost-effective. Look into the course schedules of each program you are considering to determine how much you can continue working and earning money while enrolled. Online-only and for-profit schools may seem convenient but might take longer to finish than an on-campus education.
Take time to make a realistic assessment of your career path, potential income, and total educational cost.
Make a Plan for Your Current Consumer and Student Loan Debt
Evaluate your current debt level before you return to school. Are you able to defer your current student debt and pay off current consumer debt while in school?
It may be worth it to wait a bit longer to go back to grad school until your consumer debt is paid down or off completely before taking on further education debt. If you are unable to wait, refinancing your current student loan debt can be an option to lower your monthly payments.
Use a 529 Plan to Save for Grad School
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 You’re Becoming a Full-Time Grad Student
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:
- You have a traditional IRA or a qualified retirement plan with a former employer.
- 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.
Work Part-Time Through Grad 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 as a Grad Student
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.
One area of your budget you shouldn’t cut is your emergency budget. Especially if you are a full-time student without a steady income, having a safety net in place can give you peace of mind.
Apply for Financial Aid and Federal Loans for Grad School
Once you know how much you are willing to pay out of pocket, the next step is to learn how much financial aid you are eligible for. You might remember the Free Application for Federal Student Aid, or FAFSA, from your undergraduate degree. You will head back to that familiar form and submit an application with your current financial information.
Even if you are not sure if you will receive financial aid, it is worth everyone’s time to fill out the application and find out. You will also need to fill out the FAFSA if you are hoping to apply for federal loans for grad school. The new FAFSA season opens on October 1st of each year but check with your school on the deadline for applications.
Apply for Scholarships for Grad Students
Before you take out any loans, be sure you have gone down every scholarship and grant avenue available to you. Financing your education through money that you are not required to pay back is the best option for a student.
Similar to applying for scholarships in undergrad, check out awards specific to your program, state, identity, etc. There are even grants and scholarships specific to grad students.
To learn more, check out ‘How to Get a Scholarship’.
Borrow Private Student Loans for Grad School
If financial aid, scholarships, grants, and federal loans are not enough to finance your education, then private loans are the next option to turn to. Private loans can also help students who maxed out their federal loan amounts finish up their education, rather than having to walk away incomplete.
When picking a student loan, keep in mind that there are significantly more options to consider than a federal loan. Federal loans are only available from one provider (the federal government), come at a set interest rate, and have repayment guides that are specific to federal loans. Each private lender will have their own interest rates, repayment terms, deferment terms, cosigner requirements, etc. Weigh the pros and cons of each provider and make an informed decision for your long-term financial health.
Planning for Grad School 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.
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