Pursuing a graduate degree can be a tempting opportunity; after all, you will likely improve your marketability when job hunting, increase your salary and expand your professional network.
But while all of these results represent the ideal situation, do they actually reflect the reality of repaying student loans to cover the costs of your degree?
When deciding whether or not a graduate program is right for you, you may want to take a look at the return on investment (ROI) of your degree as part of your decision.
Talking to graduates from your prospective schools can help set your expectations in a general way. But if you’d like to get more quantitative, running your own numbers is a good way to examine the costs of the program and the return it will have on your financial prospects.
Of course, there are plenty of intangible rewards that come with advanced study that is not summed up with a number. Those are things like expanding your knowledge, networking, and social opportunities as well as satisfying your own passions.
However, we want to help you go through the process with your eyes wide open and provide a framework to think about the costs of a program, your borrowing costs, and future job prospects.
Map out your income path
Let’s say you’re proposing a project to your boss or considering a major purchase — you would probably want to do some cost-benefit analysis first. Deciding on a graduate program takes an equal amount of forethought.
Not only do salaries vary depending on your degree and specialization, factors such as location and work experience also significantly contribute to your estimated ROI.
First, learn the job prospects in your field. Research nuances specific to your field’s job market and location. Browse relevant job listings in your area and read job market reports on the projected growth of your future profession. Use this information to then calculate your estimated salary with a graduate degree.
Second, consider the cost of attendance. Have you been saving money specifically for graduate school or will you need to borrow for the majority of your expenses? In addition to tuition, don’t forget to include living expenses, fees, books, and academic trips. Every school is required to provide an estimated cost of attendance (COA), which includes its own all-in cost estimate. If you plan to take out student loans, find out your monthly estimated payments based on the loan terms. You can use an online calculator like this one.
Third, estimate your future earnings. Using an income growth calculator, compare your current salary to your anticipated salary to see what your annual income growth looks like for each scenario. Then, subtract your estimated annual student loan payments from the graduate degree salary to find out just how much extra income you could actually take home each year.
How do these numbers compare to your current income projections? Of course, neither scenario incorporates promotions or periods of unemployment, but they do give you an idea of the general trajectory your income could take on either path.
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A B-school case study
Let’s put this comparison to the test using a case study of a typical business school student at a top-rated program.
At age 28, Linda has decided to take the next step in her career as a market analyst and pursue her MBA. Having already earned her undergraduate degree in finance, she currently earns $60,000 a year and hopes to jump to six figures once she finishes graduate school.
Linda was recently accepted into the prestigious University of Chicago Booth School of Business, which is ranked fourth in the nation.
With the full cost of attendance adding up to nearly $98,000 per year, she only anticipates borrowing $56,000 after receiving scholarship and fellowship money and using $60,000 she’s saved in the six years since graduating college.
Assuming Linda gets a post-graduation job with a salary of $103,000 (that’s the median salary for new Booth graduates entering marketing) and a $20,000 sign-on bonus upon graduation, will the result justify the amount of savings spent and debt incurred?
Let’s do some back-of-the-napkin number crunching:
- Total cost of attendance at Booth (two years): $196,000
- Scholarship / fellowship money: $80,000
- Savings spent: $60,000
- Debt incurred: $56,000
- Average interest rate on loans: 7.21%
- Interest accrued over 7-year repayment: $15,480
- Monthly payment: $851
- Linda’s total out of pocket cost: $131,480
When adding both her savings and total loan amount, we find that Linda will have spent more than $131,000 out of pocket for her education (and that’s not including the two years of missed income while she is in school). Was it worth it?
First, with her new degree and income, Linda should consider refinancing her loans. If Linda refinances her $56,000 debt into a lower APR immediately after graduating — and lowers her interest rate from 7.21% to 4.99% — her new monthly payment will be $791, with savings of $5,000 in interest over the life of the loan.
(She could also refinance into a shorter term, which would increase her monthly payments — or a longer term, which would lower them even further.)
Now when reviewed on an annual basis, if she maintains the same cost of living from before grad school — and that’s important — she gains back well over half of her expenditures in the first two years upon graduating.
She replaces one-third of her cash savings with her signing bonus off the bat, and then, by living well below her means, she can replace the remainder of her cash savings over the next two years in addition to making progress on her loans.
Let’s look at the numbers again after refinancing:
- Linda’s post-MBA income: $103,000
- Her signing bonus: $20,000
- New interest rate after refinancing: 4.99% (fixed rate)
- Annual student loan debt payments: $9,500
- Interest accrued over 7-year repayment: $10,500
- Linda’s new total out of pocket cost: $126,500
|Year 1||Year 2||Years 3-7|
|$9,500 to student loan debt||$9,500 to student loan debt||$9,500 to student loan debt|
|+$20,000 bonus to replace cash savings||+$20,000 income to replace cash savings|
|+$20,000 income to replace cash savings|
|Total back to cost: $49,500||Total back to cost: $29,500||Total back to cost: $47,500|
Even more striking is the difference a graduate degree makes on Linda’s two potential salaries at retirement age. Assuming a 3% annual salary increase, by age 65 Linda would earn just $179,144 annually sticking with her current income path, compared to a whopping $289,828 with her MBA. In other words, the return on her salary hike due to her degree continues over the lifetime of her career.
While this is an ideal scenario for Linda, it still creates a very compelling case for pursuing her MBA.
To get an idea of costs and projected income for other graduate degrees, take a look at the table below.
|Degree type||Typical COA||Median student loan balance||Median income|
|Dentistry (DDS, DMD)||$181,000-$423,000||$220,000||$155,000|
|Law (JD, LLM)||$40,000-$225,000||$122,000||$121,000|
Note: Data for median debt and median income based on Earnest loan applicants, with a median of 3.8 years since graduation.
There are a number of factors you’ll have to consider with your decision of pursuing a graduate degree: professional goals, personal interests, and timing in life all play important roles.
However, it’s equally important to weigh the financial implications of your intended program. Following your passion is important in life, but perhaps not at the cost of your financial security. On the other hand, you may have much to gain by completing your graduate degree.
Performing your due diligence by analyzing the ROI could very well tip the scale in deciding one way or the other. In the end, you’ll feel confident knowing that you’ve made the most informed decision possible.