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The Psychology of Taking On Graduate School Debt
Here’s something you may not know about the $1.3 trillion of outstanding student debt in the United States: a large portion actually belongs to graduate students.
According to the most recent data, the percentage of graduate-degree recipients borrowing $80,000 or more (in 2012 dollars) for their combined undergrad and grad studies increased from 7% in 2003-04 to 23% in 2011-12.
More than half of graduate students receive federal loans to finance their education—and while graduate students make up only 14% of the university population, graduate loans account for 40% of all student debt.
With higher interest rates and fewer low-cost student loan options compared to undergraduate, it’s especially important to consider how graduate school debt will impact your future before signing on the dotted line. Taking on debt is always a nuanced decision, and understanding how your brain processes this long-term financial obligation is a critical part of making a responsible choice.
MS, Forestry and Business, University of Georgia ’12
“There weren’t many jobs available in the forestry and environmental space if I didn't have a graduate education, so it was sort of a non-negotiable in my mind. I applied for assistantship programs to cover the cost of tuition, but had to take out loans for living expenses. After landing a Fortune 500 job, it was the first time in my life that I felt like I had money, and I didn’t want to fork it all over to my $50,000 of student loans.
So I avoided it at first, just making the minimum payments for two years. Then I met my now-husband who was debt-free, and my own debt made me cringe. I took Dave Ramsey's Financial Peace University course, got serious about budgeting and started a side consulting business. I paid off all my remaining debt—about $48,000—in just six months.”
Take the Future Outlook
For our hunter-gatherer ancestors, long-term thinking made them slower and weaker. While our environments have changed considerably in the last 150,000 years, our brains are still programmed to value the present over the future.
When it comes to student debt, this “present bias” behavior can prevent you from considering the long-term impact (both positive and negative). You might experience loan aversion—unwilling to go into debt now, even if a loan likely offers a long-term return. On the other hand, you might take on too much debt without considering how (and if) your future self will pay it down.
We prefer immediate rewards over higher-value, delayed rewards. In a University of Chicago study, researchers found that people who felt less connected to their future preferred entering to win a gift card for $120 in a week’s time rather than one for $240 in a year’s time. Our natural preference for the future helps us get through our daily decisions (if we always waited for a “better option” on every decision, we wouldn’t get anywhere), but it also prevents us, in decisions like investing, from reaping greater rewards in the future.
We react to the same option in different ways depending on how it is presented. In a Science study, researchers gave participants two treatment options in a hypothetical situation where 600 people were sick with a deadly disease: In Treatment A, they would save 200 lives and in Treatment B, 400 people would die. Although both treatments shared the same exact outcome, 72 percent of people chose the treatment that was framed as “saving lives.”
Money definitely doesn’t grow on trees, but it might be able to buy you happiness—as long as you spend it the right way. This “right way” isn’t universal, though; it differs from person to person based on your priorities and preferences. In a recent study, researchers found that we tend to spend more money on goods that match our personalities, and that individuals whose purchases better match their personality report higher levels of satisfaction.
One way to get our brains thinking longer-term about taking on debt is to consider how you actually perceive student loans by testing out different points of view—otherwise known as framing.
According to Linnea Gandhi, managing director at behavioral science and data analytics consulting firm TGG Group, the seemingly neutral words we use to describe higher education costs have powerful influence over our acceptance of or aversion to debt. For example, does your reaction change when you think of your student loan as a purchase instead of an investment?
If you think you’re paying $100,000 to simply build a network over two years at business school, you’re taking more of the short-term purchase approach—which may make you hesitant to go into debt (especially since you likely won’t see rewards right away). On the other hand, if you think of spending the time and the money now for future career benefits, you’re taking the long-term investment approach, which may make you more amenable to debt.
Testing different frames can help you dissect your own perception and distinguish how you truly feel. “There are different ways of saying the exact same information that can change the way you behave,” Gandhi says. “You may be more or less receptive to different frames.”
Danny and Amber Masters
DMD, Roseman University ’16; JD, Brigham Young University ’15
“Cost was literally the reason that I attended Brigham Young University. My total debt from law school was about $40,000—which is what some of my friends at other universities were paying per semester! For Danny, we really didn't even consider the cost because dental school is so competitive. When he was accepted at Roseman, he just took the spot and hoped everything would work out for us in the end.
We felt at ease with the investment while we were in school, but now we definitely feel more of the stress of it with $600,000 of debt. We both work full time and also have a few side hustles, including a personal finance blog, a photography business, taking online surveys, joining focus groups for new products, participating as mystery shoppers—the list goes on.”
Retrain Your Brain (Sort of)
Framing can help you understand your current perception of debt and why you’re behaving in a certain way, but in order to truly shift your behavior, it helps to ditch theoretics and take a hands-on approach. According to Klontz, pure information intake has only a 10% change to your behavior—but if you involve physiological or sensory input (and actually “enact” a future situation) the change rate jumps to 70%.
For example, for clients considering taking on debt for graduate school, Klontz takes out a pile of coins and walks them through what life will feel like afterward.
After the initial exercise of coin removal for various expenses, Klontz asks the person to play around with the money left over, engaging them in what he calls “deep psychological imagining.” He tells clients to imagine themselves driving a specific car, living in a specific type of home, having a partner, raising a family, and then to move coins around to finance each of these options. Exercises such as these can be “magical,” Klontz says, since they work to trigger what he calls “intrinsic motivation”—or behavior driven by internal rewards. It helps people see whether their degree and the impact of their loans will actually help them achieve the life they desire.
Average savings calculation is based on all Earnest clients who refinanced student loans owned and serviced by Navient between 03/06/2017 and 03/31/2018. The savings figure of a particular client is calculated by subtracting the projected lifetime cost of their Earnest refinancing from the projected total cost of their original student loans.
How we calculate the figures:
For the original student loans, the projected lifetime costs are calculated using the weighted average term of the original loans and the weighted average interest rate in effect in the month prior to the refinance event, including borrower benefits (e.g. automatic payment discounts).
For the refinanced loans, projected lifetime costs are calculated using the selected Earnest term and interest rate, also including borrower benefits.
Projected lifetime costs assume a principal balance of $75,000.
Projected monthly savings is derived by using the “projected lifetime savings” divided by the selected Earnest term
In order to calculate our average client savings, we excluded:
Savings from any client that selected an Earnest loan with a longer term than their Navient student loan terms
Loans resulting from a client refinancing the same Earnest loan with Earnest
Average client savings amount is not predictive or indicative of your individual cost savings. For example, your individual savings may differ based on your loan term and rate type selections, if you change your repayment options, or if you pay off your student loans early.
Explanation of Rates “With Autopay”
Rates shown include 0.25% APR reduction when client agrees to make monthly principal and interest payments by automatic electronic payment. Use of autopay is not required to receive an Earnest loan.
Explanation of Precision Pricing™ Savings
Savings calculations are based on refinancing $121,825 in student loans at an existing loan servicer’s interest rate of 7.5% fixed APR with 10 years, 6 months remaining on the loan term. The other lender’s savings and APR (light green line) represent what would happen if those loans were refinanced at the other lender’s best fixed APRs. The Earnest savings and APR (white line) represent refinancing those loans at Earnest’s best fixed APRs.
Savings is computed as the difference between the future scheduled payments on the existing loans and payments on new Earnest and “other lender” loans. The calculation assumes on-time loan payments, no change in interest rates, and no prepayment of loans.
Individuals portrayed as Earnest clients on this site are actual clients and were compensated for their participation.