The cost of graduate school varies in ways that aren’t reflected in just tuition and fees. For example, a person leaving an established career may borrow more while in school to support his or her previous lifestyle since he or she may be forgoing years of income. A person continuing in a graduate program straight out of an undergraduate study may not realize the financial consequences of another year of unpaid interest accrual being capitalized on his or her unsubsidized loans.

Have a plan for loan repayment that includes both traditional payment plans and loan forgiveness options – especially since there’s rarely a guarantee of a specific job or salary after graduation.

Borrowing for Undergraduate Versus Graduate School
If you borrowed for your undergraduate degree, you’re likely familiar with “subsidized” versus “unsubsidized” loans. With subsidized loans, the government pays your interest while you’re in school. With unsubsidized loans, interest starts to accrue from day one, even though loan payments are postponed until after graduation.

For graduate school, there aren’t usually any subsidized loan options. There are still Perkins Loans for graduate school, but their availability is limited to borrowers with extreme financial need and to schools that participate in the program. If you’re borrowing for graduate school, you should assume that interest on your loans will be entirely your responsibility and that it will start to accrue from the moment a loan is disbursed.

Interest rates on federal loans for graduate school are higher than those for undergraduate study, generally 1.5 to 2.5 points higher. All federal education loans have fixed interest rates, which won’t change after the loan is made, but the rate on new loans is set annually. As interest rates change in the country as a whole, education borrowers can expect to pay different rates on their loans.

For example, in a recent year, the interest rate for Direct Unsubsidized Loans for Undergraduate Students was 3.86%, while Direct Unsubsidized Loans for Graduate or Professional Students was 5.41%. Should a graduate school borrower need to borrow more than the Direct Loan annual limit, Direct PLUS Loans were priced at 6.41% – nearly twice as expensive as undergraduate loans – and disbursement fees are also much higher as well.

Another factor to consider, graduate students are allowed to borrow more each year than undergraduates – over $20,000 per year in Direct Loans and even more for Direct PLUS Loans (depending on the cost to attend a particular program). Higher borrowing limits mean a graduate student’s total loan debt, including any federal undergraduate debt, can reach well into six figures.

The ability to quickly repay nearly $150,000 in education debt may be perfectly reasonable for some professions. For others, repayment may only be possible using lengthy (and expensive) repayment plans.

Plan ahead and prepare for the debt level you’d personally find acceptable by researching expected earnings after graduate school. But be sure to look at a wide range of salary outcomes for your particular field. For example, some law school graduates may be offered a job with a high salary and a signing bonus. Others from the same school may struggle to find employment that pays half as well (or less). No salary or employment is guaranteed after completing most programs, but you’ll definitely have the responsibility of repaying your student loan debt.

Neither the federal government nor your school financial aid office decides what level of debt is appropriate for any given student. Their jobs are to administer federal loan programs, not make sure you can easily repay everything you’re eligible to borrow – that’s your decision!

Minimizing the Cost of Graduate School
Once you choose the graduate program that fits your career goals and consider your actual cost of attendance (including school-based awards and other grant or scholarship aid that will not need to be repaid), there are three major strategies to reduce your cost of graduate school.

1) Minimize Capitalization with Interest Prepayment

When interest is capitalized, it’s added to your overall loan balance. So if you chose to borrow $10,000 in year one at 8% interest, at the end of the year the total debt would become $10,800 (the original balance plus $800 in interest). After the second year, the total debt becomes $11,664 ($10,800 plus $864 in interest). Over time, it’s easy to see how education debt can become much larger than the amount originally borrowed.

Minimize the negative consequences of capitalization by paying interest while you’re in school. This strategy is useful for both undergraduate and graduate loans, though you’ll want to pay the interest on the highest interest rate loan first.

Interest prepayment may not be an option for everyone, but if possible, it’s a great way to minimize overall education costs. See our Grace and Deferment Strategies material for more details.

2) Graduate on Time

For programs like medicine, business, and law, the length of each program is mandatory. For other fields, the length of study is more of a guideline than a requirement – so some students finish more quickly and others take longer. For example, the expectation for a particular Master’s degree program may be two years, but some students may choose to take three. The differences can be even more extreme with PhD programs.

For those on an academic track, minimizing the years in school reduces both interest capitalization and new loan debt. Even if the school offers support, interest on existing debt continues to build.

Decisions about how long to stay in a particular program are obviously based on a wide variety of factors, but, from a financial point of view, getting the degree “on time” (or faster) can be a great strategy. For student loans disbursed after July 1, 2013, you must graduate within 150% of the “normal time” for completing the program in which you are enrolled in order to maintain student loan eligibility.

3) Accept a “Student” Lifestyle

There’s a popular saying among medical school students – “Live like a doctor now, live like a student later.” In other words, it’s easy to ignore today’s financial reality if you expect high earnings in the future. The problem is that even those with relatively high paychecks later may have high debt payments, including student loans and credit cards. Taxes can also take a major slice of those higher salaries.

Regardless of your income expectations after graduate school, it’s wise to limit your borrowing and your spending while in school. Borrow only what you really need. Some students borrow close to their annual limits, even though they could get by on less. Others let credit card debt creep higher and higher, making life during school and after graduation more stressful than necessary.

Not only is student loan debt offered at a lower interest rate than credit cards, up to $2,500 in student loan interest is tax deductible each year – making the true cost even less. Living frugally and getting by without using credit while in school will make your future life much more comfortable.

One strategy for borrowing only what you need is creating a reasonable budget before you make your borrowing decisions. If you stick to your budget and avoid major financial obligations (like a car lease or purchase) while in school, your financial situation at graduation is likely to be much better.

Make sure you take advantage of all tax benefits for which you’re eligible, including tax credits or tax deductions. Even if you have no income, you may qualify for up to $1,000 in tax credit refunds. That $1,000 refund would be even more valuable if you use it to pay your student loan interest from that year. Review our Tax Benefits for Higher Education for more information.

Repaying Graduate School Debt
Federal student loan repayment options for graduate school debt are identical to those for undergraduate debt. The difference between the two is just a matter of degree – an option that isn’t as attractive (or even possible) for a lower undergraduate debt might be extremely attractive once your graduate study puts you at a higher debt level.

In addition to federal student loan repayment plans that let you repay the debt over ten or twenty-five years with fixed or graduated payments, if you have a larger debt, you may want to explore repayment plans based on income and potentially loan forgiveness.

If you encounter financial hardship after graduation (a high debt level compared with income), some repayment plans include debt, income, location, and family size when determining monthly debt payments. While these plans tend to have a higher overall cost than other plans, they can be a great help in avoiding financial trouble during repayment.

If you have high debt and plan to work for a non-profit, the government, or in certain professions, Public Service Loan Forgiveness may be a valuable option. After ten years of qualifying employment, any outstanding loan balance you still have is simply forgiven. Coupled with an income-driven repayment plan, over half of your student loan debt could be forgiven in just ten years. In other words, no matter how much federal student loan debt was accrued in school, it would be possible to be debt-free in ten years. In the year your loan is forgiven, however, you may be required to pay federal and state tax on the amount forgiven.

Review our material on repayment plans and Public Service Loan Forgiveness for more information that can help you manage graduate school debt.

Graduate school can be a great way to advance your career, but a sound borrowing (and repayment) strategy should be part of the equation.