Student loan debt has surged in recent years. Here’s how to assess if pursuing grad school is financially wise for you.
Q: I'm gearing up to return to grad school for a master's in accounting, which means I’ll incur about $40,000 in debt. It feels ironic to take on such debt for a job that involves advising others on finances. I have my reasons lined up for this choice, yet I can’t help but worry about the financial burden. Despite my belief that I'll be in a better place after graduation, the looming debt is intimidating.
Your concerns about taking on debt are valid and shared by many. Approximately 44.7 million Americans are in the same boat, collectively owing $1.5 trillion in student loans. Thus, it’s essential to grasp what you’re committing to when considering student loans.
“Before accumulating significant debt, it’s crucial to understand the implications of your choice and what it means for your future,” says an expert from a student debt program. “Can you manage your monthly loan payments? Are you ready to tackle this debt for years?”
Assessing your earning potential post-graduation is also vital.
“Consider your career trajectory post-graduation: What are the job prospects in your field? What can you realistically earn in the early years? For instance, if you're entering a field with an average salary of $40,000, why take on $75,000 in loans?” advises a certified financial planner.
Is Taking on Student Debt Justifiable?
This question doesn't have a straightforward answer. For some individuals, borrowing substantial amounts may be the only feasible way to afford higher education.
“It can be worthwhile to a degree,” states a CEO of a financial advisory firm. “However, I’ve seen people make student loan choices that ignore basic financial principles—this can lead to costly errors. While higher education has benefits beyond financial returns, like personal growth and valuable connections, it remains a financial decision,” she emphasizes.
Conversely, for many, incurring heavy debt isn’t the sole avenue for education.
A finance blog founder recommends checking other funding options before committing to loans. “Explore alternatives before locking in student debt,” she suggests. “When I pursued my master’s degree in business, I discovered that working at a university provided me with tuition discounts, reducing my costs to just $472.”
Understanding Good vs. Bad Debt
Is student loan debt truly “good debt,” similar to real estate or business loans? Experts caution against that assumption.
Moreover, to classify debt as “good,” you must be capable of repaying it.
“Regarding ‘good’ versus ‘bad’ debt, remember— not all student loans are alike. Some have high-interest rates, while others are manageable. Debt can only be considered ‘good’ if you consistently make timely payments as part of a repayment strategy,” the expert advises.
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Determining Excessive Debt
With average tuition costs of $10,440 annually for in-state public colleges and $26,820 for out-of-state, it’s no wonder graduates are burdened with debt. The average cost for a graduate degree ranges from $30,000 to $40,000, depending on whether you attend a public or private institution.
So, how much student loan debt is too much? Ideally, your loan payments shouldn’t exceed 20% of your income, and you should aim to pay off loans within ten years after graduating to achieve other financial milestones, such as homeownership.
“To determine if a student loan is justified, research potential earnings in your field during the initial decade after graduation,” she explains. “Your debt payments should be covered by 20% of your expected income. If not, reconsider your strategy,” she adds.
Others also caution against letting student debt hinder other critical financial goals.
“If your student loans prevent you from saving for important life events, like retirement, tread carefully,” warns another expert. “We’ve encountered many parents who halted their retirement savings to fund their children’s education, leaving them unsure about their future plans.”
Financial Realities
While student loans are a daunting subject, they come with some positive statistics. For instance, individuals with a master’s degree typically earn $400,000 more over their lifetime compared to those with only a bachelor’s. Career dissatisfaction can also affect various life aspects, including health and well-being, potentially leading to greater costs in the long run.
As you contemplate student loan debt, it’s wise to keep the numbers in perspective.
“Numbers don’t lie. If your anticipated income won’t support your loan repayment, consider alternatives like scholarships or work-study programs. Be cautious not to assume everything will miraculously work out,” she warns. “This could be the first significant financial choice you make; approach it thoughtfully. Only borrow what you can comfortably repay.”
