Paying for Graduate School

Are you considering graduate school? A graduate school education has significantly different loan dynamics from undergraduate and you should be well-informed before you begin to borrow.

Three types of student loans are available to fund graduate school:

1. Federal — $20,500 per year maximum, eligible for income-driven repayment (IDR), fixed rate, low fees, discharged upon your death.
2. Graduate PLUS — no maximum borrowing other than the full cost of attendance, eligible for IDR, fixed rate, high fees, discharged upon your death.
3. Private — may be lower cost than Graduate PLUS loans, not eligible for IDR, may require a co-signer, may be fixed or variable rate.

IDR is a more important consideration with graduate school as you can currently finance an entire graduate school education with IDR-eligible federal loans. And, if you have IDR-eligible undergraduate federal student loans, these can be included in your graduate school IDR monthly payment.

Depending on its length and cost, you can emerge from graduate school with hundreds of thousands of dollars of student loan debt that can be IDR-eligible. In this situation, IDR is almost certainly financially beneficial. An imprecise rule of thumb is that IDR makes financial sense if your annual income is less than your total eligible indebtedness. You can find more precise calculators on the internet.

Public Service Loan Forgiveness (PSLF) is another important consideration. PSLF has two critical advantages over regular IDR:

1. It is a 10-year payment obligation, rather than 20 or 25 years.
2. The loan write-off is not taxable income to you. This is not well-understood but with regular IDR, your loan write-off may be treated as taxable income to you and this could amount to a significant future tax liability. 2021 update: Biden’s American Rescue Plan has made these write-offs tax-free, currently only through 2025.

Know the parameters of IDR and qualifications for PSLF before you make any decisions about how much to borrow for graduate school. Also, be aware that future federal policy may shift and limit IDR-eligible borrowing so you should pay close attention as the situation may change.

Student loan debt is nearly impossible to discharge through bankruptcy. Any default will have lifelong negative consequences for you. Be sure you can re-pay this debt before you borrow the money. You won’t escape it.

If you are certain when you enter graduate school that you will not use IDR, then you may opt for private student loans instead of Graduate PLUS, as they usually have lower fees and rates. However, this is risky because you cannot later reverse that decision and make the private loans IDR-eligible.

Instead, after you use federal student loans, opt for Graduate PLUS. If, at a later date, you conclude you will not use IDR, then re-finance the loans into a lower cost private loan.

Unless you are certain that you won’t need IDR, I recommend that you finance graduate school using the following approach:

1. Maximize use of federal student loans.
2. Use Graduate PLUS loans to cover any remaining need.
3. After graduation, evaluate whether IDR makes financial sense, given your income and indebtedness, including eligible undergraduate debt.
4. If IDR does make sense, assess how much better off you may be if you also enter PSLF.
5. If PSLF makes sense for you, factor that into your job search and career direction.
6. If you’re confident that IDR does not make financial sense for you, consider re-financing your loans if lower cost private ones are available, but recognize you cannot reverse this decision.

Graduate school can be expensive. Before you move forward, make sure you fully understand your future financial commitment — both monthly payments and the total indebtedness you’ll face, including any tax obligations for loans that may be written off. Proceed carefully.

PS: The Wall Street Journal tells the story of an orthodontist who has amassed $1+ million of student loan debt.