Financial choices about graduate school can be complicated. It pays to understand your borrowing and repayment options.
In this topic, you'll learn:
Whether you’re leaving an established career or moving directly from a four-year program, graduate school is typically a major financial commitment. Of course, earning an undergraduate degree generally is a major investment too, but there are important differences in paying for graduate school versus undergraduate. There can be different loan options, preexisting undergraduate debt, and varying program length or schedules.
The cost of graduate school varies in ways that aren’t reflected in just tuition and fees. For example, someone leaving an established career may borrow more while in school to support their existing lifestyle. On the other hand, someone moving straight from undergraduate to graduate school may not fully account for the cost of unpaid interest building up on their loans - interest that gets added to the loan balance over time, increasing the total amount owed.
Before borrowing, it can help to think through repayment - including both standard payment plans and income-driven or forgiveness options - since job outcomes and salaries after graduation can vary significantly.
Borrowing for Undergraduate Versus Graduate School
Federal borrowing for graduate students is capped. Most graduate students can borrow $20,500 a year in Direct Unsubsidized Loans, up to $100,000 total. Students in programs classified as professional degrees can borrow up to $50,000 a year, up to $200,000 total - and the two aggregate limits don't stack, so other graduate borrowing counts against that $200,000. There's also an overall $257,500 lifetime cap on federal student loans for any one borrower. Which programs count as "professional" is being contested in court right now, so ask your financial aid office where your program falls before you plan around the higher limit.
As a result, students may need to fill the gap using:
These changes represent a major shift that will force students to think more strategically about borrowing, budgeting, and selecting degree programs that align with realistic earnings potential. For example, some law school graduates may be offered a job with a high salary and 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 repaying your student loan debt will be an obligation you carry into your career - regardless of how your job search goes.
Minimizing the Cost of Graduate School
Once you chose the graduate program that fits your career goals and consider your actual cost of attendance (including school-based options and grant aid), there are a few 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 balanced 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.
For borrowers who can manage it, paying interest while in school can meaningfully reduce the total amount owed over time - though the benefit will vary depending on your loan type, interest rate, and how much you're able to pay.
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 purely financial standpoint, completing a program on time - or faster - can reduce both interest accumulation and total borrowing. Whether that's realistic depends on your program, your progress, and your circumstances.
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.
For many graduate students, keeping borrowing and spending in check - regardless of expected future income - can make repayment more manageable down the road. 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 may be tax deductible each year per household. Note that income limits and other restrictions apply, so check IRS guidelines o see if you qualify.
One strategy for borrowing only what you need is creating a reasonable budget before you make your borrowing decisions. Sticking to it and avoiding large new financial obligations while in school can help keep your debt manageable - which may give you more flexibility when repayment begins.
Make sure you take advantage of all tax benefits for which you’re eligible, including tax credits or tax deductions. Review our Tax Benefits for Higher Education for details.
Repaying Graduate School Debt
Federal student loan repayment options for graduate school debt are identical to those for undergraduate debt. Federal repayment options work the same way for graduate and undergraduate loans. The difference is scale - repayment plans that didn't make sense at a lower undergraduate balance may become much more relevant when you're carrying a larger graduate school debt.
In addition to federal student loan repayment plans that let you repay debt over longer than ten years, 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), the new Repayment Assistance Program (RAP) caps your payment to a percentage of adjusted gross income with limited reductions based on family size. While income-based plans tend to have a higher overall cost than other plans, they can be a great help in avoiding financial trouble during repayment and even offer loan forgiveness after 30 years of payments.
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 payments while working for an eligible employer, any remaining federal loan balance may be forgiven under PSLF. Paired with an income-driven repayment plan, this could meaningfully reduce total repayment - but outcomes depend on meeting all program requirements throughout the repayment period. PSLF eligibility rules are specific, and not all borrowers will qualify. Visit studentaid.gov for current program details.
Graduate school can be a great way to advance your career, but a sound borrowing (and repayment) strategy should be part of the equation.
