Is Going Back to School Worth the Cost?

people-woman-coffee-meeting.jpgWhether or not to continue one’s education is one of the top questions in personal finance. Even for financial experts, it is not an easy decision. However, there are some great ideas and some great information out there that can help you make the best choice for you. It may be easier than you think.

How Much Money Will You Make?

To figure out whether a college degree makes sense financially, you need to find out how much more money you will make with the degree than without it. If you intend to stay in your current job, it should be easy. Check your contract and talk with your boss, human resources, and/or payroll department. If you will be using the degree to pursue and different job or career, try to speak to people in the industry, and also consult the U.S. Department of Labor’s Bureau of Labor Statistics. On the BLS’s Occupational Outlook Handbook, you can find out the median income for your desired career by state. You will use this information later to determine whether or not the degree will pay for itself and how expensive of a degree you can afford.

If you are not confident that you will earn more money by getting the degree, consider how much it will improve your quality of life. Will you be less stressed about work because you are doing something you love? Will you be more effective at your job, making you less stressed, even if you aren’t getting paid more? These could make the degree worthwhile.

If you don’t stand to gain significantly from pay or a career change, and you just want to learn more, consider educating yourself. There are plenty of free online courses, some even offered by Ivy League schools. There is a nearly infinite supply of books at your fingertips (use the Overdrive app to borrow ebooks from your public library). I studied business, finance, and economics on my own for years before finally deciding to go back to school and get my MBA. If my employer were not going to pay me more for earning the degree, I would just keep doing that.

How Much Will It Cost?

Each college or university posts their graduate and undergraduate tuition on their web site. You can also explore web sites that compare university programs for your desired degree. These can help you find the best quality program in your price range. U.S. News and World Report is one of the best resources for finding and comparing colleges. I used it to find an online MBA program that fit my needs.

How Will You Pay for It?

Next, you need to determine how you will pay for your degree. It is ideal, of course, to earn your degree without any student loan debt, but that isn’t practical for many people. Let’s say for example that tuition is $600 per credit hour, most courses are 3 credit hours, and you plan to take 2 courses per term, 5 terms per year. Multiply all those numbers together, and the cost for one year of school in this particular example is $18,000. That’s a $1,500 hit to the monthly budget.

If that number sounds terrifying, don’t freak out just yet. By shopping around, comparing schools, and comparing online vs. offline course prices, you may find a much more affordable option. You also can apply for the FAFSA and finance part or all of your expenses with student loans.

How Do Student Loans Work for Post-Graduate Degrees?

If you are able to work while earning your degree, and if you don’t need to go to another city to live on campus, the student loan situation for graduate school is much more favorable than for an undergraduate degree. There is a good chance the FAFSA will offer you up to up to $20,500 per year in Direct Unsubsized Stafford Loans. These loans would have a 6.8% APR and need to be paid back within 10 years of graduating.

Let’s say for example that you need $22,000 in student loans to pay for your Master’s Degree. Assuming you make interest payments while you are in school and then the minimum payment for 10 years after graduating, the interest on the loans will be $22,000 x 0.068 x 10 = $14,960. Add that to the principal, and the total due is $14,960 + $22,000 = $36,960. Divide that by 120 months, and you will pay $308.00 per month after graduation.

If, for example, you expect to earn an extra $5,000 per year after earning your Master’s, your monthly earnings would increase by $416.67. Let’s call that $354.17 after 15% income tax. Subtract away the loan payments, and you get a net increase of $46.17 to your monthly budget for those first 10 years after graduating. Once the loans are paid off, you are earning about $350 more per month. In the case of this example, going to graduate school is a practical idea. It will result in a small increase in net income in the short term, followed by a large increase in net income in the long term.

Go through the steps above with the numbers from your own job and degree program, and see what you get. If you will experience a net loss while you pay off your loans, followed by a net gain once they are paid off, then you have a big decision to make. You would be taking a risk over the next 10 years in exchange for the hope of gains a decade down the road. That will be a big decision for you and your family to consider.

What Do I Do About My Undergraduate Student Loan Debt?

Going to graduate school when you still owe on your undergraduate loans is not as bad as it sounds. Any subsidized undergraduate loans will go into deferment when you start going to school at least half-time. This should happen automatically if your university is reporting correctly, but it is worth double checking with the lender. Deferment means that you won’t have to make regular payments during that time, and you won’t accrue interest during that time. Unsubsidized or private loans won’t have the same benefit.

Is Paying for Education with Debt Really a Good Idea?

There are a few schools of thought here, and they all make good points worth considering.

According to The College Board, the average income for someone with a Master’s is $11,681 higher than for someone with a Bachelor’s. That makes a strong case for doing whatever it takes to get the degree! However, results are going to vary widely, depending on what you major in, where you live, how good you are at the job, and how well you interview for jobs.

College Board Graphic

Dave Ramsey, the financial guru who is brilliant at helping families get out of debt, strongly recommends working through school and not using student loan debt. He is strict about no debt except for a home mortgage, ideally a 15-year fixed mortgage. There is something to be said for pulling up your bootstraps to pay for your degree up front, and it will put your household in considerably less financial risk. The math on the income increase may look great until, as Ramsey says, “Murphy comes calling.” (Murphy’s law says that anything that can go wrong will go wrong.)

An excellent point is made by David Stein in a recent episode of his podcast Money for the Rest of Us. When you borrow money to buy a car, a computer, or furniture, the interest charges mean that you are paying more than that item is worth at the price of sale. After the sale, the item immediately starts depreciating in value from the moment you take it out of the store. You might pay twice the sale price for something that will be worth half that sale price within a year. It just doesn’t make any sense. When you pay for a house with debt, the house will likely maintain most of its value. It’s value may increase or decrease with time, depending on the market and other factors.

Stein points out that when you borrow for your education, you are investing in human capital. Human capital is somewhat priceless, but oddly its somewhat unquantifiable value never loses value. Knowledge and experience don’t depreciate. Occasionally, a particular skill may lose value due to access to new technology, and humans face the possibility of memory loss due to a head injury or old age. Aside from these exceptions, human capital is an extremely safe investment. If you have reason to believe that your education will yield a higher salary after you graduate, a student loan is a much better investment than almost any purchase you can finance.

Should I Go To Graduate School?

If you are confident that a Master’s degree or any other educational accomplishment will increase your income, getting that degree may be the best investment you ever make, even if it does involve borrowing some student loans.

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