Student Loans 101: When Grad School is a Costly Mistake

You know I am a big believer in the value of an affordable college education. Emphasis on affordable. And if you follow my advice to restrict borrowing to only what a student can borrow from the federal government for an undergraduate degree, you will likely be able to pay off that debt in 10 years or so. That’s because the federal student loan program imposes relatively low borrowing maximums for undergrads that basically work as great financial guardrails.

Unfortunately, the federal student loan program for graduate school has no borrowing guardrails. Graduate students are allowed to borrow up to the full cost of attending graduate school.

And this is where I think a lot of young adults are digging a very large financial hole they will struggle to get out of. The U.S. Department of Education (DOED) just released a study on trends in graduate student borrowing. They are concerned too.

According to the report, in the 2021-2022 academic year, graduate students accounted for about 1 in 5 federal student loan borrowers, but the nearly $40 billion of graduate loans made that year was almost as much as the $44 billion for the much larger pool of undergraduate borrowers.

Among graduate school borrowers, the average amount of total debt (undergrad and graduate) rose from less than $53,000 in 2008 to more than $80,000 in 2016. That was a period when general inflation was extremely low.

Now, of course, a graduate degree typically means higher career earnings. However, the Department of Education report points out that the “earnings premium” for various fields relative to a high school degree has not increased. For most fields, the percentage gain in extra earnings 15 years ago is the same today.

That means that people who are borrowing more are likely not earning a lot more to cover their higher borrowing costs. The Department of Education says around 40% of the grad school programs for professional degrees (doctor, lawyer, etc.) had grads who left school with “high debt burdens” that were at least 20% of their discretionary earnings. A sizable portion of master’s degree students also had high debt burdens.

Every family’s graduate school conversations need to include careful consideration of how much debt is okay. It is a myth that the extra earnings from an advanced degree will make it easy to pay off grad school debt. I am not telling anyone to not pursue a career that requires a graduate degree. But you will ultimately be so much happier if you choose a school that will not leave you with a massive amount of debt. An analysis by the Department of Education makes a case for sticking with public universities. The DOED found that less than 10% of public grad school programs for professional degrees (medical, law, etc.) had 2022 grads who were dealing with loan burdens of at least 20% of their discretionary income.

Please be careful in choosing to go to grad school, and which grad school you choose. A helpful rule of thumb that can help you make a smart choice is for the student to keep total borrowing (undergrad and grad combined) to no more than the expected first-year salary. Impose that guardrail and you will be in good shape to pay off your school debt within 10 years after graduating.