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Take on graduate student loans

Question: My son graduated in December in one of the worst economic times. He was fortunate to land and entry level job in his field with an international company. One day shy of three months (the probation period) the company has laid him off. His goal was always to go onto graduate school after paying off his student loans (they would have been paid off in June if his job had lasted). Coincidentally a graduate school he had applied to has an unexpected opening in August. The bottom line: $91,000 for a 4 year doctorate program with little chance for a scholarship. When do you decide to take on this much debt? With his degree, when he graduates, he will start making $80,000/year.

Does he go on to graduate school or does he stay in the job market and try for another job? Thank you so much. Leslee, Boulder, CO

Answer: Traditionally, it has been a smart move to get additional education when the economy is down and jobs scarce. Then in several years you reenter a hopefully improved job market with a new degree.

However, the numbers you give tell me that your son needs to make a series of green eyeshade calculations, and then carefully think through the potential upside and the potential downside. For instance, with the numbers you sent in (and assuming a 6.8% interest rate) your son would end up putting over 15% of his gross monthly income toward student loan debt repayment. That's a very high percentage. It sets off warning bells. Most students carrying that much debt end up feeling oppressed by their debt burden, especially if they take out additional loans, say, to buy a car. To get that debt repayment figure down to a still steep but more reasonable 10% of monthly income he'd need a starting salary of about $126,000. We're living in an economy that is punishing for borrowers.

I just made a very simple calculation. He'll need to make a much more detailed budget to paint a more accurate picture. But once he has done that I would look into what steps might he take to lower the amount he borrows and cut down on living expenses. For instance, can he live at home while going to school or after he graduates? Are you in a position to help him out? Is there a cheaper school with a comparable graduate program that still opens up good career prospects? What if he got another job, lived frugally and saved money for a couple of years--would that make sense?

Then there is the long-term return on investment. Even when the job market recovers wage increases will be scarce in many professions. What is the experience of other graduates from the program he's thinking about attending? Are there reasons to believe he'll enjoy good jumps in pay? Or is the starting salary of $80,000 about what he should expect with 1% to 3% pay increases a year at most? Will this degree open the door to a career he really wants to do and is getting the degree now the best and fastest way to get in?

I don't know the answers to these questions, of course. My main recommendation is to really try and understand the financial and career risks and rewards of taking this step now, and make his decision from there.

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