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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.

05/08/09 by Chris Farrell

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Public or private graduate school

Question: I am trying to decide between two different graduate schools: a state school and a private college. Both have good, well respected programs, although I'm fairly certain that the private school has a slightly better reputation and would probably improve my chances of getting a good job after I'm done at least a bit. The real difference between the two schools is the cost, and it's the reason I'm concerned about accepting admission at the private school. I would probably have to take on between $30,000 to $40,000 in student loans to attend the private college, in addition to spending my entire life savings of about $30,000. This concerns me especially because the program - A masters in English literature--isn't going to greatly increase my earning potential. I plan to become a teacher, hopefully at a community college, although there's a chance I may want to go on to do a PhD. Also, I'm 31, and hope to buy a home and have children sometime in the not too distant future. And I have no retirement to speak of.

I'm really torn, because while I think I may get a better education at the private school, it seems like a bad idea financially, especially since the state school MAY be just as good (if not as cushy and warm and fuzzy). Should I take the risk and take on the debt required to go to the private college? Thank you! Anna, San Francisco, CA

Answer: Anna, I think you already answered your question as you wrote it out. You believe it doesn't make sense for you to take on that much debt and drain your savings for a degree that won't increase your earnings potential (much). If you go to the private college you'll spend years after getting your degree struggling to pay down debt, living on a financial high-wire. I take seriously the importance of enjoying your graduate school experience. But I worry that you'd end up financially strapped, limiting your freedom of choice once you have earned your degree.

I hope you've really explored that the state college graduate degree will pay off in terms of job and career. I'm not an expert, but I do know that the competition for teaching jobs at community colleges and junior colleges is soaring. When it comes to graduate school, it's less about getting an education (which is vital with an undergraduate education) and more a cold, rational calculus on the return on investment.

You might want to check out my answer to a related question that I posted on May 8th, Take on graduate student loans? Better yet, read the comment section. There are some very sharp observations on money and the risks of getting a graduate degree.

Anyone else want to weigh in with some insight for Anna?

05/13/09 by Chris Farrell

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Save more or attack student loans

Question: I am trying to balance saving enough money in case I lose my job and paying down my current (and increasing) student loan debt. I work full time and am a part-time law school student. I have pre-existing school loan debt from another graduate degree (about $45,000). Now, I'm accruing more by attending law school. The pre-existing loans are deferred, but I could still make payments since I'm working. I am not sure how to balance making sure I have enough savings and paying off the debt. Right now, I have a solid 10 months of expenses in savings (not counting any of my retirement savings). Should I stop worrying about the savings and start paying down the school loans again? Rebecca, Hoboken, NJ

Answer: As you well know, the cost of living in the New York City area is expensive. It's impressive that you've accumulated a solid 10 months in savings. It's a decent financial cushion for anyone. It's a judgment call, but a key for answering this question is this: Is your job is really at risk or are you just feeling the general unease we all have about our jobs during the economic downturn. Assuming that you are reasonably secure in your job I would start paying down the student loans again. And then you can get even more aggressive when you get a job as a lawyer.

06/22/09 by Chris Farrell

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