Before going to graduate school, you’ll want to be aware of common financial mistakes. Avoid these five:
Mistake #1: Waiting to pay off your loans
Even when loans are forgiven under the 20- or 25-year forgiveness program, borrowers are hit with a tax bill for the remaining balance of the loan. For example, Brette Hirsh, a 2009 graduate of Cardozo Law School took $160,000 in debt to finance her education. In Hirsh’s scenario, making a minimum payment on a $160,000 loan for 20 to 25 years would leave her with around $300,000 in debt. The taxes for “forgiveness” would run at least in the five figures, depending on the tax rate at the time. This tax burden might necessitate a payment plan with the IRS to pay off the tax balance.
What to watch: Make sure your monthly budget includes a generous payment toward your student loans. Brandon Yahn, Founder of Student Loans Guy and 2012 Berkeley Haas graduate, put his bonus checks toward his payments. Alexis Jani, a 2009 Tulane Law School graduate, pays back her loans at a rate of about $2,500 a month. In order to accomplish this, Jani lives well below her means.
Currently, public service loan forgiveness and teacher loan forgiveness programs relieve student loan burden without taxes, but the fate of these programs depends on the willingness of the federal government to continue them year-over-year.
Mistake #2: Not working while in school
While immersing yourself in the graduate school experience is important, that decision needs to be balanced with gaining professional experience and income during the program.
Maggie Szeder, a recent graduate of the M.A. in Psychology program at West Chester University, worked two part-time jobs during her first year for extra income and took an assistantship during her second year. Szeder’s assistantship gave her a living stipend and free tuition; she graduated without loans. Similarly, Andrew Selespak, a graduate of the University of Florida Ph.D. program in Mass Communication received free tuition and a living expenses stipend.
What to watch: Students should selectively apply to graduate programs with costs in mind. Assistantships included as part of the curriculum can reduce both the direct and opportunity costs of attending.
Mistake #3: Not applying for scholarships and medically-based financial aid
Graduate programs, employers and other organizations sponsor tuition scholarships. For example, Stanford’s MBA program recently rolled out a full tuition scholarship program for select students willing to work in the Midwest after graduation.
Jason White, a recent graduate of Florida State University College of Law received $96,000 for undergraduate and law school (accounting for interest) by taking advantage of medically-based financial aid, which funds students with a vast array of chronic health issues such as allergies, asthma, mental health conditions and diabetes.
What to watch: Scholarships and medically-based financial aid will each have their own set of eligibility requirements, and medically-based financial aid awards vary by state. To search for organizations that provide scholarships, check a scholarship search engine. You can also inquire with your employer about benefits that may fully or partially fund graduate school tuition.
Mistake #4: Failing to check interest rates and loan benefits
Public loans are not always the better option. Before deciding your loan provider, you should compare and contrast repayment plans, adjustable loan rates, refinancing options and forbearance benefits among public and private loan options.
Jani says she wishes she had refinanced earlier with a private lender to avoid the interest that compounded during the lean recession years when she first graduated from law school.
What to watch: With private loans, watch for adjustable rates as a future interest spike could outweigh paying a lower interest rate today. While private loan interest rates vary by your credit score, public loans don’t use your credit score to provide an interest rate. You may also find that public loans are more flexible with forbearance and income-based repayment options.
Mistake #5: Expecting that your lifestyle will stay the same while in graduate school
Eating ramen noodles, working multiple jobs and sacrificing your entertainment budget are potential components of a solid graduate school budget.
Jani says she made selective spending choices while keeping in mind consequences to her expected debt accrual: “I kept a budget journal. I bought second-hand clothing. Everything I purchased, I would mentally double the price thinking that was the amount I would actually pay back in loans.”
Jacob Lumby, a graduate of the M.S. Program in Personal Financial Planning at Texas Tech University lived off of $1000/month during his first year of graduate school to minimize his out-of-pocket expenses.
What to watch: Lifestyle choices you make in graduate school can get you into trouble later if you’re not careful about your spending.
Avoiding these mistakes will help you succeed in your next educational and professional steps. Smart money choices will provide a positive building block (or stumbling block, if you’re not careful) for the years that follow. Cheers to your investment!