(updated November 16th, 2013. Originally published November 14th, 2013. Follow-up article posted here.)
How much does grad school cost?
More than anyone wants to admit.
There are lots of ways of looking at this question, but I’d like to contribute a view I haven’t seen before: an opportunity cost perspective.
For every year you’re in grad school full time instead of working a job, you’re missing out on the chance to invest toward retirement, houses, or other financial goals. Unless you’re in a graduate program that pays you enough of a stipend that you have some money left over to invest, or you’re working a side job during school, you end up behind.
How far behind?
I decided to focus on one question: assuming that you want to invest some of your money toward retirement, how much does each year of graduate school cost you in the long term? If you want to get the same place—a similar dollar value for retirement at a given age—how much more money do you have to invest annually?
It’s probably obvious that you have to invest proportionally more for each year spent in grad school, but the amount of difference might surprise you.
My point, ultimately, is that grad school is a really expensive choice in ways that are both obvious and subtle. Everyone talks about the crushing load of student debt—paying back what you had to borrow in order to go to grad school—and how hard it can be to find jobs that pay well enough to put a dent in the loans. But most people don’t talk about what happens after that.
When you’re paying back loans, you’re spending present earnings to pay for experiences that happened in the past. But assuming you want to retire in the future, you also need to be making enough more money now that you can make up for the money you couldn’t save during grad school. Depending on how many years you spend in grad school, the amount of extra money you need can be substantial.
How long does grad school take?
Depends on your field. Some fields require Masters’ degrees of 1–3 years in length; some require post-Masters’ certifications that can add another year. Some professional doctorates can take as little as 3 years after college, while some academic disciplines and medical specializations can easily last a full 10 years.
For this discussion, what matters is the number of years a person spends without investing toward retirement.
Surplus
I’d like to introduce a term: surplus. Here we’ll use it to describe the amount of money a person has available for investing once all other bills are paid: taxes, education loans, rent/mortgage, insurance, water, sewer, food, child support, health care, etc.
I’m going to talk about surplus rather than salary levels because people tend to scale up their costs of living as their income increases—and people who go to school longer tend to pay much more per year toward education loans. In terms of what a person is able to invest, surplus seems the best measure.
So, for this discussion, a person who makes $25,000 a year and spends $15,000 is the same as a person who makes $80,000 a year and spends $70,000: both have a surplus of $10,000 annually.
Surplus can change because you alter your income (how much your job pays) or because you change your cost of living (how much you spend on everything). After grad school, assuming you have loans to repay, your cost of living goes way up—meaning that your surplus goes down. To get the surplus back, you either need to economize in other areas of your life (bringing your costs back down) or get a new job (raising your income).
For example: let’s suppose your costs of living are $20,000 a year and you want to put $5,000 a year toward retirement. As long as you can find a job that pays more than $25,000 a year, you’re good. Then you go to grad school for two years, picking up a Masters’ degree that leaves you with $60,000 in debt.
Once you finish, the loan repayments for your MS come to $389 a month, or $4,668 a year. To be in the same place you were before grad school, you either need to cut your other living expenses down to $15,332 or you need to get a job that pays more than $29,668.
Predicting the returns of investments is difficult, but a lot of investors (Warren Buffett among them) agree that 8% annual returns are a pretty solid bet, over time, in the stock market. So we’ll use that 8% return in this discussion, and for the sake of discussion we’ll assume that it includes inflation and capital gains taxation within that 8%.
The scenario
Let’s create some hypothetical people for our discussion. All of them graduated from college with bachelors’ degrees at age 21.
- Alice got a job with an annual surplus of $1,000. She invests in an IRA and continues doing so until age 65, when she retires.
- Belle got a job with an annual surplus of $5,000. She invests in an IRA and continues doing so until age 65, when she retires.
- Clara got a job with an annual surplus of $10,000. She invests in an IRA and a regular investment portfolio and continues doing so until age 65, when she retires.
- Gina went to grad school. She’s our variable here, and we’ll look at different lengths of time spent in quaternary education. Depending on how many years of schooling Gina goes for, she’s going to need different amounts of surplus to match Alice, Belle, and Clara.
They’re all investing, not just putting that money in a savings account.
How much do they need?
I made a spreadsheet to help keep track of the numbers. You’re welcome to play with it if you like!
At age 65, here’s where things stand with Alice, Belle, and Clara’s retirement accounts:
- Alice ($1,000 / yr): $386,506
- Belle ($5,000 / yr): $1,932,528
- Clara ($10,000 / yr): $3,865,056
So if Gina wants to end up with the same amounts as them (i.e., make graduate school a financially wise decision) she’ll need to contribute larger amounts once she finishes school.
Keeping up with Alice
Here’s how much Gina has to contribute annually, compared to how many years she spends in graduate school, to keep up with Alice and end up with approximately $386,506 at age 65.
- 1 year grad school: $1,085
- 2 years grad school: $1,175
- 3 years grad school: $1,275
- 4 years grad school: $1,375
- 5 years grad school: $1,492
- 6 years grad school: $1,620
- 7 years grad school: $1,755
- 8 years grad school: $1,905
- 9 years grad school: $2,066
- 10 years grad school: $2,250
Note that Gina has to have a surplus of these amounts every year, starting as soon as she finishes grad school, or else the numbers go up even more.
These don’t look too bad, especially for the Masters’ degrees. It seems like a solid bet that most people with an MS will be able to get a job that pays at least $275 more, annually, than their previous job paid.
There’s still a concern about the loan repayments, though. If Gina MS has a $5,000 annual loan repayment, that means her new job has to pay $5,275 more than her old one.
Keeping up with Belle
Here’s how much Gina has to contribute annually, compared to how many years she spends in graduate school, to keep up with Belle and end up with approximately $1,932,528 at age 65.
- 1 year grad school: $5,420
- 2 years grad school: $5,870
- 3 years grad school: $6,355
- 4 years grad school: $6,885
- 5 years grad school: $7,465
- 6 years grad school: $8,090
- 7 years grad school: $8,772
- 8 years grad school: $9,520
- 9 years grad school: $10,330
- 10 years grad school: $11,215
Note that Gina has to have a surplus of these amounts every year, starting as soon as she finishes grad school, or else the numbers go up even more.
Things start looking a little uglier here. Assuming the same amount of loan repayment for an MS ($4,668 per year), Gina MS now needs a job that pays $6,023 more than her old one, and she needs it as soon as she finishes school. If she’d gone to PhD school, her loan repayments would be higher and she’d need to contribute more because of the opportunity cost, which means that Gina PhD may need a new job, right away, that pays $10,000–$15,000 more than her old one.
Keeping up with Clara
Here’s how much Gina has to contribute annually, compared to how many years she spends in graduate school, to keep up with Clara and end up with approximately $3,865,056 at age 65.
- 1 year grad school: $10,830
- 2 years grad school: $11,730
- 3 years grad school: $12,710
- 4 years grad school: $13,770
- 5 years grad school: $14,925
- 6 years grad school: $16,180
- 7 years grad school: $17,555
- 8 years grad school: $19,040
- 9 years grad school: $20,660
- 10 years grad school: $22,430
Note that Gina has to have a surplus of these amounts every year, starting as soon as she finishes grad school, or else the numbers go up even more.
Here’s where things really get unpleasant. If Gina MS wants to be in the same place Clara is, financially, she needs to find a job that pays $7,378 more than her old one. If Gina PhD finishes school in 6 years, her first job needs to pay somewhere around $20,000 more than her old one.
So what?
There are lots of great reasons to go to graduate school. The life of the mind is a wonderful thing, and graduate education opens new doors of thought and of experience that aren’t accessible through any other means.
That said, the job market isn’t what it used to be. Lots of people with advanced degrees are finding it hard to get the work they’re now qualified for—there just aren’t that many tenure-track faculty positions available.
People tend to look at the cost of graduate school in terms of borrowing: how much you’ll have to ask someone else to lend you in order to go to school. This is important, but it leaves out the larger question of lost time.
Assuming you want to retire someday, graduate school comes with a substantial opportunity cost because you lose earnings early in your career when your surplus’s future value is highest because it can compound the longest.
Too long; didn’t read
If you’re thinking of grad school, look at the jobs you think you’ll want to have someday. Find out their salaries, figure out how much your life is likely to cost including loans and everything else at that point, and see how much difference there is between those numbers. That’s your projected surplus.
Take a guess at how old you’ll be when you die, then subtract 65 from it. That’s your years in retirement. Figure out how much money you want to have per year when you retire, and multiply that by your years in retirement. Compare yourself to Alice, Belle, or Clara for this number.
Then look down the list, find the number of years you’ll spend in grad school, and compare your projected surplus to the number on that line. If your projected surplus is higher, you’re good—grad school looks like a solid economic bet for you. If it’s lower, grad school may still be a great choice, but it’s on shakier economic footing.
And remember that these numbers only work if you can make those surplus amounts—and the investments that follow—happen every year, starting as soon as you finish grad school. So you’ve got to find a good job right away. If those good jobs don’t exist, consider skipping grad school and staying in the workforce.
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