People go to graduate school for various reasons. For some professions, like medicine, law, and academia, an advanced degree is required. For others, the question of whether or not to go is not so cut and dry. Factors like knowledge, skills, and prestige come into play, as well as personal reasons like wanting to switch fields.
The other big impetus is earning more money. The problem is the cost of those extra letters calls into question the return on investment. Let's look at how you can evaluate a grad school program's potential ROI.
1. Find out cost and job prospects.
The advertised price for college can be quite different from what you actually pay. This is not so with graduate school. “The cost proposition for graduate school is significantly different,” says Mark Kantrowitz, senior vice president and publisher of Edvisors, publishers of more than a dozen websites about planning and paying for college. “Financial aid for graduate school is predominantly debt.”
To help with costs, some students could get teaching assistantships, research assistantships, or even employer tuition assistance, in which your current employer will pay for your graduate degree in exchange for some number of years of continued work with them (this is especially common with Master of Business Administration (MBA) degrees).
Use the net price calculator on the school's or program's website to find out how much your graduate degree might cost, and call the school to find out more details, such as the exact amount of a teaching or research assistantship or the likelihood of getting one.
Also, look into the job prospects for people with this degree. Is it an obscure field where a doctorate will relegate you to trying to get one of the handful of professorships in that field in the country? Is it a law degree from a mid-tier school, at a time when recent law grads of all stripes have been having a hard time finding jobs? (In June, the National Association for Law Placement found the employment rate for recent grads fell for the sixth straight year.) Then the degree might not be the best idea.
2. Conservatively project your first-year salary post-grad school.
While no crystal ball will give you an exact figure, try to figure out how much you'll earn your first year out by checking out Payscale.com, Salary.com, and Glassdoor.com to see what people with your experience make with the job title you would expect to get upon graduation. Go with a conservative estimate, at the 10th or 25th percentile for your calculations. “Better to be pessimistic so that even in a worst-case scenario, your decision is going to be financially beneficial,” says Kantrowitz.
3. Make the first cut: undergraduate debt + grad school debt> first year's salary.
If your total undergraduate debt and grad school debt are higher than your first-year salary out of graduate school, then the cost of your total education is too high.
Another good rule of thumb: “You should borrow no more than you can repay in 10 years or than you can repay before you retire,” says Kantrowitz. If this particular degree and field doesn't pass those guidelines, that doesn't necessarily mean you should skip grad school. Maybe you look into a different type of degree that will increase your earnings enough to justify the cost or you find another way to fund your schooling other than by incurring debt.
4. If your debt won't be higher than your first-year salary, then calculate your lifetime earnings if you go and if you don't go to graduate school.
Take your current salary and project, with whatever your annual raise currently is, how much you'll earn every year from now until you retire. Add the numbers up. You can easily do this in a spreadsheet. For instance, if you are 25 and you're currently earning $50,000 a year, assuming 2-percent raises every year until you retire at 65, you'll make just over $3 million in lifetime earnings. (This doesn't take into account any unforeseen circumstances like periods of unemployment or bumps in salary you get from moving to a new company or being promoted to a new position.)
Take your 10th or 25th percentile projected salary after graduate school, and run the same calculation, subtracting however many years you spend on grad school. If the 10th percentile projection is that you'll earn $65,000 after graduate school but you'll miss two years of working, then your lifetime earnings will be $3.6 million. As for factoring in the cost of your loan, Kantrowitz says, “Assume every dollar of debt will cost you $2 by the time you pay it back.” So if your grad school loan is $100,000, by the time you pay it off, you'll have paid about $200,000. (If you want, you could do the actual calculation of the debt and all the interest you would pay over the repayment period. Use MOAA's Amortizing Loan Calculator) Subtracting $200,000 from that $3.6 million, you'll still earn $427,000 more over the course of your lifetime after going to grad school, assuming no periods of unemployment and straight continual raises of 2 percent every year.
5. Consider how a few years out of the workforce will affect your retirement nest egg.
If you're concerned about how a few years out of the workforce could affect how much money you accumulate for retirement, then use a compound interest calculator (like MOAA's Don't Delay Your Savings calculator) to see how much you'll have saved for retirement versus if you skip saving during grad school. (However, if you have enough taxable savings, you could still make tax-advantaged IRA contributions while you're in school so as not to miss out on those years of retirement contributions.)
If you're nervous about how quickly you'll find a new job after graduation and how much you'll be able to contribute toward retirement while paying down your student debt, then don't necessarily assume you'll be contributing more to your 401(k) after you get your graduate degree.
For both scenarios, let's say you're 25, about to start maxing out your Roth IRA annually, with a $5,500 contribution, but you currently have nothing saved. Using this MOAA's simple compound interest calculator and assuming 5 percent growth annually, you'll have $664,000 from that account by the age of 65.
If you go to a two-year grad school and delay saving by two years, you'll have $592,000, $72,000 less - an amount you could subtract from the lifetime earnings differential above. That leaves you with net gain of $355,000 - in grad school's favor.
The last calculation to do here would be to see how your 401(k) contributions would be affected. If, with your current salary, you can't contribute to your 401(k) plan, don't necessarily assume that an increased salary from grad school will automatically mean you can contribute to the 401(k) plan, since you'll now have the grad school loan debt to pay back. Work with a projected budget to see whether you could contribute more and how much that would be over your lifetime. Add that to the lifetime differential again to see what the return on investment would be.
6. Keep in mind that all these projections could be wrong.
You could complete your graduate program and not be able to find a job. You could graduate and get a much higher salary than the 10th percentile projection you made. You could finish grad school, work for three years but then be unemployed for another three. For that reason, these projections cannot be taken literally.
Because of these uncertainties, if the ROI on going to grad school vs. not going is within the range of, say, $100,000, be more skeptical about whether it will be the better choice. At that point, even if grad school seems to have a $100,000 edge, one year of unemployment after grad school with unpaid bills and extra accrued interest could negate your ROI.
7. Factor in intangibles.
On the flip side, remember grad school has many benefits that can't be quantified in dollars. If it's financially a wash, “so long as you're reasonably confident you will break even, and it's not too soon before you retire and so you have plenty of work life ahead of you, then it will boil down to the nonfinancial aspects,” says Kantrowitz. Some of these include the extra knowledge and skills you gain, the new friends and acquaintances you make during school, alumni connections you make afterward, and, especially if the program is a prestigious one, the possible boost to your hiring desirability should also be considered.
Ultimately, the numbers can pretty much only tell you when you should definitely steer clear. In other cases where it's not so obvious, they can give you a rough estimate of how the extra degree could affect your earnings, but you'll have to weigh the quantitative and the qualitative together to decide what ROI really means to you.
This article first appeared on Forbes.com and is reprinted with permission.