When I hang out with my friends, grad school seems nearly an inevitability. The tone is not so much a question of if everyone will go back to grad school, but rather when.
I like to consider myself the voice of reason in these conversations (though my friends have a different nickname for me: buzzkill), so I often ask probing questions like: What’s your hoped-for job/career outcome for grad school? Will you be taking out student loans, and if so, have you thought through what it would be like to be tens of thousands of dollars in debt? How confident are you that you’ll realize a return on your (significant) investment?
Usually I’m met by blank stares. Some of my friends mention the oft-cited $160K starting salary for some (very few) lawyers. Others mention how the cost doesn’t matter because grad school will allow them to pursue [insert dream career here]. One friend actually made the case for grad school to me by saying it would help him meet people of the opposite sex. I guess he hadn’t heard of Tinder.
Attending Grad School Is Now Riskier Than It's Ever Been
My objective for those questions is to get people to think through the graduate school decision in a very deliberate way. Doing this is now more important than ever, as going to graduate school has never been riskier than it is now.
Up until the last 5-10 years, it had been hard to build a case against grad school. A growing job market and rising demand for credentialed workers throughout the 80s, 90s, and early 2000s papered over the huge increases in tuition costs. For the last fifty years or so, getting a graduate degree was a ticket to prosperity, especially if one studied law or business. However, that’s not necessarily the case anymore. Let’s see why.
- Everybody’s got a grad degree. Some people have three. The percentage of the U.S. population that holds a graduate degree doubled from 1995 to 2014. In 2014, about 8% of the population held a graduate degree, the same percentage that held a bachelor’s degree in 1960. Having a master’s degree is becoming less and less of a differentiator in today’s job market.
- The rising cost of graduate education has far outpaced inflation over the past 30 years. I think we’ve all heard Baby Boomers tell us how they put themselves through school working part-time. That’s impossible today. The cost of graduate school has risen nearly 3x faster than inflation and far outpaced wage growth.
- There is a mismatch between supply and demand for certain professional fields. The increase in the number of people with grad degrees might have been fine if job openings kept pace. However, that hasn’t happened. As an example, take a look at the comparison between PhD and master’s degree completions and expected job openings from the BLS for Clinical and School Psychology. A “distressing gap” emerges:
Still think graduate school is a sure bet to the upper middle class?
Despite the dire picture painted above, graduate school does of course benefit many who attend. As with any big investment decision, you just have to do your due diligence first by assessing costs and risks. In addition to the above, one way you can do this is through calculating the expected return on investment (ROI) of your decision to attend graduate school. ROI is a pretty simple concept and can be summarized in the formula below:
ROI = [Net Financial Benefit] – [Net Costs]
We’re using the word “net” in the formula above because you should only consider the difference in financial benefits and costs compared to your baseline. For instance, if your current salary is $50,000 and your expected post-graduate degree salary is $80,000, you’re really only benefiting by $30,000 through that decision. Similarly, if you go from not paying tuition to paying $50,000 in tuition, you need to consider that entire cost when doing your calculations.
Further, you’ll need to pick a time horizon over which to analyze the benefits and costs. I’d recommend projecting annual benefits and costs for 10 years from the time of your expected graduation. Keep in mind that financial projections get less and less accurate the further into the future you go – by the 10-year point any financial benefit may be due more to your job performance than your graduate degree.
Confused yet? I thought you might be. Luckily, I’ve done a lot of this legwork for you already by developing a Graduate School ROI Calculator available through www.yourroaring20spersonalfinance.com. You can use this tool to change variables and assumptions to see what the financial case looks like under different scenarios.
There are of course many, many variables that can affect your ROI, ranging from the interest rate you pay on your loans to the starting salary you receive after graduation. Calculators can be helpful in assessing the risks and payoff for certain decisions and also help determine which variables are most important to generating strong ROI. I’ve picked out some of the most important to consider below:
- Difference between pre-grad school salary and post-grad school salary: This one’s pretty obvious, but grad school is of little benefit if you salary stays the same after attending grad school. The bigger this potential difference, the better your potential ROI will be.
- Years of study: Each additional year of graduate school means you’re not only paying more tuition but also missing out on a year of potential income. The shorter the program, the better the financial case.
- Amount of student loan debt: Again, pretty obvious, but the more debt you take on the harder it will be to realize positive ROI. Also consider the interest you’ll be paying: a $100,000 loan paid back at 6% interest over 10 years means you’re actually paying $135,868 when all’s said and done.
Though the case for graduate school is becoming more challenging from an ROI standpoint, I’m by no means saying that people should avoid it altogether. However, doing due diligence around this decision is more important than ever before, and making a bad decision can seriously impact your long-term financial security. No pressure, right?