Calculating the cost of graduate school is an important step in making the right decision about higher education.

## Defining Cost of Graduate School

“Graduate school” for our purposes is pursuing a Masters or Ph.D. full-time from an accredited university.

The cost of graduate school is two-fold: the actual expenditures made, and the opportunity cost of time spent earning the degree. We’ll compare the earnings / costs between our two options: Grad Degree, and No Grad Degree.

## Graduate School Earnings

What compels someone to go to graduate school? Perhaps it’s the prestige of a degree, or the pursuit of higher learning. For our purposes it’s cold, hard math: higher lifetime earnings.

One key assumption is the starting salary for a person with a grad degree and one without. For our example, we’ll say $50k versus $70k.

Do holders of graduate degrees have higher salaries over their career? Perhaps these people are put into higher positions of authority and compensated accordingly. We’ll assume that the average annual raise is a little higher for a graduate degree holder, say 4% instead of 3% for a non-holder.

Lastly, we need to estimate the cost of graduate school. We’ll use an annual cost, in this case $30k per year. The time spent in graduate school in this example will be 5 years – so roughly $150k in cost while not earning the $50k per year salary alternative.

For discount rate we’ll use 10%. Here is what our assumptions look like:

## Calculating Graduate School Earnings

Now we are ready to calculate the earnings for our two grad school scenarios. We’ll assume we have a 40 years before retirement in either scenario. The first scenario (No Degree) will start work immediately. The second scenario (Grad Degree) spends five years pursuing the degree and begins salaried work in the sixth year.

Here is a quick view of the grad school earnings table:

As you can see the graduate degree holder is earning a much higher salary — 38% higher salary after 20 years.

But have we given proper credit to the scenario entering the workforce directly? To do this, we must determine the net present value of the earnings stream. Let’s add NPV to our table:

This shows us that the NPV through Year 22 is still in favor of the first scenario — no graduate degree. At the end of 40 years the graduate degree has a higher NPV: $4.5M versus $3.4M.

## Scenarios For Graduate School

Now that we have the model built, let’s play with scenarios.

## Scenario 1: 2 Year Masters, 10% Salary Bump, Same Raise Profile

Pretty much even after 40 years at $3.4M. Interesting.

## Scenario 2: 5 Year Ph.D., $15k per year, 25% salary bump, same raises

Interesting, in this example the Ph.D. has a lower NPV despite having the specialized graduate degree.

## Conclusion

I hope this is an interesting exercise for those considering the cost of graduate school versus earnings potential. We only considered the financial impact of graduate school education My takeaway is that it is very important to know your career expectations before pursuing a graduate degree.

## Download For Free

Download this Excel analysis of graduate school cost for your own scenario planning. Leave any comments below.