3 Graduate School Savings Tips for Full-Time Employees
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Try a 529 plan, but don't neglect other savings priorities.
By Deborah Ziff March 12, 2015, at 10:30 a.m. + More
Many prospective graduate students spend at least a few years working before deciding to return to school for a postbaccalaureate degree – time that can be spent planning, and saving, for graduate school.
More than half of graduate students have a gap of three years or more before they return to school for a graduate degree, according to an analysis of government data by Mark Kantrowitz, senior vice president and publisher of the college planning website Edvisors.com.
While there are valuable types of aid available to graduate students – fellowships and research or teaching assistantships – grad programs tend to be more expensive and there’s less gift aid available, Kantrowitz says. Graduate students in most programs aren't eligible for federal Pell Grants.
"Save what you can," he says. "Every dollar you save is a dollar less that you have to borrow."
The typical graduate school borrower from the class of 2012 took on $57,600 in combined undergraduate and graduate debt, according to a report from the New America Foundation.
With that in mind, here are three tips for full-time employees saving for grad school.
[Follow a financial timeline to pay for graduate school.]
1. Use 529 plans: The tax-advantaged savings accounts known as 529 plans aren’t just for undergraduate programs. Students with 529 plan savings left over from their undergraduate years can use the rest for grad school.
If a prospective grad student doesn’t have a 529 plan account, he or she should consider opening a new one, says Greg McBride, chief financial analyst for the personal finance website Bankrate.com.
"Even if your time horizon is short, even a year or two years from now, you’re sheltering whatever returns you get from taxation," McBride says.
Under a 529 plan, earnings are tax-deferred and money taken out for qualified educational expenses doesn’t count toward a student's income.
A common tactic is to automatically have a portion of a paycheck deposited into a 529 plan or another savings account earmarked for educational expenses, experts say.
[Find out the steps to take before opening a 529 plan.]
2. Explore employer contributions: Find out what policies your company has in place on educational reimbursement, McBride says.
A few companies offer matching contributions to 529 plans as an employee perk. Check the fine print, because there are often limits to the match. Such matches are also considered taxable income to the employee under current law, Kantrowitz says.
When coming up with a savings plan, also consider that an employer may reimburse some or all tuition expenses, and sometimes ancillary expenses, such as books or technology. If an employer doesn’t currently have a policy in place "it doesn’t hurt to ask," McBride says.
They may want to lock you into an employment contract or look for some sort of return on investment, he adds.
"From an employer’s perspective, they don’t want to fork over a bunch of money only to see you move to a competitor," he says.
Another plus for students: Under the Employer Tuition Assistance tax break, up to $5,250 of employer-paid tuition support is excluded from an employee’s income, reducing adjusted gross income for the student.
Stephanie Kuenn, 36, who lives in Chicago, was working at the American Library Association when she decided to get a master’s degree in library and information studies from the University of Wisconsin—Madison in 2010. Although the recession had hit the organization hard, one of the benefits her employer offered was a partial tuition reimbursement.
"It was a good way for the ALA to encourage me in my career goals at a time when they didn’t have a lot of other things to offer," she says.
[Learn other ways workplaces can help with education savings.]
3. Balance grad school saving with other obligations: The timeline for saving for graduate school is shorter than for undergraduate programs.
Research shows prospective MBA students start thinking about programs about 18 months before they enter, says Blair Sanford, assistant dean of the full-time MBA program at the University of Wisconsin School of Business.
While saving for grad school is important, don’t let other financial priorities slip, such as retirement and emergency funds, McBride says. The opportunity to pile away money early in life and let it accrue over decades for retirement is not to be missed, he says.
Aim to capture a full employer match on a 401(k) plan before setting aside any funds for graduate school, he says.
"You can take loans for grad school," he says. "You can’t take loans out for retirement."
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