Funding a master’s degree usually means stacking several sources rather than relying on any single one. Work through free money first (assistantships, employer benefits, scholarships, and tax credits), then borrow federal Direct Unsubsidized Loans up to $20,500 a year, and use Graduate PLUS Loans only for what tuition and living costs still leave uncovered. Private loans come last, if at all. The order matters because each layer you secure before borrowing is a dollar you don’t repay with interest for the next decade or two.
Start With the FAFSA
Nearly every form of federal aid begins with the Free Application for Federal Student Aid. You’ll need your Social Security number and federal tax information from the prior year. One detail catches many applicants off guard: graduate students are automatically classified as independent regardless of their living situation, so your parents’ income won’t factor into your eligibility. File early. Some institutional aid is distributed on a first-come basis, and many schools set FAFSA priority deadlines months before the term begins.
Assistantships and Fellowships
University-funded positions are the closest thing to a golden ticket in graduate education. Teaching, research, and graduate assistantships typically require 10 to 20 hours of work per week in exchange for a full or partial tuition waiver and a monthly stipend. Stipends vary widely by institution and field; $1,000 to $3,000 per month is common. The application window usually aligns with admissions, so express interest when you apply to the program. Waiting until after acceptance often means the positions are already filled.
The tax treatment is more layered than most students realize. If your tuition waiver is tied to teaching or research, it’s generally excludable from your income under federal tax law.1Internal Revenue Service. Qualified Tuition Reduction Your stipend is a different story. Money used for room, board, and personal expenses is taxable income, and payments made in exchange for services like teaching or lab work are taxable regardless of how you spend them.2Internal Revenue Service. Scholarships, Fellowship Grants, and Other Grants Students who receive a $25,000 stipend sometimes don’t realize they owe income tax on most of it until they file their first return.
One real benefit: graduate assistants who are enrolled at least half-time and working for their university are typically exempt from Social Security and Medicare taxes on their assistantship wages. This is the student FICA exception, and it applies as long as you aren’t classified as a “professional employee,” meaning you don’t receive benefits like retirement contributions or paid vacation from the university in connection with your assistantship role.3Internal Revenue Service. Student FICA Exception That saves you roughly 7.65% compared to a standard paycheck.
Some departments also offer one-time fellowships or merit grants to attract strong applicants. These are applied directly to your tuition account and don’t require work in exchange, though they may still be taxable if the amount exceeds qualified tuition and fees.
Employer Tuition Assistance
If you’re working while pursuing your degree, check whether your employer offers an educational assistance program. Under Section 127 of the Internal Revenue Code, employers can provide up to $5,250 per calendar year in tax-free tuition assistance.4Office of the Law Revision Counsel. 26 USC 127 – Educational Assistance Programs That amount doesn’t show up as taxable wages on your W-2, which effectively adds a discount equal to your marginal tax rate on top of the benefit. If your employer provides more than $5,250, the excess may still be partially excludable or deductible under other tax code provisions if the education maintains or improves skills required for your current job.5Internal Revenue Service. Frequently Asked Questions About Educational Assistance Programs
Read the strings carefully. Many companies require a work-back agreement committing you to stay with the firm for one to three years after finishing your degree; leave before that period ends and you may owe the full amount back. Some employers also set minimum grade requirements, typically a B or higher, before they’ll process reimbursement. Policies vary enough between organizations that two people in the same industry can have very different experiences.
External Scholarships and Grants
Professional associations, nonprofit foundations, and private organizations fund scholarships and grants that are independent of your school. Engineering, nursing, social work, and public policy fields tend to have the most robust professional association funding, but opportunities exist across disciplines. Awards based on heritage, military service, disability status, and community involvement are also common. Amounts range from a few hundred dollars to a full semester’s tuition.
Applications typically require a personal statement, letters of recommendation, and sometimes a portfolio of past work. Deadlines often fall months before the academic term, so building a calendar early in your planning matters. Scholarship funds are often sent as a one-time payment either to you directly or to the school’s bursar office. Scholarships that exceed your qualified tuition and fee expenses can be taxable, so keep records of how the money is applied.
Federal Direct Unsubsidized Loans
The Direct Unsubsidized Loan is the workhorse of graduate student borrowing. You can take out up to $20,500 per academic year without a credit check, and the money can go toward tuition, fees, books, and living costs.6Federal Student Aid. Volume 8, Chapter 4, Annual and Aggregate Loan Limits The catch with “unsubsidized” is that interest starts accruing the day the loan is disbursed, including while you’re still in school. For loans disbursed between July 1, 2025, and June 30, 2026, the fixed interest rate is 7.94%.7Federal Student Aid. Interest Rates and Fees That rate locks in for the life of your loan, though it resets each July for newly issued loans.
The federal government also charges an origination fee that gets deducted proportionally from each disbursement, so the amount deposited into your account is slightly less than what you borrowed on paper. A six-month grace period after you leave school or drop below half-time enrollment gives you a window before your first payment is due, though interest continues to accrue during that time.8Federal Student Aid. How Long Is My Grace Period?
There’s a lifetime cap too. The aggregate limit for graduate and professional students is $138,500 in combined Direct Subsidized and Unsubsidized Loans, and that total includes anything you borrowed as an undergraduate.9eCFR. 34 CFR 685.203 – Loan Limits If you already carry $40,000 in undergraduate loans, your remaining graduate borrowing room under this program is $98,500.
Graduate PLUS Loans
When $20,500 per year doesn’t cover your program’s costs, the Grad PLUS Loan fills the gap up to your school’s total cost of attendance. For loans disbursed between July 1, 2025, and June 30, 2026, the fixed interest rate is 8.94%.10Federal Student Aid. Grad PLUS Loans On top of that, Grad PLUS loans carry an origination fee of 4.228%, substantially higher than the fee on Direct Unsubsidized Loans. On a $30,000 Grad PLUS disbursement, roughly $1,268 goes straight to fees before you see a dollar.
Unlike Direct Unsubsidized Loans, the Grad PLUS requires a credit check. The review isn’t looking at your credit score or debt-to-income ratio; it’s screening for adverse credit history like a recent bankruptcy, foreclosure, or defaulted debt. If you’re denied, you can still qualify by obtaining an endorser (essentially a co-signer) or by documenting extenuating circumstances to the Department of Education. You’ll also need to complete a Master Promissory Note and entrance counseling before the funds are released.
The higher interest rate combined with the steep origination fee makes Grad PLUS loans meaningfully more expensive than Direct Unsubsidized Loans. Exhaust the $20,500 annual Direct Unsubsidized limit first, then layer Grad PLUS on top only for the remaining balance.
Private Education Loans
Private loans from banks, credit unions, and online lenders are best treated as a last resort after federal aid, institutional funding, and scholarships. Interest rates can be fixed or variable and are determined entirely by the lender’s assessment of your creditworthiness. Borrowers with strong credit and stable income may secure rates competitive with federal loans; those with thin credit histories will often face higher rates or need a co-signer to get approved at all.
The practical differences from federal loans are significant. Private loans generally lack income-driven repayment options, and none qualify for Public Service Loan Forgiveness or any other federal forgiveness program. Deferment and forbearance policies vary by lender and are often more limited. The contract you sign is a standard commercial lending agreement without the borrower protections built into federal programs.
If you bring on a co-signer, ask about co-signer release provisions before signing. Many lenders allow the co-signer to be removed after 24 consecutive months of on-time, full payments, provided the primary borrower passes a credit review and demonstrates the ability to handle the loan independently. That timeline varies by lender, and some don’t offer release at all, which means your co-signer stays on the hook until the loan is paid off or refinanced. The total interest cost over the loan’s full term, buried in the disclosure statement, is usually the most revealing number on the page.
Tax Credits and Deductions
The Lifetime Learning Credit provides up to $2,000 per tax return, calculated as 20% of the first $10,000 you spend on qualified tuition and fees. Unlike the American Opportunity Credit, which is limited to undergraduate study, the Lifetime Learning Credit covers graduate coursework.11Internal Revenue Service. Publication 970 – Tax Benefits for Education The credit phases out for single filers with modified adjusted gross income between $80,000 and $90,000, and for joint filers between $160,000 and $180,000. Starting in 2026, anyone claiming this credit needs a Social Security number valid for employment and issued before the return’s due date.
Once you start making payments, you can deduct up to $2,500 per year in student loan interest from your taxable income.12Office of the Law Revision Counsel. 26 USC 221 – Interest on Education Loans This is an above-the-line deduction, so you don’t need to itemize to claim it. For 2026, the deduction begins phasing out at $85,000 in modified adjusted gross income for single filers ($175,000 joint) and disappears entirely at $100,000 ($205,000 joint). If you’re in the 22% tax bracket and deduct the full $2,500, that’s $550 back each year.
Factor Repayment and Forgiveness Into Your Borrowing
How you’ll repay affects how much you should borrow. The standard federal repayment plan spreads your balance over 10 years with fixed monthly payments. Income-driven plans cap your monthly payment at a percentage of your discretionary income and forgive any remaining balance after 20 or 25 years.13Federal Student Aid. Income-Driven Repayment Plans The program is in transition: a new Repayment Assistance Plan takes over for loans disbursed after July 1, 2026, with payments set between 1% and 10% of adjusted gross income and forgiveness after 30 years. Borrowers entering school in 2026 or later should factor that longer timeline into cost calculations.
Public Service Loan Forgiveness wipes out your remaining Direct Loan balance after 120 qualifying monthly payments (10 years) while working full-time for a qualifying employer.14Federal Student Aid. Public Service Loan Forgiveness Qualifying employers include any U.S. government entity at the federal, state, local, or tribal level, and any organization tax-exempt under Section 501(c)(3) of the Internal Revenue Code.15Federal Student Aid. Qualifying Public Services for the Public Service Loan Forgiveness Program For-profit employers, labor unions, and partisan political organizations never qualify. Only Direct Loans are eligible, and the forgiven amount isn’t treated as taxable income. If you’re headed for government or nonprofit work, PSLF can change the math on whether Grad PLUS borrowing is worth it.
Field-specific programs exist too. Teachers who work full-time for five consecutive years at qualifying low-income schools can receive up to $17,500 in forgiveness on their Direct Loans, with the top amount reserved for highly qualified math, science, and special education teachers.16Federal Student Aid. 4 Loan Forgiveness Programs for Teachers The National Health Service Corps Loan Repayment Program offers up to $75,000 for primary care providers who commit to two years of full-time service in a federally designated high-need community.17Health Resources & Services Administration. NHSC Loan Repayment Program If your field lines up with one of these programs, that changes how aggressively you can borrow without lasting consequence.