To pay for grad school, work from free money down to borrowed money: start with scholarships, assistantships, and fellowships that never need repayment, then apply savings vehicles like a 529 plan and any employer tuition benefit, and only then take federal student loans for what’s left. The order matters because each layer changes what the next one has to cover, and several of them carry tax rules that quietly shift how much of the award actually reaches your tuition bill.
Scholarships and Grants
Institutional grants from a university’s endowment or department budgets are the first place to look, and admission applications often double as scholarship applications, so you may not need to file anything extra. External scholarships come from private foundations and professional associations in fields like law, accounting, engineering, and healthcare; the American Bar Association and the American Institute of Certified Public Accountants both run grant programs, and databases such as Fastweb or the College Board’s scholarship search let you filter by degree level and field. Many deadlines fall six to nine months before the academic year starts.
Awards are either merit-based (tied to GPA or test scores) or need-based (calculated from your financial data), and each has its own application cycle.
How Scholarships Are Taxed
Scholarship money spent on tuition, fees, books, and required supplies is tax-free.1Office of the Law Revision Counsel. 26 USC 117 – Qualified Scholarships Any portion you use for room, board, or personal expenses is taxable income, even though it’s still called a scholarship. Taxable amounts reported on a W-2 go on line 1a of Form 1040; taxable amounts not on a W-2 go on Schedule 1, line 8r.2Internal Revenue Service. Publication 970 (2025), Tax Benefits for Education If your only income is a fully tax-free scholarship, you don’t need to file.
Assistantships and Fellowships
An assistantship typically bundles a tuition waiver with a monthly stipend in exchange for 10 to 20 hours of work per week, usually as a teaching assistant leading lab sections or grading, or as a research assistant on faculty projects. You’ll generally need a 3.0 GPA to stay eligible. The tuition-reduction portion is excluded from gross income under federal law.1Office of the Law Revision Counsel. 26 USC 117 – Qualified Scholarships The stipend is taxable wages, usually on a W-2.
One tax break often gets missed. Wages you earn from your university may be exempt from Social Security and Medicare taxes if you’re enrolled at least half-time and your primary relationship with the school is as a student. Federal law excludes from FICA any service performed for a school by a student who is enrolled and regularly attending classes.3Office of the Law Revision Counsel. 26 USC 3121 – Definitions Whether your school applies the exemption depends on how it classifies your position, so check your pay stubs.
Fellowships
Fellowships fund your own research or professional development without requiring you to work for the department. Federal agencies like the National Science Foundation run major fellowship programs for STEM graduate students,4NSF – U.S. National Science Foundation. NSF Graduate Research Fellowship Program (GRFP) and private foundations such as the Ford Foundation offer similar awards across disciplines. Many fellowships cover multiple years and may include health insurance subsidies or conference travel. Tax treatment mirrors scholarships: tuition and required fees are tax-free, stipend portions for living expenses are taxable.
Using a 529 Plan for Graduate School
If you or a family member saved in a 529 plan, those funds work for graduate school. The IRS treats any accredited college, university, or vocational school participating in federal student aid programs as eligible, regardless of degree level.5Internal Revenue Service. 529 Plans – Questions and Answers Qualified expenses include tuition, fees, books, supplies, and room and board if you’re enrolled at least half-time.
Withdrawals for qualified expenses are tax-free on the earnings. Non-qualified withdrawals trigger income tax on the earnings plus a 10% penalty. If you’re also claiming the Lifetime Learning Credit, you can’t use the same expenses for both, so coordinate withdrawals with the credit to get the most benefit.
Employer Tuition Assistance
Working professionals have a funding source full-time students don’t. Federal tax law lets employers provide up to $5,250 per year in tax-free educational assistance per employee.6Office of the Law Revision Counsel. 26 USC 127 – Educational Assistance Programs Anything above that cap is added to your taxable income.
Most programs make you pay tuition upfront and submit for reimbursement after grades post, and companies often tie the reimbursement percentage to the grade you earn. You’ll usually need official transcripts and itemized bursar receipts. Read the retention clause carefully. Most employers require you to stay for a set period after reimbursement, and clawback provisions requiring you to repay the money if you leave early are legally enforceable. Commitment windows range from several months to a few years.
Federal Student Loans
Once free money and savings are accounted for, federal loans fill the remaining gap. Graduate students can borrow Direct Unsubsidized Loans and Direct PLUS Loans (Grad PLUS). Graduate students are not eligible for subsidized loans, so interest starts accruing as soon as funds are disbursed.
Limits, Rates, and Fees
You can borrow up to $20,500 per year in Direct Unsubsidized Loans, with a lifetime aggregate cap of $138,500 that includes any undergraduate borrowing.7Federal Student Aid. Annual and Aggregate Loan Limits Grad PLUS Loans cover the rest, up to your full cost of attendance minus other aid.
For loans first disbursed between July 1, 2025, and June 30, 2026, the fixed interest rate is 7.94% on Direct Unsubsidized Loans and 8.94% on Grad PLUS Loans.8Federal Student Aid. Interest Rates for Direct Loans First Disbursed Between July 1, 2025 and June 30, 2026 Rates reset every July based on the 10-Year Treasury Note auction. Origination fees run 1.057% on Direct Unsubsidized Loans and 4.228% on PLUS Loans, both deducted from your disbursement before you see the money.
Grad PLUS Loans also require a credit check. Your credit history is considered “adverse” if you have accounts totaling $2,085 or more that are 90 or more days delinquent, or if you have a recent bankruptcy discharge, foreclosure, tax lien, or wage garnishment.9Federal Student Aid. PLUS Loans – What to Do if You Are Denied Based on Adverse Credit History If denied, you can appeal by documenting extenuating circumstances or by adding an endorser.
Applying
Create a Federal Student Aid (FSA) ID at StudentAid.gov. It works as your legal electronic signature for all federal aid transactions and is tied to your Social Security number.10Federal Student Aid. Creating and Using the FSA ID Then file the Free Application for Federal Student Aid (FAFSA). The 2026–2027 FAFSA uses your 2024 federal tax return data.11Federal Student Aid. 2026-27 FAFSA Form The form collects your adjusted gross income, taxes paid, untaxed income, and asset data to calculate your Student Aid Index.12Office of the Law Revision Counsel. 20 USC 1090 – Free Application for Federal Student Aid Review the FAFSA Submission Summary you receive and correct errors through StudentAid.gov.13Federal Student Aid. Learn About the FAFSA Submission Summary
You’ll sign a Master Promissory Note (MPN) committing you to repay the loan plus interest. One MPN can cover all your federal Direct Loans for up to 10 years as long as you stay at the same school, and you’ll complete separate MPNs for Unsubsidized and PLUS. First-time graduate borrowers must also finish entrance counseling before funds are released.14Federal Student Aid. Entrance Counseling
Your school then certifies the loan amount, and funds disburse in at least two installments, usually at the start of each semester. The school applies the money to tuition and fees first, then refunds any remainder for living expenses. Federal rules generally bar disbursement more than 30 days before the enrollment period begins.15Office of the Law Revision Counsel. 20 USC 1078-7 – Requirements for Disbursement of Student Loans
Private Loans
Private student loans from banks or credit unions can cover any gap federal loans don’t, but they lack federal protections: no income-driven repayment, no forgiveness programs, and no standardized deferment. Private lenders underwrite on credit score and debt-to-income ratio, so a thin file usually means you need a co-signer who shares legal responsibility for the debt. Compare offers carefully.
Tax Credits and Deductions
Lifetime Learning Credit
The Lifetime Learning Credit is worth up to $2,000 per year (20% of up to $10,000 in qualified education expenses) on your federal return, with no cap on the number of years you can claim it. For 2026, 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 $180,000.16Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 You can’t claim it for expenses already covered by a tax-free scholarship or 529 withdrawal, which is why the layers need to be coordinated.
Student Loan Interest Deduction
Once you start repaying, you can deduct up to $2,500 per year in student loan interest paid, even without itemizing. It’s an above-the-line deduction that reduces taxable income directly. For 2026, single filers lose the deduction entirely above $100,000 in modified adjusted gross income, and joint filers above $205,000.2Internal Revenue Service. Publication 970 (2025), Tax Benefits for Education
Repayment and Forgiveness
Graduate borrowers tend to owe more than undergraduates, so knowing the repayment structure before you sign the promissory note is part of the decision to borrow.
Income-Driven Repayment
Income-driven repayment (IDR) caps monthly payments as a percentage of discretionary income. For borrowers with loans originating before July 1, 2026, the available plans are Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Income-Contingent Repayment (ICR).17Federal Student Aid. One Big Beautiful Bill Act Updates The SAVE plan was struck down by a federal appeals court in early 2026 and is no longer available.
For graduate borrowers who first took out loans on or after July 1, 2014, IBR sets payments at 10% of discretionary income with forgiveness after 20 years of qualifying payments. Any balance forgiven under IDR is currently treated as taxable income in the year of forgiveness, which can create a large tax bill years later. Plan for it.
Public Service Loan Forgiveness
If you work full-time for a qualifying government or nonprofit employer, Public Service Loan Forgiveness (PSLF) cancels your remaining federal loan balance after 120 qualifying monthly payments, or 10 years.18Federal Student Aid. How to Manage Your Public Service Loan Forgiveness (PSLF) Progress PSLF forgiveness is tax-free, unlike IDR forgiveness. Payments must be made on an IDR plan for them to count. A rule taking effect July 1, 2026, lets the Department of Education disqualify government and nonprofit employers found to be engaging in activities with a “substantial illegal purpose,” and payments after disqualification won’t count. Submit the PSLF certification form annually.
Exit Counseling
When you graduate, drop below half-time, or withdraw, federal law requires your school to provide exit counseling.19eCFR. Required Exit Counseling for Borrowers It reviews your total balance, expected monthly payment, available plans, and the consequences of default. If you leave without completing it, the school has 30 days to send the materials. It’s your last structured look at the full picture before payments start.