Obviously, this is not a question to be asked--or answered--lightly. When you start thinking about continuing your studies in Literature at the level of a master's or doctoral degree, you should first canvass the professors you've known best, your former and current TA's (as grad students themselves, they are "in the trenches," so to speak), and any fellow students you may have known as undergraduates who have since gone on to an advanced degree program.

Having had a wonderful experience in your undergraduate Literature courses is not, in itself, a good reason to go on to graduate school (as gratifying as it is for us to hear!). If you're considering university teaching as a career, you should first do some research about the investment of time and commitment that involves, both during your 6-7 years in a PhD program and afterward. (Start by reading my FAQ about what professors do all day.) If you're thinking about graduate school as a route to another career path (e.g. secondary teaching and/or administration, research, foundation and grant work), research that as well.

These annoyingly practical questions should then guide you as you make choices about whether to pursue a master's degree or a PhD, and how to sift the best programs for you out of the hundreds of choices.

Briefly put, these are the pros and cons of choosing a Ph.D. program, which generally involves 2 years of taking classes, followed by general exams, and then by the writing of a dissertation, with teaching interspersed throughout.

PROS:
Eligible for internal and external funding
Lots of paid teaching practice
Understood as a sign of your seriousness of inten

CONS:
5-7 year commitment
Funding may not be complete (lots of loans)
More difficult to change schools midstream

And for master's programs, which generally involve two years or less of coursework and a thesis:

PROS:
Not committed financially or emotionally for more than 2 years
Little, if any student teaching
Qualifies for better secondary-school and administrative positions and salaries than one would receive with a BA

CONS:
More difficult to get funding
Not sufficient for most college teaching jobs
At some universities, bias against “mere” master’s students

When you've made a decision about the level and kind of graduate programs you wish to apply to, research the programs in detail. Find out how well they support grad students, and what their placement record looks like. Visit if you can. Ask around. Use rankings with great caution; they are much more subjective when considering graduate programs than undergraduate ones.

Think hard about whom to ask for recommendation letters. Spend as much time polishing, and vetting, your personal statement as you can; that and the writing sample will mean more to most admissions committees than your test scores.

For further suggestions, see the UCSC Career Center's site on planning for graduate school.