Many graduate school students borrow money to finance their education, but with so many options to consider, choosing the right student loan can feel almost as complicated as choosing a program of study. Don’t worry, though — the Student Loan Ranger is here to explain your choices and what you need to know as you make a decision.
If you’re feeling overwhelmed about paying for graduate school, you’re not alone. Finding the funds for grad school is often more challenging than finding money to pay for college. First, graduate school is usually more expensive. There are also simply fewer “free money” resources like scholarships and grants available to grad students.
This is why many graduate students use student loans to cover at least part of their cost of attendance. However, it’s important to understand how much to borrow overall and whether you will be able to manage your monthly payments after graduation, especially if you already have student loan debt from earning your undergraduate degree. Consider using a tool like the Education Department’s new online Loan Simulator to help you understand whether borrowing is the right decision for you.
If you choose to borrow, know that borrowing as a graduate student is somewhat different than borrowing as an undergraduate. The federal direct loan borrowing limit is higher for graduate students, and you will also have access to the Grad PLUS loan program if direct loans are not enough. In addition, you may have a stronger credit history as a graduate student, which means you may be able to get lower rates from lenders outside the federal loan program and save money over time.
Here is what you need to know about some options for graduate school loans and their terms and conditions.
Federal Direct Student Loans
Federal direct loans are the most favorable option for undergraduate and graduate students alike. These loans do not require a credit check and are eligible for income-driven repayment and other options that protect you in the event that you ever struggle to make your monthly payments. You also have access to other programs unique to the federal student loan program, such as Public Service Loan Forgiveness, or PSLF.
Always exhaust your federal direct loans first before you look at other options, but know that the amount that you can borrow is capped. Eligible graduate students can borrow up to $20,500 per year in direct unsubsidized loans, with an aggregate limit of $138,500. This overall limit includes any federal direct loans that you previously borrowed, including to obtain an undergraduate degree.
Interest rates are set every year and are somewhat higher for graduate students than for undergraduate students. The current interest rate on direct unsubsidized loans for graduate student borrowers is 4.3%. All federal student loans also have an origination fee that is taken off the top of the amount you borrow. For loans disbursed between Oct. 1, 2020, and Oct. 1, 2021, the fee will be 1.057%.
Interest begins accruing as soon as the loan is disbursed, but payment is deferred while you are in school. After you leave school or drop below half-time enrollment, there is a six-month grace period before you are required to begin repayment.
Federal Grad PLUS Student Loans
If federal unsubsidized student loans are not enough to cover the cost of your degree program, consider applying for a federal Grad PLUS loan as well.
The Grad PLUS loan, also called a direct PLUS loan, is available only for graduate and professional students. You can borrow up to the cost of attendance, which is determined by the school, minus any other financial assistance you get.
The terms of Grad PLUS loans are not quite as favorable as the federal direct loans. Eligibility for a Grad PLUS loan is credit-based and the interest rate is higher, which means that the loan likely will cost you more in the long term. The current interest rate on these loans is 5.3% and they are subject to an origination fee, which will be 4.228% for loans disbursed between Oct. 1, 2020, and Oct. 1, 2021.
Like the direct loans, payments on Grad PLUS loans are deferred until six months after you leave school and are eligible for income-driven repayment plans and PSLF.
Private Student Loans: State-Based and Nonprofit Lenders
Because the interest rate is higher for Grad PLUS loans, you may wish to compare them to private student loan options to see whether you are able to get a lower interest rate and save money. It’s very important to be an informed borrower and look at more than one private loan option, comparing quotes and terms to determine the best option for your personal circumstances.
You can consider borrowing from a nonprofit or state-based organization. These organizations, which are guided by public-purpose missions, typically were founded solely to help students and families pay for school.
Nonprofit and state-based lenders usually offer options with fixed interest rates, and most do not charge origination fees. You can look up such loans available in your state at ForYouNotForProfit.org and get quotes from different lenders to compare.
Many nonprofit loan programs also include borrower benefits, such as no prepayment penalties and interest rate reduction options, and some offer benefits for graduates who work in a critical field in the organization’s state. Several nonprofit programs also offer repayment options that take into consideration changes in your income.
If you plan to work in a public service field, you should know that these loan options are not eligible for the federal PSLF program. If you wish to seek loan forgiveness for public service, you should borrow federal loans.
Private Student Loans: For-Profit Lenders
Private student loans from banks and other for-profit lenders are also an option for graduate students. If you are comparing loan options, you should explore these as well. Being an informed borrower means getting and comparing quotes from several different lenders to ensure you receive the best deal possible.
Like with state-based and nonprofit loans, you may be able to save money by finding the lowest possible interest rate. Be sure to ask whether the lender offers any borrower benefits, like an auto-debit discount, or options that lower or pause your monthly payment in times of financial difficulty.
Like state-based and nonprofit student loans, student loans from for-profit lenders are not eligible for federal benefits like PSLF. If you plan to work in a public service position after receiving your graduate degree, this is an important factor to consider.
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