If you’re considering going back to school to get a master’s degree, law degree, or MBA, you might be looking into student loans to help pay tuition — especially since many graduate programs cost $50,000 a year or more. Yikes!
This is a choice to not take lightly. Taking on debt of this magnitude (possibly on top of undergraduate loans you’re still paying off), will affect your finances for years to come. So, if you’ve done your research and know that grad school is the best way to advance your career, let me walk you through the ways that grad school loans differ from undergraduate loans.
Your Parents Aren’t Involved
Grad students are considered independent students, so you won’t need your parents’ financial information when filling out the FAFSA (Free Application for Federal Student Aid). If you have memories of your parents spending hours agonizing over the FAFSA when you were in high school, relax! For most grad student applicants, the FAFSA takes less than an hour to complete.
Loans Are Unsubsidized
When a student loan is subsidized, it means that the federal government pays the interest while you’re in school and for six months after you graduate. With an unsubsidized loan, you’re on the hook for the interest payments from day one. If you choose to not pay the interest while you’re in school, it still accrues and will be added to the principal amount of your loan.
Now for some bad news: grad students are only eligible for unsubsidized loans. This means that you’ll pay significantly more in interest! The interest rate on these loans is currently 5.84% but the government can adjust the loan rate each year, so check here for current student loan rates. Speaking of paying significantly more in interest…
Check Interest Rates and Borrowing Limits
Grad students can borrow a higher amount of money than undergrads — at a higher interest rate. Let’s look into some of your federal loan options:
Also called Direct Unsubsidized Loans, Stafford Loans allow grad students to borrow up to $20,500 per year ($40,500 for medical school students) at an interest rate of 5.84%. This rate is locked in for the year, but can change for the next year.
You can borrow up to $65,000 in Stafford Loans for your entire graduate education, or a total of $138,500 in undergrad and grad school loans combined ($224,000 for medical school students).
This is especially important if you’ve changed your mind a few times on your way to getting your undergrad and it ended up taking you 6 years instead of 4 years to graduate. You may have already tapped out the amount of Stafford Loans that you’re eligible for in your lifetime, before you even start your grad degree. If that’s the case, you’ll have to use Grad PLUS Loans, private loans, or pay out of pocket for grad school costs.
Grad PLUS Loans
If Stafford Loans and scholarships aren’t enough, Grad PLUS Loans can make up the difference, paying for any part of the cost of attendance that isn’t covered by other forms of financial aid.
The catch? There are two of them: Grad PLUS Loans have a higher interest rate — currently 6.84% and there’s a 4.272% origination fee to take out the loan! Wowzers!
Think very carefully before you take out any Grad PLUS Loans because the interest rate and fees are so high. Typically you’ll have 10 years to pay off Stafford and Grad PLUS Loans, but there are various repayment plans that can help make your loan payments more affordable. They’ll extend your repayment period, but can be really helpful if your income doesn’t support a high monthly loan payment.
Don’t Forget the Fees!
Here’s something you might not have factored in when applying for student loans: fees! Stafford Loans charge a 1.068% fee, and Grad PLUS Loans charge 4.272%. These fees are deducted from the total amount you borrow, but you’ll need to pay back the total amount, including fees. (These fees can vary from year to year).
Those percentages seem small, but they add up. Let’s say you go to grad school for two years. If you borrowed $41,000 in Stafford Loans (the maximum annual amount times two), and covered an additional $60,000 in Grad PLUS Loans, you’re going to spend $3,000 in fees! (Plus, interest starts accruing on these loans the moment you take them out.)
Considering the high cost of interest rates and fees on student loans, some students are looking into private loans to fund grad school. I think this can be a good option for anyone considering taking out Grad PLUS loans, but be very cautious regarding the amount you borrow because you lose the consumer protections that are offered on Federal Loans.
If you have excellent credit, you may be able to qualify for a lower interest rate on a private student loan. Just make sure you’re not borrowing more than you can afford to pay back. Private loans aren’t eligible for the student loan forgiveness programs or income driven repayment options. Make sure that you think carefully about taking out any private loans.
Alternatives to Loans
Before you resort to borrowing tens of thousands of dollars, look into ways to reduce your grad school costs. Search for scholarships and grants you won’t have to pay back. Your school, or various civic and religious organizations, might have scholarship money available. The Department of Labor offers a free scholarship search.
If you qualify, the Federal Work-Study program will allow you to earn money to put toward your educational costs, and can serve the additional purpose of giving you work experience in your field.
If you’re planning to work while in grad school, see if your employer offers any educational benefits. Many companies will reimburse a few thousand dollars per year of tuition costs, provided you pass your classes and study something related to the work your company does. Sometimes companies require that you stay at your employer for a certain amount of time after you get your degree, so check the details of your company’s tuition reimbursement program.
Finally, you can always pay out of pocket your your grad school education. Anything you can do to avoid taking on student loan debt will only help your financial situation. If you can pay for grad school out of your monthly cash flow, why wouldn’t you? Debt free is the way to be!
See if you are able to reduce the amount of student loans by utilizing a combination of these techniques. For example: your employer might pay for a portion, you might receive a scholarship, take out the amount of Stafford student loans you’re eligible for and then pay out of pocket for the rest.
Is Grad School For You?
I advise you to really think about the return on investment you’ll get from a graduate degree, because grad school loans make it so easy to borrow more money at higher interest rates. What are the average salaries of the students who graduate from that specific program? Is this degree necessary to grow your career or could you do that in another way?
It’s easy to forget, in the excitement of getting accepted to your dream school, how paying back a six-figure loan can affect the next decade or more of your life. Before you sign on the dotted line for a student loan, get a full understanding of the loan’s terms so you won’t experience any surprises.