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The student loan debt crisis is real. Today’s students owe an average loan debt of about $23,000, with graduate students averaging about of $50,000. In this guide, prospective graduate students can learn how to utilize student loan options, including repayment plans and loan forgiveness programs, without acquiring exorbitant debt.
This section describes the types of graduate student loans, including the interest rates that are generally applied.
Stafford loans are supplied to graduate students by the U.S. Department of Education. These loans are given out on an unsubsidized basis, which means they begin to accrue interest immediately while the borrowers are completing their degree programs.
The interest rates that are applied to Stafford loans depend on when the student borrows money. In 2013, the federal government passed legislation that sets these student loan interest rates at the same amount as the 10-year Treasury note, which can change from year to year.
For example, students who took out loans in the 2013-2014 school year had an interest rate set at 5.41 percent, which is locked in for the life of the loan.
Graduate students who take out Stafford loans can borrow up to $20,500 annually. Students should keep in mind however that the federal government caps the amount that they can borrow at $138,500 — an amount that includes any funding they may have borrowed during their undergraduate years. Additionally, those studying in certain health fields lifetime loan amount is capped at $224,000.
Also offered by the federal government, Graduate PLUS loans can be borrowed by students who want to use the funds to not only pay their tuition and fees, but also reasonable living expenses. However, unlike Stafford loans, students who apply for this funding must pass a credit check and can be denied if they have undergone a bankruptcy or have accounts that are in collections.
The interest rates of Graduate PLUS loans are also determined by the interest of 10-year Treasury notes.
Students with a high financial need may be qualified to take out Perkins loans, which are funded by the federal government and administered through their college or university. Students are able to borrow $8,000 per year, with a lifetime limit of $40,000, including undergraduate funding.
The interest rates of Perkins loans are set at 5 percent for the life of the loan, and interest does not begin to accrue until nine months after borrowers have finished their degree programs.
Private loans are the funding that students receive from lending institutions outside of the federal government. These loans can be a lot riskier, as their interest rates are variable and can fluctuate throughout the length of the loan.
For example, an institution may offer an interest rate as low as 2.25 percent when the student first borrows the money, but that amount can increase at any time — putting students in a position where they owe much more than they originally bargained for when they began their graduate programs. Some private lenders will fix their interest rates, which can amount to rates lower than federal loans in some cases.
When taking out private loans for graduate school, it’s imperative that students understand the terms so they know exactly what they’re signing up for. These loans can amount to a significant financial obligation, so students must always read the fine print before signing on the dotted line.
The U.S. Department of Education has useful resources that can help students evaluate the different types of loans. However, depending on your creditworthiness, a private student loan from your bank or credit union may offer competitive interest rates. Be sure to compare the repayment plans and consider the generous deferment, forbearance, and loan forgiveness options that federal loans offer.Bob Collins, Bob Collins, VP Financial Aid, Western Governors University
Just like education itself, student loans for graduate and undergraduate students are not the same. The following table includes some differences between graduate and undergraduate student loans.
|Interest accrual||The interest on federal student loans for graduate students begins to accrue immediately after taking out the loan.||Federal student loans are unsubsidized, so interest does not begin to accrue until after the student has graduated.|
|Loan amount||Since the tuition rates for graduate school are generally much higher than those for undergraduate studies, it’s not surprising that the amount students at this level can borrow from the federal government is also higher. Most graduate students can borrow up to $20,500 in Stafford loans per year, while those in medical school may get $40,500 annually.||
The cap on undergraduate Stafford loans depends on how far students are in their degree programs. The breakdown is currently as follows:
The total amount that undergraduates are allowed to borrow is $31,000.
|Interest rates||Interest rates for graduate students are higher. In the 2013-2014 academic year, the rate was 6.21 percent.||Interest rates for undergraduate students are lower. In the 2013-2014 academic year, the rate was 4.66 percent.|
|Needs-based aid||Needs-based federal loans are available to graduate students, but on a much smaller scale.||There are more opportunities for undergraduates to receive needs-based loans, depending on their family income levels.|
|Deferment||Graduate students can defer their loans, but they have to specifically make a request.||Student loans are automatically deferred while undergraduate students are in school.|
Coralee is a graduate student going to school to become an advanced nurse. She needs to borrow $40,000 in student loans for her graduate education, in addition to her $10,000 in undergraduate loans.BEST LOAN OPTION
Coralee would be better off getting a federal student loan.EXPLANATION
As a nurse, Coralee will have the opportunity to participate in a federal loan forgiveness program. In exchange for working at a facility affected by the nationwide nursing shortage, her loan will be wiped out after a certain number of payments.
Trent is a graduate student studying business. During his research, he found a private lender that offers a fixed interest rate of 2.5 percent. He has always heard federal loans are better so he’s uncertain if he should get this type of loan.BEST LOAN OPTION
Trent would be better off getting a private loan.EXPLANATION
While the interest rates of federal loans are generally lower than those of private lenders, in this case, a fixed rate of 2.5 for the duration of the loan would be less than what he would receive from a Stafford loan.
When students apply for graduate school, they take painstaking care to ensure that the applications are filled out accurately and completely. When they apply for student loans, they should be just as diligent.
Here’s a step-by-step overview of the application process for graduate student loans.
Fill out a Free Application for Federal Student Aid (FAFSA®)
Review financial aid award letter
Contact financial aid office
Apply for additional loans as needed
It is important for students to understand when interest will begin accruing on their loan, and the interest rate and fees that the lender charges. It is also important for students to routinely monitor their lifetime loans, so they are always aware of how much student debt they accrued. Students can monitor their federal loan amounts through the National Student Loan Directory Service.Kaitlyn Tracy, Director of Admissions, Spring Arbor University
While many students may dream of winning the lottery and paying off the balance of their student loan in one fell swoop, the reality is usually much different. That doesn’t mean graduates have to be shackled to their student loan for the rest of their lives; there are several payment options that students can choose from, some of which can help speed up the repayment process.
The following gives a glimpse of how these payment plans work.
A temporary postponement that graduates can receive if they are unable to make loan payments. Interest continues to accrue during this time.
A temporary postponement that borrowers can receive if they are unemployed, returning to school, suffering from a disability, or serving in the military. Unsubsidized loans accrue interest during this time, while subsidized loans do not.
Students make monthly payments on a regular schedule. Minimum payment amounts are calculated based on a 10-year period.
Students make lower payments than those on the regular schedule. Every two years, the minimum payment amount increases.
Students who hold certain jobs in the public sector—including government agencies, the military, and non-profit and public service organizations—may be able to have the balance of their loans forgiven after making payments for 10 years.
Monthly payments do not exceed 10 percent of the borrower’s discretionary income. As the graduate’s income changes, the payments change. After 20 years of successful payments, the loan balance is forgiven.
Allows students to extend the life of their loan in order to make lower monthly payments.
Monthly payments are based on income. Some of the loan may be forgiven after an extended amount of time.
Repaying student loans can often be challenging, especially in a bad economy, but it’s imperative that graduates do what they can to keep their payments up to date.
Students who have not made payments on their loans for 270 to 360 days, and have not made arrangements with the lender to postpone payments, will have their accounts moved into default status.
The consequences of this are serious, and can include being referred to a collections agency, getting sued for the entire loan amount, and having employment wages garnished. In addition, graduates whose loans are in default may be prohibited from joining the military or renewing professional licenses.
It doesn’t have to get to this extreme point, however. Some strategies to prevent defaulting on student loans include borrowing only as much as needed, applying for a forbearance or deferment when a temporary financial hardship arises, and exploring alternative repayment options.
Bob Collins, VP Financial Aid, Western Governors University
Students should only consider loans after exhausting all other resources such as personal savings, school payment plans, employer tuition benefits, and scholarships. The cost of higher education is an investment in yourself — the more you borrow, the higher the cost, lowering your return on investment. If you have to borrow money, apply the income tax savings, if any, as a lump sum payment toward the principal balance of your student loan.
First, do your homework. Even before looking at loans, students should research and consider costs at different universities. For example, tuition and fees at online universities vary widely, from approximately the same cost as public universities to more than twice as much. Higher cost does not necessarily mean higher quality, so be sure to understand all of the costs—tuition, books, and fees.
Another factor in your cost consideration should be the length of time you expect to take to complete your degree—the longer it takes, the more it is likely to cost. Some universities, such as WGU, combine a flat-rate tuition with a competency-based model, which allows students to advance as soon as they demonstrate mastery of course materials, making it possible for many students to accelerate their progress toward a degree, saving both time and money.
If a student needs to take out a loan, it is best to borrow only the amount needed for unmet direct costs (tuition and fees after other resources are applied), rather than borrowing the maximum amount allowed.
Not understanding the total repayment cost over the life of the loan (principal plus interest over 10 or more years).Mistake #2:
Borrowing the annual maximum. This is a bad idea. Be frugal to optimize your return on investment. Borrow only what you need to cover the unmet direct costs (tuition and fees after other resources are applied). Live within your means and pay your indirect costs (living expenses) with job wages, savings, and investments.
Those in public service fields find their jobs rewarding because they get the opportunity to give back to the community. But there is one reward that they may not be aware of: the Public Service Loan Forgiveness Program, or PSLF. Under this program, graduates who work for qualified employers on a full-time basis are able to have their loans forgiven after making 120 consecutive payments.
Qualified workers are those who are employed by a public service organization approved by the program. These employers include:
Federal, state, local, and tribal government agencies
Private not-for-profit organizations that provide services to the public, such as emergency management, law enforcement, education, library, and public health services
Tax-exempt not-for-profit organizations with 501(c)(3) status
For PSLF purposes, full-time employment is defined by whatever the employer considers that status to be, or 30 hours per week, whichever is greater.
Subsidized and unsubsidized Stafford, Direct PLUS, and Federal Direct Consolidation loans are covered by PSLF.
Students with private and other non-federal loans are ineligible to receive PSLF benefits.
Any payments that are made after October 1, 2007 for the full monthly amount on the bill are qualifying payments. In addition, they must be made no later than 15 days after the due date. Only payments made while the borrower is working full-time at the qualified employer will be considered.
Students who are enrolled in the Income Contingent Repayment Plan, the Income Based Repayment (IBR) Plan, and the Pay As You Earn Repayment Plan are making qualifying payments.
Income does not affect someone’s ability to benefit from PSLF. However, income does influence the monthly payments that students make if they participate in a qualified payment plan.
The Internal Revenue Service does not consider loans forgiven through the PSLF to be income. Therefore, the amount forgiven on the loan is not taxable.
After making 120 qualified payments, borrowers must submit a PSLF application form. They must still be working for the qualifying employer in order to have their loan balance forgiven.
Graduates can get more information at Studentaid.ed.gov.
Graduate loans are different from undergraduate in a few ways.
Graduate students are only eligible for federal unsubsidized loans and possibly federal Grad Plus loans (which are credit based). This differs from undergraduate students, who are eligible for possibly federal subsidized loans and other loan programs, such as the Perkins Loan.
Other differences include the amount of federal loan limits available. Graduate annual aggregate limits could go as high as $20,500. Undergraduate annual limits are lower.
The lifetime federal graduate loan limit is $138,500, of which $57,500 could have been used towards their undergraduate degree.
Interest rates and origination fees could vary as well.
Choosing a graduate program is a decision that affects students for a lifetime. They should consider the following elements when choosing a program:
A grad program is going to take time, energy, and money.
Their savings and credit could have an impact on their ability to finance their education.
Financial aid by filing a FAFSA®, check local foundations, scholarship searches, military programs, education benefits from their employers, and other organizations that could be a source of funding.
Help from professionals—talk to your school’s financial aid office.
Based on who you are today, what your life situation is, and how much you must have to live and support yourself and your family.
Students tend to borrow more than they need for their education. Most students take out the maximum eligibility, even if it is more than the cost of attendance. Students also do not monitor their aggregate loan amounts and are surprised when they graduate how much loan they have and what that means in a monthly payment.
The best way to avoid these mistakes is to plan ahead when enrolling in a program to minimize the amount of loans needed. Also, keep track of the total amount of loans and utilize the tools provided by studentloans.gov that can calculate their anticipated monthly payment based on their loan totals.
Graduate students can never get too much information about funding their education. Learn more about graduate school loans through some of the following resources:
Provides a comprehensive understanding of federal subsidized and unsubsidized loans, including interest rates and repayment schedules.
Includes information on entrance and exit counseling, which is designed to give students detailed explanations about student loans and their responsibilities as borrowers.
A broad look at the Public Service Loan Forgiveness (PSLF) Program.
Students gain an in-depth understanding about the differences between federal and private student loans, and the pros and cons of each.
This site includes a wealth of information on interest rates and fees, including how they are calculated and the effects they have on loan balances.