Which Student Loans Are Available for Graduate Students?
Federal and private grad school loans are the two kinds of financial aid typically available to grad students. A federal loan is one that usually draws funds from the federal government. A private loan is available through a traditional bank lender or credit union. Financial aid may be available to those who qualify.
Many of these loans take into account how your education will progress. For example, if you’re attending medical school, you’ll need time to complete your residency. There are many factors to look at when you’re considering the right loan option(s) for you. We’ll look at how the two compare and what you should look for in a loan.
Federal Student Loans
There have been a lot of changes in federal student loans in the recent past, both for grad and undergraduate students. Unfortunately, many of the low-interest or subsidized options may no longer available for graduate students. For example, the Federal Direct Subsidized Loan has been eliminated for graduate students. (It remains an option for undergraduate loans.) But there may be two federal options that you may qualify for. A Direct Unsubsidized Loan or a Grad PLUS Loan are both available.
The Stafford Loan
We’ll look at the Federal Direct Unsubsidized Loan first, often called a Stafford. This loan is your first line of funding. You may only need the PLUS loan if the Stafford doesn’t cover your expenses. This loan offers fixed rates, meaning your payments may be the same from month to month. You typically do not need to display any kind of financial need to qualify for this loan. But there are limits placed on the loan based on different factors.
The greatest amount that you may borrow for the 2020 year is $20,500. If you’re attending medical school, you qualify for up to $40,500 per year. The total loan limit for a Stafford loan is $138,500 for grad students and $224,000 for medical students. These numbers include any debt that you may still have from undergraduate.
The interest rates for an unsubsidized loan may depend on the year in which you take out the loan. But the Stafford loan has a lower interest rate than the Grad PLUS loan. Interest begins from the moment the funds are first released (or disbursed) to your school. Much like a credit card, your total debt may increase based on the rates of the loan.
If you can’t qualify for the money you need for grad school through a Stafford loan, you may consider the Grad PLUS loan.
Grad PLUS Loan
Private Loans are available to students to assist in covering expenses that are above what traditional financial aid can cover. Some private loans require school certification before being approved and are intended to cover educational related expenses while other private loans do not require school certification and may be used for various living expenses above and beyond typical educational expenses.
A grad PLUS loan is a type of Direct PLUS loan. It allows you to borrow money if you reach the limits of your Stafford loan. Grad school may be very expensive. The $20,000 limit may not cover more than the tuition and textbooks. In some cases, it might cover even less.
This loan is not a need-based loan. This means that you typically don’t need to show financial hardship to qualify. But the lender may do a credit check and factor in adverse credit history. This is because you’re borrowing on top of the Stafford limit. The Grad PLUS loan begins charging interest from the time it distributes the funds. It may accumulate until the loan balance is settled. Like the Stafford loan, it’s a fixed interest rate.
The limit for a PLUS loan is the Cost of Attendance deducted from any other loans you might be receiving. There are no loan limits for the Grad PLUS loan. But again, lenders may be looking at your credit to ensure the loan may be repaid.
Loan Origination Fee
You typically pay for a loan origination fee on both the Stafford and PLUS loans. This charge generally covers the work the lender needs to do to grant the loan. For example, lenders have to underwrite your history. They’re likely looking at how you’ve paid back past debts. They also have to arrange for payment. They might need to work out a contract with your school or negotiate delivery terms. The lender may also need to process paperwork and ensure that there are no loose ends.
The origination fee is a percentage of the loan. This percentage varies depending on the year in which you take it out. As with the interest rates, the Stafford loan origination fee is lower than that of the Grad PLUS loans. (In some cases, a lot lower.)
It’s important to factor in all costs before you take out a federal loan. A high loan origination fee is the same as bumping up your interest rates by a certain percentage. Applying an amortization formula may help you understand the true life of the loan and loan repayment schedule.
The Disbursement of Loans
Federal loans are generally disbursed through the US Department of Education. The department releases them in two or more installments. Your disbursement schedule may depend on how many semesters you’re attending.
Your school may receive the funds and credit them to your account. The school and the federal government earmark the money for certain costs. Your tuition and fees come first, followed by room and board costs. You are only eligible for room and board coverage under certain conditions. You may be required to be residing in student housing owned by the school.
The school is also allowed to use the fees to pay for other charges. This may only be done with your permission though. Before the disbursement, ask your school how they communicate about these funds. It typically helps to understand their rationale so you may prepare.
If you happen to have any funds left over by the end of the term, the balance goes back to you. The payment for this may come in the form of cash, a funds transfer to your bank account (autopay), a check, or a debit card. Each school may have its own policies. This refund should be used for your education though and cannot go toward other expenses. Books, school supplies, or lab equipment would all qualify.
Deferment and Grace Periods
As long as you’re enrolled in school (at least half-time), the federal government generally defers your loans. You may be able to make payments on these loans, but you are typically not required to do so. You’re may also be granted a 6-month grace period after the time you graduate. This means that you may work and save for half a year if needed. The same grace period might apply if you drop below part-time enrollment.
There are plenty of reasons not to take the federal government up on this offer though. Interest rates are running from the moment you take out the loans. You may need to at least try to make payments to avoid getting caught in a cycle of debt. It may be difficult for any grad student to scrape enough cash during this time. But remember that it may save you from all that interest accumulation. Over time, that’s thousands and potentially tens of thousands back in your pocket. You typically have up to 10 years to pay back a direct loan. You may qualify for longer if you choose to merge your loans. Or if you have more than a certain amount of debt from a single lender. This amount may vary, but is generally high (e.g., at least $30,000).
How to Apply for a Loan
You may apply for a Stafford loan by filling out the Free Application for Federal Student Aid (FAFSA®). You’ll need to be either a U.S. citizen or qualifying noncitizen. Once you’ve gone through the application process, you’ll receive a financial award letter. This communication may tell you what you qualify for. From there, you’ll contact your school to accept the loan and sign the final paperwork. This is typically all you need to do, regardless of which loan you’re interested in. FAFSA may include information on your eligibility for Graduate PLUS loans. This way, you know exactly what you have access to so you may plan before enrolling.
Private Student Loans
A private student loan is not regulated by the government. It’s issued by independent lenders. You may find private grad student loans through banks, credit units, or student loan organizations. Unlike federal loans though, the interest rates and loan terms may vary.
There is typically no deadline to apply for student loans. This is handy because you may try other things before you settle on private loans. Or if you underestimated how much you would need during a semester. You may apply for a private loan to cover the rest of your incidental expenses. Applying for a student loan is a lot like applying for other types of loans. The lender may look at your income, credit history, total debt, and whether you have a cosigner. (A cosigner is someone who agrees to pay the debt even if you are unable to.) The better your credit score, the better rates you’ll typically receive.
How Much Can You Borrow?
Like the Grad PLUS loans, private loans usually are based on the Cost of Attendance. So let’s say that year in grad school amounts to $55,000. If you’ve received $20,000 in a Stafford loan, then you could take out a total of $35,000 in private loans. To work out living expenses, private lenders may base the costs on the area where the school is. A more in-demand area, such as San Francisco, might rate more than $2,000 a month for off-campus housing. The total loan limit that you’re allowed to borrow is generally based on the lender. But it should be noted that private lenders are more likely to award more than the government.
The repayment terms may be up to the lender. They may ask you to begin making payments while you’re still in school. But this is difficult when you’re trying to concentrate on learning. So while it might save you some money, it might not be practical if you’re too busy. Or lenders may want you to repay only the interest while you’re still in school. This way, you may focus on the principal of the loan by the time you’re ready to start your career.
Some lenders might grant you a deferment or grace period. Their terms are usually the same as the federal government (e.g., 6 months, etc.). The amount of time that you have to pay back the loan may be nearly anything that the lender wants it to be. In some cases, you’ll likely have more than two decades. Lenders usually give you at least 5 years.
Which One Is Better: Private or Federal?
In general, it’s usually better to choose the federal options whenever you can. You may focus on your schooling when you’re a student, and you’ll also have more flexible payment options. The federal government might offer you an income-driven plan too. This means that you’ll typically pay back your loans in proportion to the job that you receive out of school. You may also qualify for student loan forgiveness.
Private loans may be an option if you need to borrow more. But remember that the more you borrow, the more interest you’ll pay over time. Private loans are sometimes based on variable interest rates too. This means that you might see your interest rate rise over time.
One benefit of a private loan though is that you might get a better interest rate. Federal loans are a product of fixed criteria. They don’t really look at you as a person but as a student. A private lender may take into account your good credit. Federal loans also typically don’t have a statute of limitations. This means that your debt may not be forgiven if you default. (This is separate from student loan forgiveness based on income.) Private loans may also tend to offer more flexible refinancing options.
6 Factors You Should Look for in A Grad School Loan
We can’t stress enough how different lenders can be — even when they’re offering the same loan. Even lenders offering federal loans may each have their own rules and expectations. See what you should look for before you start applying:
1. Low rates
The rates of your loan may have everything to do with how much money you pay over time. If you’re considering a private loan, you should compare the numbers to a federal loan. In general, you may want to avoid variable rates whenever you can. These rates sometimes look lower. But there’s a good chance that they may increase over time and force you to pay more.
2. Low Fees
The fees for the federal loans may be the same no matter where you apply. But that doesn’t mean that some lenders won’t tack on extra. Remember that the loan origination fees may add more to the total cost of the loan. Lenders may try to hide processing fees, especially if they’re offering low rates. You should always get these fees upfront and factor them into the total amount you’ll pay over time.
3. Repayment Options
The government may generally give you the best repayment options available. If you’re not making as much money as you thought you would, federal lenders may work with you. The federal government may even forgive your debts in some cases. Lenders have introduced a variety of options to compete with federal loans. You may see some degree of flexibility with them. But they generally can’t come close to the same amount of choice.
Every lender may go about their business a little differently. This regardless of whether you’re applying for a private or federal loan. The lender’s communication style may have a lot to do with how much information you have. Their processes determine how the school is paid and your account is credited. The more you know, the easier it is to plan ahead. It also speaks to the lender’s priorities.
5. Total Loan Amount
Graduate student loans may end up costing you a lot more than you ever considered. You don’t want to be surprised by the time you start on your repayment plans. Just because the monthly payment looks low, doesn’t mean that it’s affordable. Student loan options may vary across lenders, but you should be calculating the total to avoid massive student loan debt. If you have questions, you may check with the financial aid office.
6. Monthly Payments
You can’t predict how much money you’re going to make over time, but different degree programs may at least give you an average. Whether you’re going to law school or getting your Ph.D, the type of graduate degree you receive may give you an idea of whether you’ll be able to make the loan payments.
Graduate school loans are a means to higher education and an advanced degree, and they may be extremely useful for students of all backgrounds. Options like income-based repayment and payment deferrals may be help students even if their careers don’t always go as planned. The key is to look for lenders who may work with you. In most cases, the best loan application process and loan program may be the federal kind. To get more answers about rate loans or additional funding, talk to your school’s financial aid office.