Undergraduate vs. Graduate Student Loans: 6 Ways They Differ
Heading off to graduate school? You’re probably not a newbie at the financial aid process after your years as an undergraduate. You might even have a few things to say about the increase in graduate student loan borrowing and the $1.3 trillion in outstanding student debt that’s become a key 2016 presidential campaign issue.
However, it’s a mistake to assume that graduate student loans are the same as undergraduate loans. There are actually significant differences between the two, and knowing those differences can be the key to saving money on your grad school debt in the long run. Here are six key factors to consider when taking out graduate school loans.
1. Graduate student loans typically have higher interest rates.
The 2015-16 federal student loan interest rates for graduate and professional students range from 5.84 percent for Direct Unsubsidized loans to 6.84 percent for Direct PLUS loans – much higher than the 4.29 percent interest rate on federal undergraduate student loans. Private student loans, another common option for grad students, can come with an even higher rate.
2. Graduate students can borrow more than undergrads.
Graduate students can typically use federal Direct PLUS loans for anything not covered by other financial aid, including tuition, fees, textbooks and living expenses. PLUS loans are funded by the U.S. Department of Education and require a credit check, although the credit requirements are not as stringent as they would be with a private lender. At 6.84 percent, they have the highest interest rates of all the federal student loans.
3. There are no subsidized graduate student loans.
Grad school federal loans start accruing interest charges while you’re a full-time student, unlike subsidized loans for undergraduates. Let’s say you borrow $30,000 in federal aid when you start the program. By the time you graduate two years later, the balance would be $3,500 higher due to interest. For undergrads with subsidized loans, the interest clock doesn’t start until after graduation.
4. Graduate students may qualify for lower rates on private student loans.
Private student loans aren’t backed by the federal government, which makes them more like traditional loans. If you’ve already established a good credit history and/or have income coming in, you may be able to qualify for lower rates on private loans, unlike undergrads, who also need cosigners.
5. Student loan refinancing is usually a more viable option for graduate student loans.
While anyone with higher education debt can apply to refinance student loans, there are a couple reasons why this option tends to be more popular with grad students. First, in order to refinance loans at a lower interest rate, you need a positive track record of paying your debts and proof that you make enough money to pay back the loan – two things that are more common for those with graduate degrees.
The other reason is that undergrads tend to have low interest rate federal student loan debt, which can be tough to beat with a private loan interest rates. Grad students, on the other hand, often have higher interest rate debt from both federal and private lenders. In today’s low rate environment, it’s possible to get a better deal – and save money – through refinancing. (1)
6. Grants are few and far between for graduate students.
Even if you were eligible for a Federal Pell Grant the last time around, you can’t count on that for graduate school. Pell grants, which are need-based grants that don’t have to be repaid, are typically awarded only to undergraduate students.
Undoubtedly, graduate and professional students are taking on more debt than undergrads. But the good news is that their unemployment rates are lower, and they’ll likely make more money when they’re out of school. In our recent analysis of over 200,000 SoFi applications, we found that grad school paid off for the majority of applicants in the form of higher lifetime income.
But that doesn’t mean that grad students can afford to be laissez faire about their student loans. Smart upfront planning combined with a savvy repayment strategy – which may include refinancing – can make a world of difference to your bottom line.
(1) Before refinancing federal loans, check to see if you benefit from federal student loan features such as potential loan forgiveness, graduated and extended repayment plans and income-based repayment plans. These programs don’t transfer to private lenders through the refinance process.