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.
Out of the over $1.5 trillion in student loan debt in the United States, dollars borrowed by graduate school students are rising more quickly than undergraduate debt.
The reality is that, when looking at funds borrowed over the last academic year, the percentage taken out by graduate students is at 40% of the total, compared to 32% in 2002.
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 some key factors to consider when taking out graduate school loans.
1. Graduate Students Are Typically Considered Independent Students
Although, as a graduate student, you’ll still need to fill out the Free Application for Federal Student Aid (FAFSA®) to qualify for federal student aid, you no longer need to include financial information about your parents on the form.
That’s because students who are pursuing either a master’s or doctorate degree are virtually always considered to be independent students.
There are a couple of key benefits associated with being an independent student. First, it helps streamline filling out the FAFSA. And, secondly, as an independent student, you’ll likely report much less income because your family’s earnings generally are no longer considered when financial aid eligibility is calculated, which could potentially give you access to additional aid options.
There are circumstances where undergraduate students can also be considered independent, but it’s usually more common with graduate students.
2. Graduate Student Loans Typically Have Higher Interest Rates
The 2019-2020 federal student loan interest rates for graduate and professional students are 6.08% for Direct Unsubsidized Loans for Graduate or Professional students and 7.08% for Direct PLUS loans—much higher than the 4.53% interest rate on federal undergraduate student loans.
(Note: Federal student loan interest rates are reevaluated annually, and updates are announced in early July.) Private student loans, another option for grad students, can come with even higher rates.
Graduate students can typically use federal Direct PLUS loans for anything not covered by other financial aid, including tuition, fees, college 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 7.08% , they have the highest interest rates of all the federal student loans.
Federal loans also have fees that should be factored into the total cost of borrowing. For Direct subsidized and unsubsidized loans, the loan fee for the 2019-2020 school year was 1.059%. For Direct PLUS Loans, the fee was 4.236%.
These fees are deducted proportionally from each loan at the time of disbursement. This means that the amount of money a borrower receives will be less than the total value of the loan. Borrowers are still responsible for repaying the total value of the loan.
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.
Say for example, you borrowed $20,000 in Direct Unsubsidized Loans (for graduates, of course) to cover the cost of tuition when you started the program. When you factor in the current disbursement fee of 1.059%, you would have received approximately $19,788.
Since this loan type is unsubsidized, it will accrue interest while you attend school. Note, that even though you received $19,788, interest will accrue based on the loan total of $20,000. If the program is two years long, and you made no payments during that time, the loan would have accrued approximately $2,432 (assuming the interest rate stays the same 6.08% for those two years). For undergrads with subsidized loans, the interest clock doesn’t start until after graduation.
4. Borrowing Limits Are Higher for Grad Students
Typically, graduate students can borrow $20,500 annually in Direct Unsubsidized Loans , although there is currently a lifetime cap of $138,500 when undergrad loans and graduate school Direct loans are combined. If you’re in a qualifying health field, you may have a higher lifetime limit, potentially up to $224,000.
Compare that to annual limits for undergraduates, and they’re typically capped at $5,500 during year one; $6,500 for year two; and $7,500 for subsequent years, with a total availability of $31,000.
Having said that, although graduate students have more flexibility in how much can be borrowed, it can be challenging to pay back those higher amounts of debt.
5. Graduate Students May Qualify for Competitive Rates on Private Student Loans
Private student loans aren’t backed by the federal government; they’re issued by private lenders or banks.
If you’ve already established a solid credit history and/or have steady income coming in, those are important cornerstones that may help you qualify for more competitive rates on private student loans. This is in contrast to the typical undergrad, who may be new to credit and lending entirely, and don’t usually have well-paying, full-time jobs.
6. Student Loan Refinancing Can Be 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 qualify to refinance loans at a lower interest rate than what a borrower may currently have, a strong credit history that includes a positive track record of paying debts is important—and proof that you make enough money to pay back the loan (among other factors that will vary by lender).
Depending on a graduate student’s background, there is a chance that they might be viewed as a more stable lending choice than an undergraduate. For example, some graduate students have spent a few years working in a field before returning to school. This could have allowed them to build a strong credit history and income.
Additionally, some graduate programs offer the potential for students to increase their earning potential after graduation, which also could be appealing to private lenders.
The other reason is that undergrads with federal student loans enjoy interest rates that are typically quite low already, and can be tough to beat when compared to private loan interest rates. Grad students, on the other hand, often carry student loan debt with higher interest rates and generally have higher debt burdens than undergraduate students.
With a strong credit history and steady employment (among other factors), it may be possible to get a better deal—and save money—through refinancing.
Refinancing won’t be the right option for everyone. Federal loans come with a variety of protections and benefits, like income-driven repayment plans and loan deferment. When you refinance a federal loan, it becomes a private loan, and will no longer qualify for any federal benefits.
7. 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.
There are a variety of other opportunities available to grad students to help them finance their education, including some scholarships , other grants , and fellowships. Grants are generally offered based on financial need while fellowships are awarded based on a student’s academic performance and research.
Scholarships, grants and fellowships are available through sources like federal and state government, schools, and even some corporations. Each opportunity might have very specific application criteria or might only be for students specializing in certain areas of study.
If you’re interested in looking for a grant or scholarship for grad school, you can get a more detailed overview of what is available here. Typically, graduate and professional students are taking on more debt than undergrads. So smart upfront planning combined with a savvy repayment strategy—which may include refinancing—can make a world of difference to your bottom line.
Thinking Outside the Box
When you think about paying for graduate school, it’s natural to consider student loans, but there are additional avenues likely worth pursuing. For example, your school of choice may offer scholarships, fellowships, and grants.
Typically, the college will use the information in the FAFSA® to decide what funding, if any, they can offer you.
Other times, though, there may be separate applications unique to your school; you can ask for specifics at the financial aid office. Sometimes, the award might be small; other times, it might be full tuition reimbursement.
Some graduate students work on campus as teaching or research assistants . These opportunities could offer the opportunity for students to expand their skill set while earning some income.
If you’re pursuing a graduate degree while working full time, you can check with your employer to see if they offer a tuition reimbursement plan.
If they do, the program will have its own parameters and processes.
Sometimes, if you accept funds from this program, you’ll need to stay at the company for a predetermined amount of time; other times, they might fund only certain degrees.
Still other times, they may not specifically have tuition reimbursement funding available, but there might be professional development dollars you can access. Or, your employer may be willing to allow you to work a more flexible schedule to accommodate your class schedule. It doesn’t hurt to ask!
Want access to more student loan resources? Explore our student loan help center to help guide you in your debt repayment!
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