Both undergrad and graduate students looking to finance their education commonly choose to take out a loan. However, if you’re considering grad school, it’s important to understand that there are several key differences between graduate and undergraduate student loans. Most notably, graduate loans are never subsidized — unlike their undergrad counterparts — and usually have higher interest rates. Additionally, you should explore both private and federal loans and choose the best option for your financial situation. As with any educational pursuit, it’s best to exhaust other resources — such as grants and scholarships — before pursuing a loan.
Many students don’t think about the ensuing debt they will amass after receiving a degree, leaving many individuals unable to make their minimum payments. If you are struggling to make your minimum payments, it’s important to seek professional guidance on the best way to handle or restructure your loans. Going into default should be avoided at all costs, as it can significantly impact your credit score and your ability to qualify for loans in the future. Outlined below is a quick look at some of the most important factors grad students should consider when exploring loan options.
What Are the Types of Student Loans Available to Graduate Students?
Just like undergrad students, grad students can either take out a federal or private loan to pay for school. One of the biggest differences between undergrad and graduate loans is that there aren’t any subsidized loans available to grad students, meaning loans are not available on the basis of need. There are two kinds of federal loans that graduate students qualify for:
- Stafford Loans. These are unsubsidized loans with a variable interest rate adjusted annually on July 1. However, the interest rate on these loans never exceeds 8.25%. Through a Stafford loan, you can receive up to $20,500 annually.
- Grad Plus Loan. These loans allow you to borrow up to the full cost of tuition for your graduate program. To qualify, you’ll need to have a good credit score and be in attendance at a qualifying school. These loans have a fixed interest rate and flexible loan limits; for the 2020-2021 academic year, the interest rate is 5.30% on Plus loans. One drawback to these loans is that they have a stiff origination fee of 4.228%.
In general, it’s best to pursue federal loan options before exploring private alternatives. However, both have key advantages and disadvantages depending on a student’s financial situation. To choose the best loan for your grad school education, it’s essential to fully assess your finances and pick the loan that is best for your unique circumstances.
Federal Loans Vs. Private Loans for Grad School
Federal loans tend to have better repayment terms and interest rates than those offered through private lenders (banks, credit unions, and other financial service companies). They are available at both fixed and variable interest rates, which are almost always set higher than federal loan options. Additionally, the federal loans available to grad students discussed above have deferment options, meaning you can choose not to pay the loan while you’re in school. Private loans do not have this option.
Private loans are credit-based, meaning if you have a really great credit score, you can potentially borrow more money at a better rate than that offered by some of the federal options. One of the key drawbacks to federal loans is borrowing limits, but with private loans, there are virtually no limits on the amount you can borrow. Additionally, federal loans have origination fees. Specifically, the Plus loan’s steep origination fee of 4.228% could be avoided with a private loan.
What Are the Differences Between Grad School and Undergrad Loans?
If you’re considering grad school, it’s equally important to understand the differences between undergrad and grad school loans. Some of the biggest differences between the two include:
- Higher interest rates: Interest rates on grad school loans are significantly higher than those on undergrad loans. For example, federal grad school loans tend to range between 6-7%, while the interest rate of most undergrad federal student loans tends to stay below 4.5%. These numbers change annually, but you can usually count on paying more in interest as a grad student.
- All loans are unsubsidized: As an undergrad, you are eligible for subsidized federal loans; interest does not accrue on these loans while you’re a full-time student. Conversely, in grad school, these loans are unavailable, meaning interest will start accruing the moment you receive your loan.
- Increased borrowing limits: As a grad student, you can borrow more money in federal loans than undergrads. Undergrad students are usually only eligible to borrow $5,500-$12,500 per year in federal loans. However, grad students can borrow up to the full cost of their tuition through the Plus loan. While this may seem appealing, the combination of higher borrowing limits and interest rates can cause grad students to quickly accumulate substantial debt.
These are a few of the key differences between the federal loans available to grad and undergrad students. It’s important to note that if you are going into a grad program with leftover debt from undergrad, the interest will continue to accrue if your undergrad loans are unsubsidized. Conversely, if your undergrad loans were subsidized, the interest will pause while you’re in graduate school.
What Are the Similarities Between Graduate and Undergraduate Student Loans?
Federal undergrad and graduate loans share a few key similarities:
- You won’t need to start repaying the loan until you’re no longer enrolled as a full-time student. However, interest will continue to accrue (for grad students) in the meantime.
- You won’t have to complete a credit check to receive a loan. All you need to do is fill out a FAFSA.
- You may be able to qualify for income-driven repayment plans if your salary makes it too hard for you to make the minimum payments.
- If you work in certain qualifying fields, you may be eligible for federal loan forgiveness. However, grad students typically have to make more qualifying payments than undergrad students to be eligible.
Pursuing a graduate degree should be exciting. However, if you’re in a stressful financial situation, it can be hard to choose the best loan path for your situation. Working with a skilled student loan lawyer is a great way to ensure you enter a loan with favorable terms.
Spotting Trouble Before It Starts and Protecting Your Financial Future
Graduate school debt is a different animal than your undergraduate loan. The borrowing limits are higher, and the interest rate on a Grad PLUS loan can be steep, often far exceeding the original cost of attendance your university estimated. Be aware of early signs that payments may become difficult; if your budget feels stretched thin while you’re still in your university program, that’s a red flag. Unexpected costs or a lower-than-planned income after graduation can quickly turn a manageable student loan payment into a major problem.
When you see trouble brewing, you have choices. You don’t have to wait until you miss a payment and damage your credit history. Emergency forbearance and deferment are two tools that can give you breathing room. A forbearance lets you temporarily stop making payments, but be aware that interest will likely continue to build up on your loan, increasing the total amount you owe. A deferment might be a better option if you qualify, as the government could cover the interest on certain types of loans during the pause.
The key is to contact your loan servicer, the company that handles your bill for the creditor, immediately. Don’t wait.
Building a financial safety net during your education is also a powerful move. It doesn’t have to be a huge amount of money. Setting aside even a small sum from a part-time job or a stipend creates a buffer. This small cushion can cover a payment or two if your first post-graduation job takes longer to find than expected.
Juggle These Two Sets of Loans With A Post-Graduation Game Plan
At the end of the day, it’s on you to know your debt inside and out. That’s the first step to paying it off in a way that’s sustainable and really puts a dent in the debt. For example, it is common for a grad school loan to carry a higher interest rate and fewer favorable terms. Managing factors like these and your ability to find a job or any other career decisions you plan on making requires a clear strategy. Here’s how you can juggle undergrad and graduate loans with a post-graduation plan of attack.
Figure Out Which Loan to Target First
Your graduate school loans probably have the highest interest rate. Paying extra on that specific loan while making minimum payments on the others can save you a significant amount of money over time. This approach attacks the most expensive debt first.
When to Consider Debt Settlement
If you are in default or facing serious financial hardship, settling the debt is an option. This involves negotiating with the creditor to pay a sum that is less than the full amount you owe to satisfy the loan obligation. This path can have consequences for your credit, but for many, it provides a final resolution (and you can take steps to raise your credit in the meantime).
Match Your Payment to Your Income
Income-Driven Repayment (IDR) plans are a critical option. These plans set your monthly student loan payment at an amount that is intended to be affordable based on your income and family size. Remaining balances on these plans can lead to forgiveness after 20 or 25 years of payments.
Remember Your Credit
Every on-time student loan payment helps build a positive credit history. A default, on the other hand, can seriously damage your credit for years. Your credit impacts your ability to get a car loan, a mortgage, or even a credit card with good terms, so protecting it is a top priority.
Consult a Skilled Student Loan Lawyer
If you are struggling to figure out the best strategy for paying off your student loans, learn about the various programs you can take advantage of. Working with a skilled student loan lawyer is a great way to understand all your options and pick the best repayment plan for your situation.
At McCarthy Law, our attorneys are dedicated to helping students navigate the complexities of the student loan system. Under our student loan debt settlement program, our licensed attorneys negotiate with lenders to ensure our clients pay only a fraction of their original loan balance. To schedule a consultation with one of our skilled student loan settlement attorneys, call us or fill out our online contact form.