Dear Dr. Don,
I am attending dental school and have expenses of $71,000 a year. Graduate school loan rates are expensive, and I'd like to know if there are less costly options. Do you have any suggestions other than the 6.8 percent Stafford loan for the first $40,500 and a Perkins loan at 7.9 percent for the remainder? I don't see how anyone can pay all of this back over time.
-- Alex A. Student
If you can't figure out how to afford your college loans, then you may want to reconsider what you are doing. But there are some important points to consider across the student loan landscape that can make a difference to your own bottom line.
Sallie Mae, a private loan originator, has unveiled a new loan program with a lower interest rate. It's called the Smart Option Student Loan for graduate students. Students have a choice of variable- or fixed-rate loans with no origination fees and no prepayment penalties.
The variable-rate loans go up to 7.27 percent annual percentage rate, or APR. The loans use the one-month London Interbank Offered Rate, or Libor, as the base rate on the loan. An interest-rate spread is added to that cost based on the borrower's credit risk. The program's fixed-rate loans go up to 8.56 percent APR, depending on the credit history of the borrower. If you have good credit, consider the variable-rate loan.
The risk is that as interest rates head higher, your loan rate will also rise. If you have a 2.25 percent variable rate, compared to 5.75 percent fixed, Libor could go up by 3.5 percent before you're paying the same interest rate as the fixed-rate loan.
In your letter you mentioned using a Perkins loan for part of your college funding. Because of the loan amount and interest rate you mentioned, I believe you were confusing a Perkins loan with a Graduate Plus loan. The Graduate Plus loan has a 7.9 percent interest rate, but it also has a 4 percent loan origination fee.
If you qualify, a Perkins loan is a great choice because it has a low interest rate of 5 percent, no origination fees and attractive loan management options when you're finished with school. Not all schools participate in the Perkins loan program. If your school takes part, and you qualify, a graduate or professional student may be eligible to receive up to $8,000 a year with total Perkins loan borrowing of $60,000, an amount that includes any undergraduate borrowing.
Consider fees, repayment and consolidation options, and the other features of the loans when choosing between federal and private student loans. In general, federal student loans have more repayment options than private student loans.
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