U.S. Markets closed

4 Ways Graduate Student Loans Differ From College Debt

Kelsey Sheehy, Emma Kerr

Graduate students have a leg up on the financial aid process.

Most are no longer student loan novices. They have perfected the art of filling out the Free Application for Federal Student Aid, or FAFSA, they understand terms like Expected Family Contribution, or EFC, and they know the differences between subsidized and unsubsidized Stafford loans. But while the process and the terms may be familiar, financial aid for graduate students comes with its own quirks and nuances.

Here are four key differences between federal financial aid for graduate students and undergraduates:

-- FAFSA for graduate school: Grad students are typically considered independent students.

-- Less financial aid for graduate school.

-- Interest rates for graduate students are higher.

-- Borrowing limits for graduate students are higher.

The process for obtaining federal financial aid starts similarly for graduate and undergraduate students with the FAFSA, but the options available can vary.

[Read: How Your Existing Student Loan Debt Affects Graduate School Options.]

1. FAFSA for Graduate School

Graduate students seeking federal financial aid do not need to enter Mom and Dad's financial information on the Free Application for Federal Student Aid.

If students are married, were born after Jan. 1, 1996, when filing the 2019--2020 FAFSA or are pursuing a master's or doctorate degree, they are almost always considered independent. For many students, declaring an independent status means reporting much less income because family income does not impact their EFC, which is the number generated by the information submitted in the FAFSA that helps determine financial aid eligibility.

This was an unexpected surprise for Patrick O'Keefe, executive director at the Maryland Republican Party and a graduate of the University of Florida's mass communications master's program, who says applying for federal aid was much easier as a graduate student.

"I was automatically declared independent for my graduate school FAFSA, which means all I had to do was submit my personal tax return," O'Keefe says. "I was instantly given my EFC and loan eligibility amount after completing it, which made it much easier to plan."

Submitting the FAFSA as a graduate student allows students to be considered for direct unsubsidized loans, PLUS loans and the federal work study program.

2. Less Financial Aid for Graduate School

Low-income students who qualified for need-based Pell Grants as undergrads will be disappointed to learn that those funds are typically not available at the graduate level. The Pell Grant may be available to graduate students enrolled in a postbaccalaureate teacher certification program. However, students who relied on Pell Grant funding as undergraduates may need to take on debt to pursue a master's or professional degree.

"On the graduate side, there tends to be less subsidy," says Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators. "You're just going to see larger amounts of loans and potentially some work-study."

Federal loans available to grad students include unsubsidized Stafford and Graduate PLUS loans.

Students need to pass a credit check to take out a PLUS loan, and those with a bankruptcy, foreclosure or an account in collections may be denied.

[Read: How Bankruptcy Affects College, Grad School Financing.]

3. Interest Rates for Graduate Students

Interest rates for graduate students are a mixed bag. "There's sort of good news (and) bad news for graduate students on interest rates," Draeger says.

The good news: Interest rates on student loans are set to decline in the coming academic year. The interest rate is tied to the 10-year Treasury note, so students won't pay an above-market rate on student loan interest.

The bad news: Graduate students still pay a higher interest rate on student loans than undergraduates, and those rates could increase as the market changes.

Graduate students are not eligible for subsidized loans, so those higher interest rates start accruing on day one, Draeger says. For loans first disbursed on or after July 1, 2018, and before July 1, 2019, undergraduates enjoy a fixed interest rate of 5.05%, while graduate students pay 6.6% for subsidized student loans and 7.6% for PLUS loans.

Students who took out loans while earning their bachelor's degree also need to consider the interest rates on those loans, says Cathy Mueller, executive director of Mapping Your Future, a nonprofit organization that helps students plan for college and manage their finances.

While students can postpone loan payments if they return to school, interest will still accumulate, she says.

"If they're going to be putting those loans on in-school deferment, those loans are going to continue to grow because of the interest," she says. "One of the things they can do to minimize the impact is pay the interest, if they can afford to do that."

[Read: How to Find Free Money for Grad School.]

4. Borrowing Limits for Graduate Students

Stafford loans for undergraduates, who are typically dependent students on the FAFSA, are capped at $5,500 the first year, $6,500 the second year and $7,500 for any remaining years, up to a maximum of $31,000. Graduate students, though, can borrow a lot more.

Most grad students can take out $20,500 a year in Stafford loans but cannot exceed $138,500 between undergrad and grad school. For students in certain health fields, those limits are raised and have varied annual limits, with a lifetime cap of $224,000.

That's a lot of debt, even for someone entering a lucrative profession, Mueller says. "It can become a burden for students to pay that amount of money back," she says. "No matter whether you're in a high-paying career field or not, it can stifle other options for you."

Graduate PLUS loans allow students to get into deeper trouble. Students can cover their entire out-of-pocket costs each year -- including tuition, books and living expenses -- using a PLUS loan. But that doesn't mean they should, Draeger says.

"The student should really be evaluating what their budget is and how much they really need to take," he says. "Ultimately, that all has to be paid back with interest."

Trying to fund your education? Get tips and more in the U.S. News Paying for Graduate School center.



More From US News & World Report