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How Your Existing Student Loan Debt Affects Graduate School Options

Courtney Nagle

According to a study published in 2017 by the Council of Graduate Schools, enrollment rates in graduate school programs have risen each year over the last five years, with a higher increase in the number of graduate certificates awarded in the 2015-2016 school year. More than 500,000 first-time graduate students enroll in graduate programs each semester.

Once accepted, students must figure out how they plan to pay for their graduate education. That could include tuition reimbursement from an employer, fellowships or borrowing student loans. The federal government offers a few types of loans for graduate students. Direct unsubsidized loans, which are also known as direct Stafford loans, and direct PLUS loans, which are referred to as grad PLUS loans, are the most common. Private loans are available as well.

[Read: Weigh the Cost, Benefits of Graduate School.]

It's important to understand how your existing student debt may influence your funding options for graduate school. Here are a few things to keep in mind.

There are limitations on how much a student can borrow in Stafford loans. A graduate or professional student can borrow up to $20,500 per year, with an aggregate limit of $138,500, which includes any Stafford loans borrowed for his or her undergraduate degree.

The aggregate loan limit for a borrower's undergraduate degree varies based on whether the student was considered a dependent of his or her parents or an independent borrower. As a dependent, aggregate borrowing limits are capped at $31,000 for undergraduate studies, and for independent students, it is $57,500.

Unlike undergraduates, graduate and professional students are no longer eligible to receive direct subsidized loans. However, of the $138,500 aggregate loan limit for graduate or professional studies, $65,500 can be in subsidized loans that a graduate or professional student may have received for periods of enrollment that began before July 1, 2012, or for prior undergraduate study.

A student who reaches the aggregate loan limit is not eligible to receive additional loans, per the U.S. Department of Education. However, a borrower can choose to repay some of his or her loans to bring the outstanding loan debt below the aggregate limit. After doing so, the student could then borrow again, up to the amount of his or her remaining eligibility under the aggregate loan limit.

In addition, graduate and professional students enrolled in certain health profession programs may receive additional direct unsubsidized loan amounts each academic year. There is also a higher aggregate limit on direct unsubsidized loans for these students, so those enrolled in a health profession program are encouraged to talk to the school's financial aid office for information about annual and aggregate limits.

So what should a prospective graduate student keep in mind in light of these varying borrowing limits? If you reach the limit be sure to consider how much will be needed in addition to these loans to cover the costs of attendance in a graduate program. With the average cost of a graduate degree ranging from $30,000 to $40,000 per year, if a borrower used Stafford loans to fund an undergraduate degree, the amount left for graduate school may not be enough to cover the full cost of tuition and expenses.

[Read: When Paying $100,000 for a Graduate Degree Is Worth the Cost.]

Grad PLUS loans don't have a set cap. Unlike Stafford loans, the PLUS loan does not have a set cap. Rather, a student can borrower up to the amount of the cost of attendance, as determined by the school, minus any other financial assistance received.

However, it is important to know that credit card debt or other various types of debt could affect your eligibility for a grad PLUS loan, which is dependent on a credit check.

If the borrower has a history of late payments or bankruptcy, there might still be an option to secure a PLUS loan with the help of a co-signer or endorser who does not have an adverse credit history. That person would agree to repay the grad PLUS loan if the borrower does not.

According to the U.S. Department of Education's Office of Federal Student Aid, a borrower may also be able to qualify by documenting that there are extenuating circumstances relating to his or her adverse credit history. With either option the borrower must also complete credit counseling for PLUS loan borrowers.

If credit worthiness is not an issue, private loans may be the most affordable option. Private graduate school loans often have lower interest rates than federal student loans. For example, Sallie Mae's law school loan offers fixed interest rates with an annual percentage rate ranging from 6.24 to 8.93 as well as variable interest rates with a starting APR that ranges from 4 to 8.82 percent. In contrast, the current interest rate for direct PLUS loans is 7.6 percent, which is fixed for the life of the loan.

The Student Loan Ranger recommends looking into private loans if you are in a program where loan forgiveness will not be available. There are some associated risks, as most private loans do not offer income-based repayment options or other protections like deferment or forbearance, but in normal circumstances where borrowers can manage their monthly payments, it can be a more cost-effective avenue.

[Read: Tackle Undergraduate Student Loans While in Graduate School.]

It's a good idea to repay undergraduate debt while attending graduate school. Even though federal loans may qualify for deferment or forbearance while enrolled in an approved degree program more than half time, interest will continue to accrue, and existing student loans may become unbearable as even more debt is accrued.

If no payments are made during deferment, any interest accrued will likely be added to the principal balance. This is known as capitalization and means after graduation, students could end up paying interest on interest. This is also why so many students enter repayment with a much higher balance than the original loan amount.

As you consider enrolling in a graduate program, the Student Loan Ranger recommends weighing the benefits and earnings potential available for the degree being sought. It's important to borrow responsibly and take into consideration what will be a manageable student debt load while in grad school and beyond.

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