Currently, grad students with demonstrated financial need can take out subsidized Stafford loans, which don't accrue interest until after graduation. Through school and six months after graduation, the government pays for the interest that accrues on subsidized loans.
But starting July 1, graduate students will no longer be eligible for the federal subsidy. If you already have a subsidized Stafford loan, you won't be responsible for the interest that accrues until after you graduate, but any new federal Stafford loans taken out by graduate students as of July 1 will be unsubsidized. Unless you make interest payments while you're in school, the federal loans will accrue interest at a fixed rate of 6.8 percent as you work toward graduation. The unsubsidized Stafford loans will also have a 1 percent origination fee starting July 1.
Though the decision may seem egregious to loan-burdened graduate students, it was the "lesser of two evils" debated in what became the Budget Control Act of 2011, says Mark Kantrowitz, founder of FinAid.org and FastWeb.com. Instead of cutting the Pell grant program, a lifeline that makes college possible for millions of needy students, Congress moved to eliminate graduate student loan subsidies. Over 10 years, it will save the government an estimated $18 billion.
[Read about other federal aid changes coming in 2012.]
Grad students are now and will still be able to take up to $20,500 in Stafford loans a year. But while demonstrated financial need currently determines how much of the loan burden is subsidized, all Stafford loans taken by graduate students will be unsubsidized. Though the change will cause an uptick in long-term costs, it's not likely to stop a future graduate student from pursuing higher education, says Kevin Michaelsen, director of financial assistance at North Carolina's Meredith College.
"I think that when they are looking at loans, some will opt to not take the unsubsidized, but most are trying to make a change in their career, so the only way they can is to take that loan," Michaelsen says. "They likely will go ahead and take that loan because that's the only route available."
[Find out how to get more money from your grad school.]
Among loans, students do have other options--they just might be more expensive. In addition to the Stafford loan program, the government offers Grad PLUS loans, which have a fixed rate of 7.9 percent. And students also have a wide variety of alternative loans offered through private lenders to consider, though many experts have traditionally discouraged students from turning to private loans before exhausting federal options.
The new subsidy change may make these private loans, which tend to post low but variable rates, look more attractive. Comparing a Stafford loan's 6.8 percent fixed interest rate to a 3 percent variable interest rate might make the latter seem like a bargain to an inexperienced borrower, but "we're in an unusually low interest rate environment right now," FinAid.org's Kantrowitz cautions. "A variable rate has nowhere to go but up."
If you take a private loan, be prepared for rate increases, which can set in at any point. Private loan holders also aren't eligible for some post-graduate financial aid programs, including Public Service Loan Forgiveness, which only requires professionals working for the government, a nonprofit, or a variety of other public service organizations to make loan repayments for 10 years.
If you decide private loans are the right route for you, take one from a lender you've heard of, Meredith College's Michaelsen recommends. "Always go with a bank that has a local presence or state presence," he says.
[Read why private loan borrowers might need increased protections.]
No matter which loan you choose, do your research to make sure you're taking on a manageable load relative to your future, recommends Reyna Gobel, author of Graduation Debt: How to Manage Student Loans and Live Your Life.
"The most important thing for loans is that you're borrowing based on what you can afford to pay back," Gobel says. "That's a hard question to answer, but you can talk to career services and find out what jobs you can expect."
Financial aid experts often advise that loan repayment of about 10 percent of your monthly take-home pay is doable. Before you enroll in a graduate program, seek out information on alumni job placements and salaries, Gobel recommends, and take advantage of money management counseling services at the school if you decide to attend.
"Money isn't the only criterion," notes Kantrowitz, "but you need to consider the balance between debt and income, so that you don't have to abandon your dream because of the debt ... or that you have to go with whatever job pays the best, not whatever job fulfills your career ambition."
Trying to fund your education? Get tips and more in the U.S. News Paying for Graduate School center.
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