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A Graduate Student's Complete Guide to Student Loans

Lyle Daly, The Motley Fool

The life of a graduate student can be costly, but fortunately there are plenty of student loans available to ease your financial burden.
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If you’re in graduate school or planning to attend one, then there’s a good chance that you’ll need student loans to help pay for your studies.

Grad school isn’t cheap, and the tuition typically costs more than what you pay as an undergrad. It’s also a huge time commitment, so you may not be able to work enough to keep up with your bills.

Although you could already have some experience with undergraduate student loans, your loan options won’t be the same in grad school. That’s why it’s important to know exactly what student loans you can apply for as a graduate student and how to finance your education without accumulating excessive debt.

Federal student loans for graduate students

Just like undergraduates, graduate students can get federal student loans through the U.S. Department of Education. There are, however, a couple key changes to the federal loan options for graduate students:

  • Graduate students aren’t eligible for Direct Subsidized Loans (loans where the U.S. Department of Education pays the interest while the student is in school, during the first six months after the student leaves school, and in any periods of deferment).
  • Graduate students have a new loan option in Direct PLUS Loans, which aren’t available for undergrads. Unlike other types of federal student loans, there is a credit check involved to get this type of loan.

With federal student loans, you’ll always have a fixed interest rate. There will be an origination fee, which is a fee that’s taken out of your loan when it gets disbursed to you. These loans offer income-based repayment plans, deferment or forbearance, and potentially the opportunity for loan forgiveness.

Here are the federal student loans available to you as a graduate student:

Direct Unsubsidized Loans -- Direct Unsubsidized Loans are a very common federal loan option that don’t require you to show financial need. The grad school you’re going to will use your cost of attendance and the financial aid you’re receiving to set the maximum amount you’re allowed to borrow with these loans.

From the moment your Direct Unsubsidized Loans are disbursed, they’ll start to accrue interest. You don’t need to make payments on these loans until after the grace period ends, which is six months after you leave school, but this will result in you owing more on the loan because of the interest that’s charged.

For loans disbursed on or after Oct. 1, 2018 and before Oct. 1, 2019, the origination fee is 1.062%.

Direct PLUS Loans -- Direct PLUS Loans are available only for graduate or professional students and eligible parents who wish to take out loans to finance their children’s education. Graduate and professional students would apply for what are called Grad PLUS Loans.

The maximum amount you can get in Direct PLUS Loans is your school’s cost of attendance minus your financial aid. Interest accrues the entire time that you have the loan, just like with unsubsidized loans. Once again, you don’t need to start making payments until six months after you leave school.

The origination fee with this type of loan is much higher than that of Direct Unsubsidized Loans. For loans disbursed on or after Oct. 1, 2018 and before Oct. 1, 2019, the origination fee is 4.248%.

These loans are unique in that they’re one of the only federal student loans where your credit history is important. If you have an adverse credit history, that can prevent you from getting a Direct PLUS Loan. The following items would indicate an adverse credit history:

  • Accounts with total outstanding balances greater than $2,085 that are delinquent by 90 days or more, or that were placed in collections or charged off within the two years preceding the date of the credit report
  • Any default determination, bankruptcy discharge, repossession, foreclosure, charge-off/write-off of a federal student aid debt, wage garnishment, or tax lien within the five years preceding the date of the credit report

To qualify for a Direct PLUS Loan with an adverse credit history, you’ll need to do one of the following:

  • Find an endorser who doesn’t have an adverse credit history and agrees to repay the loan if you don’t.
  • Explain to the satisfaction of the U.S. Department of Education any extenuating circumstances for your credit issues.

Direct Consolidation Loans -- A Direct Consolidation Loan allows you to bundle all your federal loans together into one new loan and just one monthly payment. Consolidating your loans would generally be something you’d do after graduating.

How much can graduate students borrow with federal student loans?

The annual loan limit for graduate students is $20,500. There’s also a total loan limit of $138,500, and this limit includes your undergraduate loans.

There are higher annual and total loan limits for graduate students in some health professional programs. If you’re in one of these programs, then you can find out your loan limits by getting in touch with your school’s financial aid office.

How to apply for federal student loans

The first step in getting federal student loans is completing the Free Application for Federal Student Aid (FAFSA®). By the time you’re in graduate school, you’re probably very familiar with this process.

If you’re interested in Direct PLUS Loans, then you’ll also need to complete the online application for that type of loan.

After you complete your financial aid applications, your school will determine how much aid you’re eligible for and send you your award letter. You then claim the aid you want through your school’s financial aid office.

Private student loans

Another popular way to pay for graduate school is private student loans, which you’d borrow through private lenders. Approval on a private student loan application will depend on your financial situation, with your income and credit score being particularly important. Your credit score will also determine the interest rate you qualify for.

Students often apply for private loans with cosigners to improve their odds of approval and to get a lower interest rate. If you apply with a cosigner, then the lender will use your cosigner’s financial information for the loan application.

Private loans lack some of the benefits of federal loans, most notably income-based repayment plans and the possibility of loan forgiveness. You also generally won’t have the option of putting a private student loan in deferment or forbearance, although select loan providers offer this.

On the other hand, quite a few private lenders offer student loans with no origination fees, so they can save you some money in that regard compared to federal loans.

How to apply for private student loans

To get a private student loan for graduate school, you just need to evaluate your lender options, see who will offer you the best deal on a loan, and then fill out your application on the lender’s website.

You can compare what kind of loan terms and interest rates the top lenders have available on our student loan providers page. From there, you can visit each lender’s website and plug in a few pieces of information to see the loan terms you’re prequalified for.

Getting the money you need for your graduate studies

How you pay for graduate school will have a significant impact on your financial situation once you graduate.

Start by submitting your FAFSA® for the upcoming school year. This is always a good starting point, because you’ll need to do this to qualify for any type of federal financial aid.

One benefit of being a graduate student is that there tend to be plenty of scholarship and grant opportunities available. These are great if you can get them, since you won’t have to repay anything.

After you’ve exhausted those opportunities, you can move on to federal and private student loans. It’s usually recommended that you go for federal loans first because of the borrower protections they have. However, this isn’t set in stone, as you may find that private loans would save you money through lower interest rates and no origination fees.

Whichever loan options you choose, make sure that you borrow only what you need. If possible, you should also start paying your loans back while in school, as this can save you a substantial amount in loan debt.

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