Graduate school is a major investment and a major return… or at least it used to have major returns.
In the past, graduate school was almost a guaranteed good investment. However, in the last decade tuition costs have soared. With that student loans have soared.
Therefore, you have to do your homework first.
The first piece of homework is to research the cost of your graduate studies and expected incomes. The second piece of homework is to understand how student loans work for graduate school.
This is our guide to help you with the second piece of homework, i.e. understanding how student loans work for graduate school.
Before we get started I wanted to mention FitBUX has developed a free student financial planning technology specifically for soon-to-be and current students. Our technology will help you develop a financial plan so you can navigate your way through school. Be sure to check it out.
Why This Is So Important To Understand
Understanding how student loans work for graduate school is extremely important because of the spike in cost I mentioned above.
Before getting into how they work, I want to give you a historical perspective because it highlights how important this topic is.
In the past, a financial analyst like myself would geek out and run analytics to determine what cost relative to income would make graduate school worth it.
In short, if you graduated with a 1:1 ratio of student loan debt to income, it was worth it. This means, if your expected income post graduate school was $75,000 and you could graduate with $75,000 or less in student loans, it was worth it.
Times have definitely changed. Now days, its common for Member’s of FitBUX to finish grad school with a 2:1 or 3:1 ratio. For example, they expect to make $70k in income but have $210k in student loan debt.
To make things even more difficult, we now have repayment options such as income-driven repayment plans. There are also forgiveness features such as public service loan forgiveness.
All these factors combined (cost, repayment options, forgiveness) make financial planning extremely difficult.
However, understanding how student loans work for graduate school will help you simplify everything.
What is a graduate student loan?
First and foremost, there are two somewhat obvious points to make about graduate student loans but I must state them:
- You can’t use them for undergraduate studies, trade schools, or professional schools; and
- You have to pay them back!
There are two student loan options for graduate school:
- Federal student loans; and
- Private student loans.
Federal Student Loan Keys To Know
- You can take out up to $20,500 in Direct Unsubsidized loans per year;
- In total, you may not exceed more than $138,500 in Direct Unsubsidized loans as a graduate student;
- The aggregate limit for Direct Unsubsidized loans includes your undergraduate student loans.
- If you need more than what the Direct Unsubsidized loans provide you, then you can use Direct PLUS loans to fund the rest of your graduate school;
- Loans typically have a 6 months grace period, i.e. you don’t have to make a payment until 6 months after graduate school ends;
- Interest rates are set by Congress every May/June for the following year. The year runs from July 1 through June 30th;
- You need to be enrolled at least half-time to be eligible for loans;
- Repayment options:
- Standard repayment options;
- Graduated repayment which no one uses anymore; and
- Income-driven repayment/loan forgiveness options.
Private Student Loan Keys To Know
- Most of the time they have a 6 month grace period but not always so you have to check;
- 99% of the time they have a higher rate than Federal student loans;
- There are no income-driven or loan forgiveness options; and
- You choose a repayment term with the most common lengths being:
- 5 year term
- 10 year term
- 15 year term
- 20 year term
Does Credit Score Factor Into It
Yes and no…
Both Federal Direct PLUS loans and private student loans require a credit check. However, they aren’t treated the same.
Federal Direct PLUS loans for graduate school require a check but its not a major factor. In fact, in seven years, we at FitBUX have not ran into anyone trying to go to graduate school and got denied for Federal Direct PLUS loans because of their credit score.
However, its not the same for private student loans. They are so strict that most people will need a co-signor to get the loan. Less than 1% of FitBUX members have gotten private student loans without a co-signor!
Do I need private student loans for graduate school?
The government now funds 100% of graduate school with Federal loans. This includes tuition, cost of living, etc…
Therefore, its’ very seldom that you will use private loans for graduate school and you want to avoid them if possible. They are more costly and they have less repayment options.
However, some people may use them because the 100% funding isn’t always 100%.
If you do need them we recommend the following companies:
Your Schools Certified Amount
The Federal government says they fund 100% of graduate school but that isn’t 100% accurate.
Each year every university must certify an amount with the government. This certification is the universities estimate of total cost which includes tuition and cost of living.
The universities do not want people to drop out. Therefore, they are extremely conservative on these estimates, i.e. they put in a very large cushion for cost of living.
Thus, you should be able to get 100% of graduate school funding by the Federal government.
How do you apply for graduate student loans?
To be eligible for Direct Unsubsidized Federal student loans, you need to complete the Free Application for Federal Student Aid (FAFSA)
If you took out Federal student loans for undergrad, this process should be familiar to you.
The only difference is for undergrad you most likely filed as a dependent. For graduate school, you’ll file as an independent student. Therefore, you don’t need to provide any parental information.
Next comes one of my biggest pet peeves. Once you submit your FAFSA, you are given your financial aid award letter from your college. ITS’ NOT AN AWARD! IT’S A FREAKING LOAN!
Sorry, short rant is over. This “award” letter will detail the Federal student loans you’ve been offered.
Your “award” may not be enough to cover your cost. Therefore, you will need a Grad PLUS loan. You will apply for this after completing the FAFSA. Each university is different so contact your financial aid office for their requirements.
How do private student loans work for graduate school?
Private student loans are offered by banks, credit unions and online lenders.
Some private student loans must be paid back while you’re in school. However, most online lenders now offer you the ability to defer while you are in graduate school. Others may require a small monthly payment such as $25.
Also, fixed rates are possible with private loans. However, most of the time we see students get variable rate loans. Therefore, be careful what you choose!
5 must knows after taking out graduate school loans
You need to understand how student loans for graduate school work once they’re taken out. Below are important concepts to understand.
1. Grace periods
Grace periods begin the day you disenroll from school, graduate or drop below half-time status.
For Federal loans, you only have a grace period on Unsubsidized Direct loans.
On Graduate PLUS Loans you technically don’t have a grace period. However, you can ask to be put onto forbearance for six months. This in essence is the same thing as a grace period.
The key on Graduate PLUS loans is that some loan servicers automatically will put you on forbearance. Others you have to ask for it. Either way, you should be certain you are on forbearance and not simply assume it!
2. Loan fees
When taking out a loan, you’re charged a loan fee at the very start.
This is taken out of the total amount borrowed as a percentage of your overall loan. Direct Unsubsidized Loans have a low fee of 1.057%. Direct PLUS Loans have a fee of 4.228%.
Most private loans do not have a fee. However, that shouldn’t be a deciding factor for you because most private loans have a lot higher interest rate.
3. Interest accrual
Loan accrue interest daily. Since you do not have a payment while you are in school, the interest is added to your loan balance.
Capitalized interest is unpaid interest that’s added to the principal balance of the loan once your grace period is over. You can’t stop it and it automatically happens.
One of the worst pieces of advice is to blindly pay the accrued interest before it capitalized. Check out this article to learn what you should do instead.
5. Deferring undergraduate loans while in graduate school
You do not have to repay undergraduate Federal loans while you are in graduate school as long as you are enrolled more than part
Be responsible before, during and after graduate school!
Being a responsible means affording the student debt you’re taking on.
Having a financial plan that helps you before, during, and after school will ease the burden of student loans.
FitBUX’s student financial planning technology allows you to plan in school and see how it impacts your life post-graduation. Once you have your plan you can use FitBUX to track your expenses to make sure you are following the plan and not overspending while you complete your graduate studies!
By Joseph Reinke, CFA