If you, like many people, took out federal student loans to fund your undergraduate education, you may be familiar with many of the terms and conditions. However, if you’re getting ready to head to graduate school, you should be aware that the rules are quite a bit different when it comes to borrowing for an advanced degree.
Here’s what you should know.
The Amount You Can Borrow Changes
As a candidate for an advanced degree, you can borrow more to cover tuition and education-related expenses. While undergraduates can borrow between $5,500 and $12,500 each year, depending on academic year and dependency status, graduate students can borrow up to $20,500 on an annual basis. Additionally, the aggregate loan limit is set at $57,500 for undergraduate students and $138,500 for graduate students. On average, it is more expensive to obtain a graduate level degree and, at the same time, financial aid is often more sparse. The higher annual and aggregate limits for graduate student loans reflect this.
Interest Rates Are Higher for Graduate School Loans
Interest rates for both undergraduate and graduate school loans are tied to financial markets, but rates for graduate students are higher. For the 2016-2017 academic year, interest rates on new Direct Loans for undergraduates stand at 3.76% while rates for graduate and professional students are set at 5.31%.
This may seem counterintuitive since graduate students are more likely to repay their student loans. But the thinking is that graduate students can afford to pay slightly more, and the funds generated through higher interest rates on graduate school loans are used to fund subsidies for undergraduates.
Higher rates, which are often coupled with much higher debt loads to cover expensive graduate school educations, can also mean that it’s easier for advanced degree holders to get into trouble with their loans. This makes it essential for anyone considering graduate school to run through the basic calculations (at the very least) prior to signing for a loan.
As a Graduate Student, Your Parent's Info Isn't on Your FAFSA
As an undergraduate, your parents’ finances are typically assessed along with your own in order to gain a more accurate view of your family’s ability to pay for college. (This, of course, doesn’t mean that your parent’s will (or even should) pay for your education. It just provides a way to look at eligibility for financial aid in a consistent manner.) By the time you get to graduate school, you’ll almost certainly be considered an independent student, and your parent’s finances won’t be considered in determining your eligibility for aid. That said, far fewer need-based grants are available at the graduate level.
Eligibility for Student Loan Forgiveness Changes
All federal loans are eligible for forgiveness, although undergraduate loans become eligible sooner: undergraduate loans become eligible for forgiveness after 20 years of qualifying payments, while those with graduate school loans currently need to wait 25 years. Presumably, because graduate loans are often for much greater sums, borrowers need a disincentive to pursue forgiveness as a strategy.
What Stays the Same
Fortunately, if you’re familiar with how federal student loans work from your undergraduate days, there are a few things that apply across the board.
1. There’s no credit check
Like their undergraduate equivalents, federal student loans for graduate study are unsecured and do not require a credit check. Prospective students seeking federal aid in the form of loans simply need to fill out the FAFSA.
2. You don’t need to begin repaying the loan until you graduate or drop below half-time enrollment
Borrowers who take out federal student loans for graduate school are not required to begin making payments until they graduate or their enrollment drops below half time. Interest may continue to accrue during this period, and any interest that does accrue will be compounded when the loan enters repayment.
3. You’re eligible for flexible repayment plans tied to your income
The reality is that not all borrowers attain a salary that enables them to make the standard monthly payment on their student loans. To make things more manageable, the federal government does provide a variety of income-driven repayment plans (such as REPAYE) that help to ensure loan payments do not consume an excessive portion of a borrower’s income. Payments made under these income-driven plans can be as low as zero dollars and count toward loan forgiveness.
4. You’re eligible for PSLF
The Public Service Loan Forgiveness (PSLF) Program is designed to incentivize graduates to enter public service. Under this program, borrowers who have made 120 qualifying monthly payments while working full-time for a federal, state, or local government organization or a tax-exempt non-profit are eligible for forgiveness of the outstanding balance on their loans. This applies to both undergraduate and graduate debt holders.