Weighing Grad PLUS Loans? Avoid 4 Errors

For most graduate students, it probably doesn’t come as a shock that higher education can be expensive. Many students, however, will be surprised to find that paying for graduate school can be even more challenging than paying for undergraduate school because there generally are fewer resources like scholarships and grants available for grad students.

Many grad students will need to use student loans to cover some or all of the cost of their program, even if they didn’t need to borrow for undergraduate school. For students who aren’t careful, grad school debt can skyrocket out of control.

One option that many grad students turn to is the federal Grad PLUS loan, which covers up to the full cost of graduate school, including living expenses, minus any other financial aid. While the Grad PLUS loan has relatively high borrowing limits, it also has a high fixed interest rate and high fees, so it’s important to be informed and careful when looking at this loan.

If you need to borrow to pay for grad school or a professional school like medical or law, informed borrowing can help you save a lot of money over time. Here are four costly mistakes to avoid:

Overborrowing

It’s important not to borrow more than you can afford to repay, and you shouldn’t borrow more than you absolutely need to. That means you should not automatically borrow the full cost of attendance, and you should only accept what you need. If there's room in your budget, you can borrow less than what is offered.

The Consumer Financial Protection Bureau’s "financial path to graduation tool is a free online resource that can help you understand a school's financial aid offer, create a plan to pay for all remaining costs and assess how much debt you can afford to repay.

If you find later on in the semester that you didn't borrow enough, you can always choose to borrow more based on your remaining eligibility.

Not Exhausting Federal Unsubsidized Student Loans First

Federal direct student loans should always be your first choice when borrowing to finance graduate education, but not all of them have the same terms.

Federal direct unsubsidized student loans have the lowest interest rates among federal student loans, which for grad students are currently at 5.28% for those taken out on or after July 1, 2021 and before July 1, 2022, plus a 1.057% origination fee for those taken out on or after Oct. 1, 2020 and before Oct. 1, 2022. Grad students are eligible for up to $20,500 a year in these loans.

Grad students can also borrow federal Grad PLUS loans, which carry a higher interest rate at 6.28% for loans taken out on or after July 1, 2021 and before July 1, 2022, and a higher origination fee at 4.228% for those taken out on or after Oct. 1, 2021 and before Oct. 1, 2022. Graduate students can borrow up to the cost of attendance less other aid in these loans, but they are not the cheapest option.

The Free Application for Federal Student Aid, commonly called the FAFSA, determines eligibility for federal student loans. Once you submit the form and your eligibility is approved, you will be eligible to borrow federal unsubsidized loans.

Note that neither subsidized student loans, on which the federal government pays the interest while the student is in school and in some other cases, nor federal Pell Grants are available to graduate and professional students.

Not Comparing Interest Rates

After exhausting federal unsubsidized loans, grad student borrowers can compare interest rates in the private marketplace before automatically accepting Grad PLUS loans. Borrowers can often find cheaper interest rates and no origination fees, which may save them money over time.

Plus, grad students may have more well-established credit histories than undergraduate students and can often take out these loans without needing a cosigner. A credit check is required when applying for a Grad PLUS loan, but there are exceptions if you have an adverse credit history, such as obtaining an endorser.

Be sure to look at several loan options and compare interest rates and terms to determine the best option for your personal circumstances. Be aware that private student loans with variable rates allow interest to fluctuate over time, so while the rate may be low initially, it is likely to change over time and could be much higher down the road.

One option to consider is borrowing from a nonprofit or state-based organization, because these lenders follow a set of strong consumer protections and offer fixed-interest-rate loan options with low or no origination fees. You can find the nonprofit loan options in your specific state at ForYouNotForProfit.org.

Borrowers should be aware that certain federal student loan repayment benefits, such as Public Service Loan Forgiveness and federal income-driven repayment plans, are not available for private loans.

Not Paying Interest While in School

Keep in mind that interest accumulates on both federal and private loans while you are enrolled in school.

After graduation, the interest that has accrued will be added to the loan's principal, and that can make a loan even more expensive. Once the interest becomes part of the principal, which is called capitalization, you’ll be paying interest on interest. Making interest-only payments while in school can help mitigate the cost.