It's that time of year again. Last month, millions of students returned to campuses around the country. And while the idea of "back-to-school" conjures up thoughts of backpacks, lunchboxes and new beginnings, parents of graduate students and student-loan borrowers are reminded of the huge sums of cash they will have to shovel out for tuition and related education expenses. For those who volunteer to return to school for graduate degrees, the options for funding are vanishing with the new student loan legislation being enacted this summer. Here's the low down on three things grad students should consider before taking the student loan plunge (again).
What Options are Out There?
In June of 2012, legislation went into effect ending graduate students' ability to borrow using subsidized Stafford loans. So the first question is: what is the difference between a subsidized loan and an unsubsidized loan? Generally speaking, subsidized loans offer more assistance to students with financial need and provide the benefit of having the Department of Education pay the interest on the loan while you're in school. Unsubsidized loans may or may not be needs-based and the borrower is responsible for all interest on the loan. While subsidized Stafford loans are no longer accessible to graduate students, there are four primary sources of lending that remain:
- Unsubsidized Stafford Loans. The school sets the amount of money a student may borrow in unsubsidized loans. The current interest rate on these loans is 6.8 percent and the maximum annual award is between $5,500 and $20,500 .
- Graduate PLUS Loans. PLUS loans are made to graduate students to help pay for education expenses not covered by other financial aid and take into consideration the credit history of the applicant. These loans may cover tuition, books, and supplies as well as living costs. The current interest rate on these loans is 7.9 percent.
- Perkins Loans. Perkins loans typically have lower interest rates and are offered by schools that participate in the Federal Perkins Loan Program and are awarded to applicants with exceptional financial need. Unlike other federal loans, the school is the lender. The maximum amount graduate students may be awarded is $8,000 annually up to $60,000 total including any amount received previously for borrowed for undergraduate education.
- Private Loans. These are loans offered by non-federal institutions like banks, credit unions or Sallie Mae. Rates differ across institutions and may be either variable or fixed depending on the lender. Unlike the federal loans, the terms of repayment are individual to the lender and do not qualify for the types of repayments discussed below. A great resource for those considering private student loans can be found here.
How Much to Take
The bottom line here is simple: take as little as possible. If you are choosing to pursue a graduate degree you are probably doing so in an effort to advance your career. If, instead, you are choosing a graduate degree to "find yourself," allow me to suggest a less costly alternative like meditation or travel. The average cost of a two-year graduate program is roughly $60,000 and that barely scratches the surface when it comes to a top-tier business school or a three-year law degree or medical school. My advice is to start your search early. Research scholarship and grant opportunities both within the institution and the community and start saving in advance for living expenses. Better yet, if you can, get assistance from your employer and attend part-time.
Here we outline the pros and cons of each payback option offered for federal loans. The obvious conclusion here is to pay as little in interest as possible, which generally means the sooner you pay off your loan, the less money you will end up paying overall.
- Standard Repayment. Pro: Known, constant payments with a 10-year payoff schedule with the least amount of interest paid over the life of the loan. Con: Will likely result in the highest monthly payment of all options.
- Graduated Repayment. Pro: Payments start out low and increase over the term of the loan, hopefully matching your increase in earnings over that time period. Con: Your increase in earnings may not match the increased loan payment, adn you'll pay more interest over the life of the loan than the standard repayment.
- Extended Fixed Repayment/Extended Graduated Repayment. Pro: Similar to the standard repayment options, but for loan amounts exceeding $30,000 and provide a payback period of up to 25 years. Con: The longer payment period means more interest is paid over the life of the loan.
- Pay As You Earn. Pro: Designed for borrowers who meet partial financial hardship thresholds, "pay as you earn" loan payments are calculated annually based on your adjusted gross income and can move up or down with payments as low as $0. Con: Only eligible for certain federal direct loans and the payments may be less than the interest that accrues each month, making the term of the loan last up to 20 years. Payments may also increase if you get married or move to a different state.
- Income-Contingent Repayment. Pro: Similar to the "pay as you earn" repayment option with the additional benefit of the payment being a minimum of the amount of accrued interest initially. Con: Payment term can last up to 25 years and requires annual documentation.
- Public Service Loan Forgiveness. Eligible for some types of loans taken by students who chose to pursue a career in public service, this option can be very cost-effective for many students interested in working for a public school or non-profit organization.
Researching ways to fund your graduate education is just as important as researching the schools to which you intend to apply. Being comfortable with the terms of financing that education can remove a lot of the stress associated with going back to school, allowing you to focus more on the degree and less on the debt.
Kristen E. Owen is a Wealth Management Associate at Monument Wealth Management, a Registered Investment Advisory firm located just outside Washington, D.C. in Alexandria, VA. Follow Kristen and the rest of Monument Wealth Management on Twitter, LinkedIn, YouTube, Facebook, and their "Off the Wall" blog which can be found on their website.
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