Graduate and professional students have several private and federal loan options available.
Unlike undergraduates, who can qualify for Pell Grants and other subsidies, student loans are the primary financial aid vehicle for graduate students. Fortunately, grad students have several funding options to choose from.
• Stafford loans. Most graduate students can borrow up to $20,500 a year in federal Stafford loans and cannot exceed $138,500 between undergrad and grad school. Those limits jump to $47,167 annually, with a lifetime cap of $224,000, for students in certain health fields.
Graduate students only qualify for unsubsidized Stafford loans, which begin accruing interest immediately. Student loan legislation passed in August 2013 tied federal student loan interest rates to the interest rate on the 10-year Treasury note. As the rate on that note increases, so do the interest rates on Stafford loans and Direct PLUS loans.
Interest rates for new loans are determined as of June 1 each year and locked in for the life of the loan. The rate for graduate Stafford loans is equal to the rate of the Treasury note, plus 3.6 percent, and is capped at 9.5 percent. Grad students who borrowed a Stafford loan for the 2013-2014 school year did so at an interest rate of 5.41 percent. Stafford loans come with federal loan benefits, including flexible repayment plans and certain loan forgiveness programs .
• Graduate PLUS loans. Students can cover their entire out-of-pocket costs each year – including living expenses – via the PLUS loan program. Unlike other federal loans, borrowers must pass a credit check, and those with an account in collections or a bankruptcy on their record may be denied.
Like Stafford loans, the interest rate on new PLUS loans is determined annually using the rate on the 10-year Treasury note as of June 1. Graduate students will pay that rate plus 4.6 percent, with a
cap of 10.5 percent. Grad PLUS loans borrowed for the 2013-2014 school year have an interest rate of 6.41 percent. The interest rate is locked in for the life of the loan.
Grad PLUS loans also qualify for federal repayment options such as graduated or income-based repayment, as well as loan forgiveness.
• Perkins loans. Graduate students with limited financial resources may qualify for a Perkins loan, but experts warn that these funds are few and far between. While the Perkins loan is a federal program, the funds are doled out by the institution and loan payments are made directly to the school.
Qualifying students can receive up to $8,000 a year in Perkins loans, which come with a fixed interest rate of 5 percent. Unlike Stafford and PLUS loans for graduate students, interest on Perkins loans does not begin accruing until nine months after graduation.
• Private loans. In some cases, students can borrow loans with interest rates starting as low as 2.25 percent. But if the rate is variable it can change dramatically over the course of the loan, and students could wind up paying a lot more than they initially planned.
Several private lenders, such as Wells Fargo and Sallie Mae, also offer loans with fixed interest rates, which may be lower than the rates available via federal PLUS loans. While the loans may seem enticing, students should fully understand the terms of the loan before signing on the dotted line, says Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators.
"We almost always say that students should be choosing federal loans over private," Draeger says.
Students who plan to take out a private loan should look for one that mimics the benefits offered with Stafford and PLUS loans, including a grace period for repayment and protection against income loss, he says.