I was lucky enough to have my parents fund my undergraduate degree. But pretty much since the time I could hold a pencil, they let me know that for any education after that, I would be on my own. So how is a lowly B.S. holder with a year of entry-level work under her belt supposed to fund three years of advanced education? For me (and most) the answer is loans. And with loan application season rapidly approaching, this post will break down some of the options, both federal and private.
Let’s start with the feds. Step 1. Fill out the FAFSA. Step 2. See what you get offered. There are four types of loans the government can offer you for graduate study.
Federal Perkins Loans
If you get offered one of these – take it! These loans are few and far between and are offered only to students with low incomes. Qualified students can receive up to $8,000 a year at a fixed interest rate of only 5%. And the best part is, these loans DO NOT start accruing interest while you’re still in school.
Subsidized Stafford Loans
These loans have a fixed interest rate of 6% and a fee of 1%, which has real interest rate hovering around 7%. The feds award this loan to students who “need help paying tuition” (but hello, doesn’t everyone?) based on the information filled out in the FAFSA. These loans are considered subsidized because like Perkins loans, the interest does not begin to accrue until you graduate.
Unsubsidized Stafford Loans
This is the one that basically every grad student gets. If you’re a legal US citizen and haven’t defaulted on other loans, the feds will offer you this one. Your income and credit score don’t matter, and you can get the full amount you qualify for. Like the subsidized Stafford loans, the APR is about 7%, but the reason it is “unsubsidized” is because the interest starts to accrue while you are still in school. The good news is, you still don’t have to start paying off your loans while you are enrolled at least half time.
Grad PLUS Loans
So aside from tuition expenses, just living in general also costs money. That’s what Grad PLUS loans are for. Basically, they cover living expenses like room, board, and transportation costs included in the schools estimated “cost of attendance.” The student can get all the money they qualify for, but there are a few caveats. 1) The interest rates and fees on these loans are higher, bringing the APR to about 8.8%. 2) These loans require a separate application and also a credit check, so students with adverse credit or who have defaulted on other student loans may not qualify for Grad PLUS.
So, the four types of federal loans aren’t that complicated. Here’s where it gets hairy, because there are literally thousands of different terms for private loans from many different borrowers. Here are a few tips:
- Generally, you shouldn’t consider a private loan until you’ve exhausted your options with the feds. The federal loans with the highest APR, Grad PLUS loans, generally still have better repayment options than private loans. The best private loans will be on par with Grad PLUS loans, but they will pretty much always only be available to students with the best credit and often with a credit-worthy co-signer as well.
- Don’t be fooled by seemingly low interest rates. Private lenders can sneak in high fees that make the loan end up costing more. According to FinAid, about 4% in fees equals around 1% increase in interest rate.
- Don’t be fooled by fees! Similar to the above tip, lenders who charge no fees often just roll them into a higher interest rate.
- Beware repayment terms. Longer repayment terms with a lower interest rate may seem attractive, but the longer term of repayment can actually increase the amount paid in interest.
- Compare carefully and watch out for credit checks! Often times, private lenders will advertise their cheapest rates which may only apply to the most credit-worthy of their borrowers. Students with bad credit may actually receive loan offers of 6% higher interest rates, and lenders usually won’t give you this information up front. You find out after you apply. Comparison sites like Credible let you compare your personalized offers WITHOUT affecting your credit score. I highly suggest using tools like these before applying to every loan under the sun – because each credit check takes a small but temporary hit to your score, which can make qualifying for private loans even harder.
Private loans can be sneaky, but they’re not all bad. For law students specifically, private loans can help you finance the cost of post-graduation expenses, such as bar preparation classes. The feds won’t. The takeaway is, when it comes to any loan type – do your research! Try your best to calculate how much you will actually need so you aren’t overborrowing and racking up interest on money you won’t use. Come up with a budget and figure out what repayment plan might work best for you. Max out on your federal loans first, and then if you are still planning on taking out private loans, see if you can find a willing cosigner (parent, grandparent, etc) with good credit to help you get more competitive rates.
After you’ve been approved, don’t stress too much. I’m not saying don’t be cost conscious, but focus more on doing well in school so you can get a banging job after graduation and pay off those loans quick. Happy borrowing!
For more information on federal and private loan comparisons, check out these sites: https://www.usnews.com/education/articles/2010/04/15/the-4-best-grad-student-loans and http://www.finaid.org/loans/privatestudentloans.phtml.