How Student Loans Work for Graduate School


Graduate school is an investment in your future. Doing the research on programs and student loan debt ahead of time is a smart way to invest. Start making the best decisions by understanding how student loans work for graduate school.

What is a graduate student loan?

Graduate student loans help you pay for school after your undergraduate degree.

You have two student loan options when going to graduate school: federal student loans and private student loans. Your student loans need to be paid back eventually. Federal student loans have a grace period and don’t need to be paid back while in school. Private student loans and PLUS loans will need to be paid back as soon as funds are disbursed. The student loan funds are disbursed directly to your graduate school’s financial aid office.

Before taking out any student loans, make sure you’ve exhausted your other options. Scholarships, grants and fellowships are ways to pay for graduate school that don’t require you to pay the money back.

How does graduate student loan financing work?

Graduate school isn’t the same as an undergraduate school when it comes to financing. When financing graduate school, consider:

  • Your current income and budget. Ideally you can pay for a portion of school from your own earnings. However, some programs don’t allow you to work due to course load. If this is the case, you’ll need to take out more student loans.
  • Your credit score. Federal Direct PLUS Loans and private student loans require a credit check. Having a high score and healthy credit helps you pay for graduate school.
  • Your potential earnings after graduating. All student loans need to be repaid, so make sure you can afford the loan after earning your degree. Research whether the salary of your desired profession is worth the student loan debt.

Prior to taking out student loans for graduate school, use a student loan calculator. Determine what your estimated total student loan debt will be for your desired program.

How do you apply for graduate student loans?

To be eligible for federal student loans, you need to complete the Free Application for Federal Student Aid (FAFSA) just like you did for your undergrad. When filing, you’re no longer considered a dependent. This means you’ll file as an independent student and don’t need to provide any parental information.

After you submit your FAFSA, your college will send you an award letter detailing the federal student loans you’ve been offered.

If you need a Graduate PLUS loan, you need to apply for this after completing the FAFSA. Check with your school regarding its application requirements.

If you find you need funding beyond federal student loans, you can look into private student loans. You’ll want to shop around for private student loans.

When looking for a private student loan, focus on a low interest rate and a helpful loan servicer. You’ll be paying these loans back while in school, so a low interest rate will reduce your payment and how much you have to pay back overall. Look at reviews for loan servicers as well. Having a loan servicer with good communication can make a world of difference when in repayment.

How do federal student loans work while in graduate school?

Federal student loans should be your first choice when paying for graduate school. These student loans have flexible options for repayment. More importantly, they give you options for federal student loan forgiveness.

Types of federal student loans for graduate students

You have two main options for federal student loans while in graduate school:

  • Federal Direct Unsubsidized Loans
  • Direct PLUS Loan

Federal Direct Unsubsidized Loans have lower interest rates and fees than PLUS loans. These loans also have a six-month grace period after graduation where you don’t need to make a payment. This can help you during a job hunt.

There’s a limit to the amount you can borrow with a Federal Direct Unsubsidized Loan. Each year, you can borrow a maximum of $20,500. In total, you may not exceed more than $138,500 as a graduate student. This aggregate limit includes your undergraduate student loans.

Because of this limit, many students opt for Graduate PLUS Loans. The maximum you can borrow is the cost of attendance minus other financial aid you receive. You must be enrolled at least half-time in school. If you have shaky credit, you can also add a cosigner to a Grad PLUS Loan.

How do private student loans work for graduate school?

Private student loans are offered by banks, credit unions and online lenders. Private student loans must be paid back while you’re in school as soon as funds are disbursed. Individual lenders offer various rates and payment plans depending on your situation.

Types of private student loans for graduate students

Private student loans are generally the last option you choose when financing higher education. But in some cases, you may want to choose a private student loan before the Graduate PLUS Loan.

The Graduate PLUS loan interest rate is currently 7.6%. If you can find a lower rate and afford the payments in school, it can be worth shopping around. Credible allows you to do just that. You can compare multiple private student loans at once.

When looking at private student loan lenders for graduate school, keep an eye out for:

  • Repayment terms, including the length of the loan
  • Interest rate (fixed vs. variable)
  • Size of payment
  • Forbearance protections or other borrower protections

You’ll also want to look at borrower reviews for private student loan lenders. Having a lender with bad communication can be a nightmare in itself.

6 things to remember after taking out graduate school loans

You need to understand how loans work once they’re taken out. Here are a few important concepts to understand for graduate school loans.

1. Grace periods

Grace periods begin the day you disenroll from school, graduate or drop below half-time status. You have a grace period on Direct Federal student loans of six months. Unsubsidized federal loans collect interest while in school and during the grace period.

Graduate PLUS Loans don’t have a grace period. Repayment for PLUS Loans generally begins within 60 days of disbursement.

2. Amortization

This is a specific vocabulary word you may see on some of your student loan paperwork. Amortization is a payment breakdown that ensures your loan is paid back at the end of your term.

In addition to knowing you’re on a fixed student loan payment schedule, you should also know how much of your payment goes to interest and how much goes to the principal balance of your loan. Amortization tables give you these details and how much in interest you’d save by paying off your loan early.

3. Loan fees

When taking out a loan, you’re charged a loan fee at the very start. This is taken out of the total amount borrowed as a percentage of your overall loan.  Federal student loans all have loan fees, but some private student loan lenders don’t. Direct Unsubsidized Loans have a low fee of 1.062%. Direct PLUS Loans have a fee of 4.28%.

Don’t let a loan fee be a determining factor in applying for a private student loan instead of taking a federal student loan. Finding a low interest rate far outweighs a one-time loan fee and should be a priority when looking for a student loan.

4. Interest accrual

Interest is the fee paid to borrow money. It’s a percentage of your overall loan balance (principal).  Interest accrual means the same thing as interest accumulation. Knowing the type of loan you have means you can also figure out when interest is accumulating.

For graduate school, your federal student loans accrue interest daily. Here’s the formula:

Interest Amount = (Outstanding Principal Balance x Interest Rate Factor) x Number of Days Since Last Payment

Direct Unsubsidized Loans and Graduate PLUS Loans have fixed interest rates. This means the rate won’t change during the life of the loan. Private student loans can have fixed or variable interest rates. As mentioned above, you may want to compare fixed private student loan interest rates before taking out a Grad PLUS Loan with a 7.6% interest rate.

5. Capitalization

Capitalized interest is unpaid interest that’s added to the principal balance of the loan. Capitalized interest is compounding interest.

Let’s say you have a Direct Unsubsidized Loan while in school. It will accrue interest during school and the grace period. If that interest isn’t paid off prior to entering repayment after the grace period, it’s added to the total amount you owe. Then you begin repayment on your student loan and are paying interest on interest. This is what happens when interest capitalizes.

It’s capitalized interest that can cause student loan figures to keep going up. Depending on the loan, interest can be capitalized monthly or annually. You can avoid this by paying off the new interest that accrues first. This way you’re not on a sinking ship.

Sometimes, income-based repayment plans may give you a monthly payment that’s lower than the interest due. This still means it will capitalize on your loan.

6. Deferring undergraduate loans while in graduate school

If you can’t figure out how to start paying back your undergraduate student loans while in graduate school, you’re not alone. If you have federal student loans, you may be eligible for an in-school deferment on your student loan payments.

A deferment is a temporary stop in payments. You’re still responsible for all interest accrual during this time. You’ll need to contact your loan servicer to look into this. Deferment may not be an option if you have a private student loan.

Be a responsible borrower in graduate school

Being a responsible borrower means you can afford the student debt you’re taking on. Looking at your school’s location and your expected income after graduating are important first steps. Plan on devoting 10% of your income to debt payoff; more than that might feel overwhelming.

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By Pete Ostrander
Pete Ostrander Assistant Director of Career Development