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Grad School: Bigger Debt, Bigger Rewards

We’ve all heard the horror stories about student loan debt by now. Seven out of 10 students take on debt to earn their bachelor’s degree, and the amounts that some borrowers end up owing can be intimidating.

Many students headed for graduate school probably think they already know the ropes when it comes to taking out student loans. But when you move on to grad school, the rules — about how much debt you can take on, the types of loans you’re eligible for, and how much it will cost you to pay them back — all change.

Not only do grad students often take on much more debt than undergraduates, but they’ll typically be paying higher interest rates. In many ways, grad school student loan debt is like regular student loan debt on steroids.

Of course, many graduate and professional degrees boost the job prospects and earnings power of their recipients considerably, making student loan payments more manageable.

Earnings and Unemployment Rates by Educational Attainment, 2015
Source: U.S. Bureau of Labor Statistics

The standard advice you’ll get from financial aid counselors is to round up all of the grants, scholarships, work study and help from your family that’s available to you before taking out loans to pay for school. If you have to borrow to pay for your education, the conventional wisdom is to max out on federal student loans before turning to private lenders.

But some federal student loans are a better deal than others. In today’s low interest rate environment, private student loans can be competitive with the pricier government loans — particularly when compared to federal PLUS loans for grad students. It’s important to keep in mind, though, that while rates on government loans are fixed for life, private lenders offer both fixed- and variable-rate loans. Variable-rate loans typically carry lower initial interest rates, but the rate can change over time.

Loans for grad students

Once you move on to graduate school, you’re no longer eligible for direct subsidized loans and the relatively low interest rates that you might remember from your undergraduate studies, regardless of your financial need. Rates on direct unsubsidized loans for graduate students are significantly higher — they’ll be 5.31 percent for new loans issued after July 1, 2016. And unlike subsidized loans, interest on unsubsidized loans starts accruing as soon as you take your loan out.

Loan typeBorrower typeInterest rate
Direct Unsubsidized LoansGraduate or professional5.31%
Direct PLUS LoansParents and grad students6.31%
Interest rates on federal direct loans for grad students. Source: U.S. Department of Education

The aggregate borrowing limit (undergrad loans + grad school loans) for direct subsidized and unsubsidized federal loans is $138,500. Medical school students and others earning certain health-related degrees can take out up to $224,000 in federal direct loans. If you need to take out more than that to cover grad school costs, the government also offers PLUS loans.

PLUS loans

While you can take out all of the PLUS loans you need to cover school attendance costs, it will cost you more to pay them back. Interest rates on PLUS loans issued from July 1, 2016 through June 30, 2017 will be 6.31 percent. On top of that, PLUS loans carry a costly 4.3 percent up-front disbursement fee. That fee is taken out of the loan before you even see the money. For loans paid back on a standard 10-year repayment plan, the disbursement fee has roughly the same effect as adding one percentage point to the annual percentage rate (APR).

PLUS loans are also not subsidized while you are studying. If you make no payments for two years while enrolled in grad school, it will cost you more than $42,000 to repay $30,000 in PLUS loans at today’s rates, with 10 years of payments at $353 a month. That’s in part because interest will accrue on your loans while you’re still in school, adding $1,159 to the balance before you’ve even started making payments. All told, you’d rack up about $12,000 in interest in the course of paying off this loan (you can use’s student loan calculator to run your own numbers).

Private student loans

Before taking out a federal PLUS loan for graduate school, it’s worth taking a look at private student loan lenders.

When shopping for private student loans, keep in mind that government loans are “one size fits all” — everybody who takes the same type of loan out at a given time pays the same rate, and those rates are fixed for life. Private student loans offer more options (and sometimes more risk!) when it comes to rates and terms.

With private student loans, a good rule of thumb is that the longer the loan term — the number of years you’ll take to repay the loan — the higher the interest rate, and the lower the monthly payment. The interest rate also depends on the borrower or cosigner’s credit risk, and whether you’d rather have a fixed-rate or variable-rate loan.

Pick a variable-rate private student loan, and you’ll start out with a better interest rate than you’d get on a fixed-rate private loan with the same repayment term. But there’s some uncertainty involved with variable-rate loans — they’re tied to indexes like the prime rate or LIBOR and can move up and down over time.

In the chart above, gray bands indicate periods of recession, when policymakers often lower rates. If you had to guess, which way would you say rates are headed next? Source: Federal Reserve Bank of St. Louis.

In the chart above, gray bands indicate periods of recession, when policymakers often lower rates. If you had to guess, which way would you say rates are headed next? Source: Federal Reserve Bank of St. Louis.

If you’d rather have the certainty of a fixed-rate student loan, most private lenders offer those, too. You’ll pass up the chance to start out making lower monthly payments but if interest rates go up, your monthly payments will remain unchanged.

Repayment plans

Whether you’re relying on government or private student loans, the time to start thinking about repaying them is when you take your loans out, not after you graduate.

When choosing between private and government student loans, keep in mind that there’s more to consider than the interest rate. Private student loans don’t offer some of the borrower benefits packaged with federal loans, like access to income-driven repayment (IDR) plans — where your monthly payment is dependent on how much you earn– and the potential for loan forgiveness after 10, 20, or 25 years of payments.

IDR plans can help graduates with modest earnings pay off big loan balances. So if you know you’ll be taking on big student loan debt to earn a degree that may not command a lucrative salary, a government IDR plan might be a good safety net.

But IDR plans aren’t the best solution for everyone. If you won’t qualify for loan forgiveness, stretching out your payments over a longer period will typically increase the total amount repaid. If you do qualify for loan forgiveness, you may face a large tax bill.

Many private lenders are adopting borrower-friendly features like in-school grace periods and optional deferment. Remember that interest will accrue on your loans during these periods, just as it does on unsubsidized federal direct loans and PLUS loans. Private lenders typically offer several repayment plans, including the option to keep a lid on costs by paying the interest on your loans while you’re still in school.

Shop around

If you are considering a private loan, it’s a good idea to comparison shop since private lenders compete for your business. Because the rates and terms offered by private lenders depend on the borrower or cosigner’s creditworthiness, you need to do a little homework to find the actual rates you’ll qualify for.

The student loan marketplace offers an online comparison tool that let’s you find the actual rates you could qualify for with multiple lenders, without sharing your personal information during the shopping stage or affecting your credit score.

As an example of rates offered by lenders on the platform as of July 1, fixed-rate student loans from Citizens Bank were available at rates as low as 3.74 percent, with variable-rate loans starting at 2.45 percent. Keep in mind that not all private student loan lenders are on the platform. Your school’s financial aid office may also maintain a list of private lenders.


Whether you rely on federal or private student loans to earn your graduate degree, you can explore refinancing some or all of your student loans with a private lender after graduation. The government might also offer student loan refinancing in the future. As things stand, if you choose to refinance a federal loan with a private lender, you will lose some federal protections and access to federal repayment plans.

Your income and credit history may qualify you for lower rates. With interest rates hovering near historic lows, the potential savings are significant, particularly for those with higher-interest PLUS loans or grad school debt.
We’re test prep experts here Magoosh, not financial aid experts. The views expressed here belong to Credible. We encourage all of our students to do sound research on the Federal Student Aid website when making important financial decisions!

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