6 Things to Know About Grad PLUS Loans Before Applying

grad plus loan

If you’re looking for ways to pay for graduate school, you’ve likely come across the option of taking out a Grad PLUS loan. These federal student loans for graduate students could be a viable way to cover the costs of grad school.

But like any type of debt, it’s important to fully understand the financial implications before applying. Here are 6 things you should know before applying for a Graduate PLUS loan:

1. Your Grad PLUS loan is funded by the US Department of Education.

This means that eligibility is determined when you fill out the FAFSA. In addition, you will have access to benefits typical of federal loans, including eligibility for income-driven repayment plans.

The borrowing process is relatively simple and the benefits associated with federal student loans are quite valuable compared to many private loans. This can make Grad PLUS loans a very attractive choice.

2. You can borrow up to the full amount of cost of attendance.

While the maximum amount that you can borrow under the federal Direct Unsubsidized Loan program for graduate school is $20,500 a year, with a maximum lifetime limit of $138,500, a Graduate PLUS loan allows you to borrow up to the cost of attendance as determined by your institution, minus any other financial aid received.

Conceivably then, it is possible to pay for graduate school in its entirety by exclusively taking out federal loans — assuming you qualify (see #3 on this list, below). If you’re leery of the private student loan market, this is a definite plus (no pun intended).

However, remember that anything you borrow has to be paid back. You can always decline all or part of the loan prior to disbursement if you determine that it is unnecessary.

3. You must demonstrate creditworthiness to qualify.

Unlike federal Direct Unsubsidized loans, Graduate PLUS loans require evidence that you do not have an adverse credit history via a credit check.

If you do have a poor credit history, you may be required to find an “endorser” (i.e. cosigner) with a better credit history, or document the extenuating circumstances that resulted in your adverse credit history in order for the loan to be approved. Because of this, some borrowers will find that they have to turn to the private student loan market in order to obtain the money they need to attend graduate school.

Alternatively, you can take these steps to improve your credit prior to attending graduate school and help ensure that you qualify for a Grad PLUS loan. Of course, delaying your decision to attend graduate school can also give you more time to save up money so that you don’t need to borrow as much.

4. Interest accrues from the moment your loan is disbursed.

While you’re not required to make payments if you’re enrolled in a graduate program at least half-time, interest on your loan begins accruing the moment your loan is disbursed.

Though other student loan options available for graduate students also entail interest that begins accruing from the moment of disbursement, this is a good argument for borrowing as little as possible. Additionally, making interest-only payments while still in school will help avoid that interest being capitalized (added to your principal balance) once you enter repayment.

5. In addition to interest, a loan origination fee is applied.

Beyond the interest that is accruing on your loan, an origination fee is deducted when your loan is disbursed.

While the amount of the fee can change, in recent years it has been approximately 4.2 percent, proportionately deducted prior to disbursement. However, during repayment the origination fee counts as part of your outstanding balance.

Federal Direct Unsubsidized loans also charge a fee; however, it’s in the neighborhood of 1 percent — a much more reasonable rate. Private lenders may or may not charge an origination fee for their loans. This means that it is worth investigating your private loan options and comparing them with Graduate PLUS loans to make sure you’re getting the best deal.

6. Currently, Graduate PLUS loans have a fixed interest rate.

As of the 2015-2016 academic year, these loans had a fixed interest rate of 6.84%. As with other federal loans, the interest rate is set by Congress and can change each academic year.

What is interesting about this rate is that while you have to prove creditworthiness in order to qualify for the loan, having better credit does not improve the interest rate that you will be offered. As a result, you may want to see if you can get a better interest rate on the private market before committing to a Grad PLUS loan.

Typically, attending graduate school is much more expensive than obtaining an undergraduate degree, even if you are an in-state resident at a public institution. This means that even if you did not have to turn to loans to fund your undergraduate education, you may find yourself in the market for student loans as a graduate student.

However, many graduate degree programs can substantially increase your earning power, making finding a better job — and, therefore, affording student loan payments — easier than it would otherwise be with only a bachelor’s degree.

As with all loans, borrowing only as much is you absolutely need and having a repayment plan in place can help ensure that you do not get in over your head.

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