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 six things you should know before applying for a Graduate PLUS loan.
1. Your Grad PLUS loan is funded by the 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.
The borrowing process is relatively simple, and the benefits associated with federal student loans are 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
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. But a Graduate PLUS loan allows you to borrow up to the cost of attendance, minus any other financial aid received.
It’s possible to pay for graduate school in its entirety by exclusively taking out federal loans — assuming you qualify (see 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’s unnecessary.
3. You must demonstrate creditworthiness to qualify
Unlike federal Direct Unsubsidized loans, Graduate PLUS loans require evidence that you don’t have an adverse credit history via a credit check.
If you have a poor credit history, you may be required to find an “endorser” (or cosigner) with a better credit history, or document the extenuating circumstances that resulted in your adverse credit history. 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 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
Although 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 also include accruing interest, this is a good argument for borrowing as little as possible. Additionally, making interest-only payments while still in school will help to stop interest from capitalizing once you enter repayment.
5. 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, it was approximately 4.3 percent during the 2017-2018 academic year. During repayment, the origination fee counts as part of your outstanding balance.
Federal Direct Unsubsidized loans also charge a fee; however, it’s closer to 1.1 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 2017-2018 academic year, these loans had a fixed interest rate of 7.00%. 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.
Andrew Pentis contributed to this post.
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