Grad PLUS Loan: 6 Things to Know Before You Apply

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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 grad school costs. But like any debt, it’s crucial to fully understand the financial implications before applying.

Here are six things you should know before applying for a graduate PLUS loan:

1. Grad PLUS loans are unlocked with a FAFSA form
2. You can borrow up to the full amount of cost of attendance
3. You must demonstrate creditworthiness to qualify
4. Interest accrues from the moment your loan is disbursed
5. You must pay a loan origination fee
6. Graduate PLUS loans have a fixed interest rate
7. Grad Plus Loans can be consolidated
Plus: Review your options before borrowing grad PLUS Loans

1. Grad PLUS loans are unlocked with a FAFSA form

Your eligibility for a grad PLUS loan is determined when you fill out the Free Application for Federal Student Aid (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 generally more generous than what’s offered with many private student loans. This can make graduate PLUS loans a very attractive choice.

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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 advantage.

However, remember that anything you borrow via grad PLUS loans 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.

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 turn to the private student loan market to obtain the money they need to attend graduate school.

Alternatively, you can take steps to improve your credit before 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 won’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 grad PLUS loan begins accruing the moment your loan is disbursed.

Other student loan options also include accruing interest, but 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.

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5. You must pay a loan origination fee

Beyond the interest that is accruing on your grad PLUS loan, an origination fee is deducted when your loan is disbursed, so you’ll receive a little less than what you actually borrow.

While the fee can change, it was 4.228% of the loan amount for the 2020-2021 academic year.

Federal Direct Unsubsidized Loans also charge a fee; however, it was 1.057% for 2020-2021 — 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 your best deal.

6. Graduate PLUS loans have a fixed interest rate

For the 2020-2021 academic year, graduate PLUS loans have a fixed interest rate of 5.30%. 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 although you have to prove creditworthiness 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.

7. Grad Plus Loans can be consolidated

If you’re considering a grad PLUS loan, you may not be a first-time federal loan borrower.

If you already borrowed for your undergraduate degree, keep in mind that you could eventually group all of your federal loans via a Direct Consolidation Loan. There are pros and cons to consolidation, though, so move forward cautiously.

If you find yourself not needing federal loan protections, you could ultimately refinance grad PLUS loans too. Student loan refinancing is the only way for you to lower the interest rate on the federal debt (a Direct Consolidation Loan carries a rounded-up average of your original loans’ rates).

Just remember that qualifying for refinancing is a tall order and requires good credit or a creditworthy cosigner.

Review your options before borrowing graduate PLUS Loans

Typically, attending graduate school requires more debt than for an undergraduate degree, even if you’re 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 as you absolutely need and having a repayment plan in place can help ensure that you do not get in over your head.

Be sure to compare loan options for grad school before proceeding.

Andrew Pentis contributed to this post.

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