Should I Use Private or Federal Student Loans for My MBA?

MBA loans

If you’re considering going to school for your MBA, paying for it can be one of the biggest obstacles. The average borrower will walk away with $42,000 in combined undergraduate and graduate student loans when they finish their programs.

When it comes to student loans for MBA programs, you have multiple options. Depending on your needs, you may stick with federal loans, but private lenders with MBA loans designed specifically for your needs can be attractive, as well.

Find out about different MBA loans below and learn what factors you should keep in mind as you compare options.

Interest rates for MBA student loans

Federal loans generally have lower interest rates, so for many people, getting a federal loan is the cheaper option. However, if you have excellent credit, a private lender may approve you for a low interest rate, which can save you money in the long run.

If you take out a federal loan for your MBA program, you will receive either Direct Unsubsidized Loans or Direct PLUS Loans.

A Direct Unsubsidized Loan has a current interest rate of 5.31%. Because it is unsubsidized, the loan builds interest, even while you’re in school. A Direct PLUS Loan has a current interest rate of 6.31%

For borrowers that prefer to use a private lender, there are several options available. For example, Citizens BankCollege Ave, and Connext all offer loan designed for business school students.

If you opt to go with a Citizen’s Bank MBA loan, you can choose between a variable and fixed interest rate. While a variable interest rate is often lower at first, it can fluctuate and rise with the market.

Right now, Citizen’s Bank variable interest rates range from 3.51% to 9.26%, depending on what payment plan you choose. The fixed loan interest rates range from 5.10% to 10.60%.

College Ave also offers fixed and variable interest rates. If you opt for a variable rate and sign up for the autopay discount, your starting interest rate could be anywhere from 3.94% to 8.78%. If you instead sign up for a fixed-rate loan, your interest rate would range from 6.73% to 11.35%.

Finally, Connext offers variable interest rates from 4.32% to 9.36% and fixed interest rates from 6.12% to 9.70%. The shorter the repayment term, the lower your interest rate will be.

MBA student loan origination fees

If you take out Direct Unsubsidized or Direct PLUS Loans, there are some fees associated with your loans. The government takes out the fee before they disburse your loan, so the amount you receive is slightly less than the loan you take out.

If you take out a Direct Unsubsidized Loan, the government will charge you a loan fee of 1.069%. If you take out a Direct PLUS Loan, your fee will be 4.276%.

Private loans tend to work very differently. Most private lenders do not charge application, disbursement, or origination fees. In fact, Citizen’s Bank says that borrowers save $925 on average in fees.

Refinancing options for MBA loans

There is one downside to federal loans: If interest rates go down, you cannot refinance your loans through the federal program. In that instance, you must refinance through a private lender instead.

With private MBA loans, you can refinance them to a lower interest rate as the market and your credit improves. By refinancing, you could save hundreds or even thousands of dollars over the length of your repayment term.

Repayment plans

Federal loans offer unique benefits when it comes to repayment — benefits that can make managing your debt much simpler.

First, you do not need to start making payments on your federal loans until you graduate from school. With private loans, you may be required to make payments right away, which can be a lot of pressure while you are trying to get your MBA.

If, after graduation, you lose your job, you can defer your federal loans or ask your loan servicer to put you on forbearance. That means you can stop making payments without going into default. With private loans, you typically do not have this option.

If your income is relatively small after you graduate, your federal loans may be eligible for an income-driven repayment plan (IDR). Under an IDR plan, your payments are capped at a percentage of your income and can be as low as zero.

With private loans, IDR plans are not available and you have to keep up with your payments, even if you have a small income.

Finally, in the case of death or total disability, your loan servicer will discharge your federal student loans. For private loans, that may not be the case. And because many private loans require a cosigner, that means a loved one can end up making payments on a loan even after the borrower has passed away.

Choosing between federal and private student loans for your MBA

In most cases, it makes sense to take out as many federal loans as you are eligible for before turning to private student loans to pay for the rest of your education.

Federal loans typically have lower interest rates and more generous repayment terms. However, some borrowers with excellent credit and steady incomes may benefit from going through a private lender.

For more information on managing graduate school loans, check out the ultimate student loan repayment guide for MBA grads.

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