Financial aid: sorting through student loans

English: A vector image of a mortar board hat.

When I see clients with really big student loans, the money has been used not for college, but for graduate or professional education. Many people will borrow $20,000-$40,000 for college. I view that as an acceptable amount if the person has any reasonable hope of employment after graduation. The rule of thumb is don’t borrow more than you can reasonably expect to make your first year of employment. That way, you’ll end up paying about 10% of your income, and that’s doable if you are at least a little frugal. After all, many people spend that much on a car and pay it off in 5 years.

Where there’s really trouble in River City is when the student has an undergrad loan for that much, and then goes on to graduate school. Getting a masters or PhD in an academic field is pretty chancy unless you’ve carefully researched employment possibilities. Without getting significant aid you’re probably wasting your time and money—we all know how difficult it is to get a job in academia. Even with a free ride, you need to think very carefully about the lost income over the years when you continue to be in school.

If your career really requires an advanced degree, you should first look into whether your employer will foot the bill for at least some of it, whether you can study part time, attend a weekend intensive program, etc. But let’s say you’re determined to pursue a professional degree that pretty much requires full time study (Physical Therapy, Occupational Therapy, prestigious MBA and law school programs, etc.) Let me exclude from this discussion medical school because I must confess I don’t know how even affluent middle class people can pay for it any more. Medical school, particularly an advanced specialty, can cost hundreds of thousands of dollars and unless family is willing to foot the bill, I think young medical students are, under our current system, pretty much faced with career-long debt.

The kinds of loans available to you are going to be quite different from the more favorable ones that you might have had as an undergrad.

Basically, the fun subsidies are over. You’re not going to see that lovely subsidized loan (where the Feds cover your interest while you’re in school) at that 3.76% interest rate. The Ford Unsubsidized Loan (also known as the Stafford loan) is the best deal you can probably get as a graduate student. Interest begins accruing as soon as you take the loan, although payment of interest and principle can be delayed until 6 months after you graduate. And the rate (currently) is 5.31% + a 1.069% origination fee.  The loan limit is $20,500/year.

Do you need more than that, Bunkie? First, explore everything you can to cover other costs—teaching assistantships, a job, choosing a state school, scholarships and awards, and living at home with mom and dad. Your next option is a Direct PLUS loan, where you can borrow up to the cost of attendance (including reasonable living expenses) minus any other loan amounts (like the Ford Unsubsidized). You must have good credit for these loans. The interest rate on this loan is currently 6.31% plus a loan origination fee of 4.276% deducted as dispersed (so you have to borrow more in order to cover the fee).  You can choose a 10 to 25 year (ouch!) repayment plan on these loans.

Once you exhaust these possibilities, you’re into private loans. Some are made directly through the school and some come from private lenders. These are fraught with perils:

  • Are they fixed or variable? The fixed rate can be 5% (usually only if you’re already earning money or have a parent co-signer) up to more than 12% (thanks Sallie Mae). Before you sign for a variable with teaser rates, think about whether you expect interest rates to go up significantly over the term of the loan (yes, probably).
  • Do they require a co-signer? Note to parents: no, no, no. If you don’t know why, we need to talk.
  • Do you have to make payments while in school? Interest?
  • Do they have financial hardship forbearance? This doesn’t mean you get off the hook—it just means they won’t go after you while you’re ill or unemployed—but interest continues to accrue.

 

As you can probably tell by the length of this post, graduate school financial aid (and it’s almost all loans) is really complex and you really need to know what you’re signing before you choose how much, and how to borrow. Please use those research skills you learned in college to understand the different possibilities and traps of these types of loans.

 

Resources:

For more specifics on Federal student loans, comb this site.

More information on the terms and pitfalls of private loans can be researched here.

 

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