How Do Student Loans Work For Grad School? | Student Loan Planner

How Do Student Loans Work For Grad School? | Student Loan Planner


How do student loans work for graduate
school? Here’s an example. The first debt that you always take out for graduate
school is something called a Stafford loan. Now for grad school, you don’t have
Stafford subsidized anymore. You only have Stafford unsubsidized. This means
that the interest rate is 6.08%. And then on top of that you have an origination fee that’s about 1%.
This means that you lose about 1% of what you borrow to paying
this upfront fee, and then you also have to pay this approximate 6%
interest rate on top of that every year you have the debt, right? So if
you think about that, that’s a very limited amount that you can take out for
a lot of graduate programs. Unless you are in a specified medical professional
program that has higher limits, the limit yearly for Stafford loan borrowing is
$20,500 per year. The total limit is about $138,500. So if you are at a MBA program like, you know,
Wharton, that costs $80,000 a year,
you’re limited to only a little over $20,000 in Stafford
loans with this 6% interest rate and 1% origination fee. Now, where are you gonna get the rest of
that debt if you can only borrow $20,000 of Stafford. The next portion of
debt comes from something called the Grad PLUS program if you’re borrowing
from the federal government. The Grad PLUS loan has an interest rate of 7.08% with an origination fee of 4.24% approximately. So that is a much more costly loan. The benefit of using it
is you have access to income driven repayment programs. The downside of
course is, it’s very, very expensive. For certain medical professions like,
obviously, human medicine, dentistry, and some others, you actually get a higher
yearly Stafford loan limit of $40,500 a year up to an
aggregate maximum of $224,000 for all of, you know, your
Stafford borrowing. So what that tells you is that you will get to borrow it at
a cheaper rate, up to that $40,000 level, and then you will switch
over to Grad PLUS. So it doesn’t make sense to take these federal loans. Let’s say
that you’re taking out loans for a professional program and you’ve hit your Stafford loan limit already, and you’re
wondering “Do I take out the Grad PLUS loan or do I go with this cheaper
private option”, and the thing that you really need to be aware of, is when you
have all federal loans you have one payment that’s 10% of your
income, max. When you take extra private loans you create two payments. One that’s
10% of your income and one is whatever the private loans are that you
borrowed. If your plan is to refinance the whole thing at graduation then that’s
not that big of a deal. But if you are not wanting to refinance that whole
thing at graduation then you’re making a mistake
because you’re creating an extra payment for no reason. Or for a limited reason of
limited utility of having a lower total interest cost, which might not be as
important as having a low required payment as a new grad. So if you do want
to take out mostly all private loans because you’re getting a better deal
than with the federal government, you could do that as well. You just want to
make sure that your debt to income ratio is below 1.5 to 1 and that
you’d be able to make this payment of, you know, think of it being 1%
of the total amount that you’ll have to pay monthly. Can you afford that, you know,
with your expected income? If you can, then you might inquire about private
loans. We actually have private loans, you can check out studentloanplanner.com/private, and you’ll be able to see the different private loan options that
you could apply for. The simple truth is most people will be better served for
graduate school programs by taking out only federal debt. There are some
exceptions to that, like people who know they’re gonna have a really high income
and are gonna come out with a modest amount of debt, and those people could
consider private loans. But be careful, because when you go visit that financial
aid office, they will give you anything that you ask for because there are no
caps on borrowing. If you have questions, if you want a one on one plan, we can
help, studentloanplanner.com/help, and then you can obviously comment in this
section here in the youtube comments below. Thanks so much.

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