Education Debt Management for Graduate Students
Borrowing for Graduate School
If you need to borrow to fund your graduate school education, your first stop should be the federal Stafford loan.
Stafford loans are guaranteed by the federal government and come in two varieties: subsidized, where the government pays the interest while you are in school, and unsubsidized, where you are responsible for the interest while you are in school (but you can elect to defer payments while in school). If you elect to defer payments on an unsubsidized Stafford loan, the deferred interest will be added to the principal amount of the loan. To be eligible for subsidized Stafford loans you must be able to show financial need. All students are eligible for unsubsidized Stafford loans. Because Stafford loans are guaranteed by the government, there is no credit check to be eligible.
Stafford loans issued after July 1, 2006 carry a fixed 6.8% interest rate. The interest rate on Stafford loans issued prior to July 1, 2006 is variable and is reset every July 1 based on then-prevailing market interest rates.
Non-medical graduate students can borrow up to $18,500 (starting July 1, 2007, $20,500) per year in Stafford loans, of which up to $8,500 may be subsidized. Medical students can borrow up to $38,500 (starting July 1, 2007, $40,500) a year in Stafford loans (up to $8,500 may be subsidized). Independent non-medical graduate students can borrow up to an aggregate of $138,500 in Stafford loans, while medical students may be eligible to borrow up to a total of $189,125.
Many students combine subsidized and unsubsidized Stafford loans to borrow the maximum allowable each year.
For many graduate students Stafford loans will not be enough to cover the annual cost of school. New starting July 1, 2006 graduate students will be able to use federal PLUS loans to fund the gap between their Stafford loan allocation and their cost of education.
After July 1, 2006, graduate students can borrow up to 100% of their cost of education (less other aid received) in federal PLUS loans. These loans carry a fixed 8.5% interest rate, have minimal credit approval standards, and allow interest payments to be deferred while in school (deferred interest payments are added to the principal amount of the loan).
Federal PLUS loans may offer many graduate students a lower cost alternative to higher rate private education loans and credit cards, and don't have the collateral requirements and higher credit standards that home mortgages or home equity lines of credit do.
Credit eligibility for federal PLUS loans is not based your on debt-to-income ratio or your credit score (as eligibility for private student loans and home equity loans is). You will be eligible for a PLUS loan, even if you have a high debt-to-income ratio or a bad credit score, as long as you don't have an "adverse" credit history. That is, as long as you haven't been more than 90 days late on any debt and don't have any defaults, bankruptcies or other adverse action on any education debt, you should be eligible to borrow PLUS loans.
Managing Your Loans After School
Generally speaking, you will need to start repayment on your federal student loans 6 months after you leave school (for PLUS loans, repayment starts 60 days after disbursement, although payments may be deferred while in school). The standard repayment term is 10 years. Virtually all federal student loans are eligible for consolidation under the Federal Student Loan Consolidation Program. Consolidating your loans will allow you to extend your repayment period up to 30 years, and significantly reduce your monthly payments.
The Federal Student Loan Consolidation Program is authorized by the Higher Education Act of 1965, the same federal law that allows for your current federal loans. The government established the Federal Student Loan Consolidation Program specifically to help graduates better manage their student loan payments. Most federal consolidation loans are made by private sector lenders - many of the same lenders that make the types of student loans you currently have - and are guaranteed and subsidized by the federal government.
As you can see from the chart below, consolidating your federal loans can significantly reduce your monthly payments.
| Monthly Savings of Borrowers Who Consolidate Federal Student Loans* |
| Current Loan Amount |
$25,000 |
$50,000 |
$75,000 |
| Estimated Monthly Payment Before Consolidation |
$288 |
$575 |
$863 |
| Estimated Monthly Payment After Consolidation |
$188 |
$341 |
$480 |
| Monthly Savings |
$100 (35%) |
$234 (41%) |
$383 (44%) |
|
*The Estimated Monthly Payment Before Consolidation assumes a 6.8% interest rate under the standard 10-year repayment plan. The Estimated Payment After Consolidation is calculated under the Level Repayment Plan using an interest rate of 6.825% with extended payment terms and borrower benefits applied. Actual rate and payment may vary.
With a federal consolidation loan, your existing federal loans are refinanced with one new federal loan - not unlike refinancing a mortgage.
By consolidating, you combine your multiple federal student loans into one federal loan with a single monthly payment and lock in fixed rate on your variable rate federal loans (federal student loans taken out prior to July 1, 2006 carry variable interest rates that are reset every July 1, based on market interest rates. Federal student loans taken out after July 1, 2006 carry fixed interest rates.).
By consolidating, you can also extend the repayment term on your federal student loans to up to 30 years (the repayment term on federal Stafford loans is 10 years). Extending your repayment term will reduce your monthly payments significantly. Of course, stretching out payments means paying more interest over time, but a federal consolidation loan can always be repaid early without penalty.
Moreover, by consolidating your variable rate federal loans during your grace period - the 6 month period after you leave school where no payments are due - you can reduce your interest rate on those loans by 0.6%.
In addition, because the interest rate on a federal consolidation loan is capped at 8.25%, consolidating federal PLUS loans issued after July 1, 2006 will effectively reduce the interest rate on those loans by 0.25% (from 8.5% to 8.25%).
Even if you are happy with your current payments, you can benefit from consolidation by directing your monthly savings elsewhere. Taking your consolidation savings and paying off higher interest rate credit cards or private student loans will save you money immediately.
Consolidating your loans can also improve your chances of being approved for a mortgage or car loan. Lowering your monthly student loan payments means that less of your monthly income will go toward paying debt, reducing your "debt-to-income ratio." Your debt-to-income ratio (the lower, the better) is one of the factors a mortgage or car loan lender will look at in determining how much you can borrow.
There are no fees, no credit checks and no employment verifications to apply for a federal consolidation loan. In fact, the government prohibits federal consolidation lenders from charging fees.
The application process can be completed in a matter of minutes online or over the phone. All that is required is a short federal application, basically containing some personal information, contact information for 2 personal references and information on your current student loans, which your lender can fill in for you. Virtually everyone with federal student loans qualifies for a federal consolidation loan - as long as they have over $7,500 in federal loans and aren't in default on those loans.
You can learn more about federal loan consolidation or apply for a federal consolidation loan with Vault's no-obligation Loan Consolidation Service.
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