How to Get Financial Aid for Grad School

Cathi Blair took out a federal loan. After five years' teaching, most of her debt will be canceled.

Berkeley grad student Doug Spencer helps manage an apartment complex in return for reduced rent.

A growing number of students work part time while they are in grad school. Campus research jobs are ideal because students can get paid for working on their dissertations. But those plum assignments are hard to get, and many more grad students end up with teaching assistantships. Teaching can be fun, and it prepares the student for a future as a professor, but grading undergrads' finals just when grad exams loom can be stressful.

Alas, there is such a shortage of grants and high-paying campus jobs that most grad students have to borrow, often massively. Almost 60 percent of all grad students have some education debt, and the average such debt is more than $40,000. Those attending professional schools should expect to rack up far more than that. More than 90 percent of all medical and dental students borrow, and their typical debt load exceeds $90,000. Debt loads of $200,000 are not unusual.

Point shaving. With those kinds of numbers, students who shop around for loans that waive fees or knock a couple of points off the interest rate can save thousands of dollars. Grad students say one way to save big bucks is to stick with federal loans even when private loans seem to offer lower terms, since the federal loans can be deferred or even forgiven. That was a happy discovery for Cathi Blair, who started spending down her family's savings to fund her pursuit of a master's in education at Eastern Kentucky University. Blair, who has worked more than 20 years as a scientist for the state, is preparing to launch a second career as a science teacher. One of her fellow students pointed her to a program that will repay up to $17,500 worth of federal education loans for science teachers. So she borrowed to pay tuition instead, preserving the family nest egg. After five years of teaching, most of her debts will be canceled. "It would have been extremely hard on my family" to pay all the costs out of pocket, she says.

About 80 percent of schools allow students to shop around for Stafford and Grad plus loans. Many of these will steer students to loans offered by "preferred lenders." While those are no longer simply the lenders that pay the biggest kickbacks to the school, they are not necessarily the lenders that offer the best deal. Students can save money if they spend a few hours checking out nonprofit lenders, services such as Graduate Leverage, or web shopping tools like Simple Tuition. Advisors recommend students who have to borrow first max out their low-cost federal Stafford and Perkins loans. Private loans should only be a last resort for several reasons including: They tend to have variable rates, which means payments may rise in the future, and, unlike federal loans, they will generally not be forgiven for graduates who go into low-paid public service jobs.

Students who move on to low-paid or public-service professions can get many of their federal—but not private—student loans forgiven. Among the advantages of federal loans:

• Income-based repayment. Starting in 2009, graduate students who consolidate their federal loans with the federal government can apply for an income-based repayment plan that caps monthly payments at 15 percent of family income. Some borrowers can have their remaining debts canceled in as little as five years.

• Public-service forgiveness. A host of programs will repay educational loans for teachers, healthcare workers, and other public servants. Some of the programs, however, are designed with so many loopholes that most students won't get much benefit. Last year, for example, Congress congratulated itself on agreeing to repay Grad plus loans for those who work at public-service jobs of almost any type for 10 years and who make 10 years' worth of on-time payments on their plus loans. Since standard plus loans last only 10 years, students won't get any advantage from this program unless, as soon as they finish school, they apply for the federal government's 25-year income-based repayment plan.