Government Helps Low-Income Grad Students Pay for School

Today's economy means higher tuition and fewer scholarships for graduate study. But starting this fall, grad students will get a big break when it comes to repaying federally backed loans. That's when they'll be able to ask the government to let them pay a percentage of their income instead of a standard fixed monthly amount.

Although mortgages and other loans are increasingly hard to come by, grad students can still borrow the full cost of their studies through federally backed programs. Those programs cover not only all tuition and fees but also transportation, books, and reasonable living costs. The big change is that "income-based repayment" will allow those with small paychecks or big educational debts to cap their monthly payments at less than 15 percent of their income.

Best of all, graduates whose incomes are low because they're in public service jobs may have some of their loans forgiven. For this, they can thank a new federal law and also a growing number of smaller loan repayment programs offered by grad schools, employers, and charities.

"Loan repayment options and forgiveness are getting better and better every year," says Corinna Spencer-Scheurich, an attorney for the South Texas Civil Rights Project in San Juan, Texas, who racked up about $70,000 in debt from college and law school and has received help paying it down from her alma mater, Lewis & Clark Law School, and from a nonprofit. Spencer-Scheurich, who got her law degree in 2004, says she's managed to afford a car and a house despite making less than $50,000 a year at a job she loves. She plans to apply for the feds' new income-based repayment program when it opens for business July 1. If she stays in her public service job and makes 10 more years of low monthly payments, whatever is left of her debt—she figures tens of thousands of dollars—should be forgiven in 2019.

Spencer-Scheurich hopes the new repayment programs will inspire more people to pursue dreams of earning a grad degree and entering public service. "People should follow their hearts. It is possible," she says.

Look Here First

Students hoping to borrow their way through graduate school should first apply for federal education loans. Even when credit is tight, these are easy to get, and they're usually the lowest-cost options. Federal grad loans are available to almost all students and can be obtained directly from the federal government, through private lenders such as Sallie Mae, and from state nonprofit educational lending agencies. A search tool for cheap federal loans is at Simple Tuition.

While it can seem daunting to try to figure out which loan is the best deal and whether you should look to the feds or to an alternative lender, financial aid officers say students should apply for loans in the following order:

• Cheapest. Some schools offer low-income grad students federal Perkins loans, which charge no interest while the student is in school and only 5 percent afterward. These are the cheapest education loans currently available. Unfortunately, Perkins funding is limited, so many otherwise qualified students can't get them.

• Fairly cheap. Almost all grad students can get at least $20,500 a year in federal Stafford loans, which this fall will charge a maximum annual rate of 7.14 percent (after counting all fees). Low-income Stafford borrowers will be charged no interest while they are in school and only about 5.9 percent (counting fees) after they leave.

• Next-to-last resort. Students who need more than the Stafford maximum can borrow their remaining cost of attendance, even covering books, transportation, and rent, through the federal Grad PLUS program, which will charge a maximum of 9.2 percent in annual interest this fall.

• Last resort. Some students, including those who have fallen behind on their undergraduate federal loans, don't qualify for federal loans for grad school. Usually, the only way these students will get a private loan from a bank is if they can find a U.S. citizen with good credit to guarantee repayment. A few schools are trying to help by making small loans, and some students are trying to raise money from private citizens using social networking sites such as greennote.com. But private loans are difficult to obtain and expensive. What's worse: Many loan repayment programs—especially the government's new income-based repayment program—won't cover them.