Best Federal Loans for Graduate Students

Federally backed student loans have several advantages over private loans and credit cards:

1) The interest rates are fixed, so your payments won't rise if rates rise.

2) The government provides free insurance, so your loan will be repaid if you are killed or disabled.

3) The government allows you to defer payments if you go back to school or join the military. (Warning—often, however, the government keeps quietly adding on the interest, which can make this an expensive option.)

4) Federal loans can be forgiven for graduates who go into teaching, health, public service, or other in-demand fields.

5) Students expecting to go into low-paying jobs can choose to repay their federal loans by committing up to 15 percent of their income, instead of a fixed payment.

6) Most schools allow students to shop for the best federal loan deal, which means they can often find discounts or other bargains.

7) Once you're finished with school, it's easy to consolidate all your federal student loans into one loan for easier payment and bookkeeping. The federal government also lets you stretch out repayment for as much as 30 years, which significantly reduces your monthly bills (though it also significantly increases the total amount of money you'll pay over the years in interest.)

8) Unlike some private lenders, the federal government doesn't charge you anything extra if you want to repay your student loans early.

To apply for any federal loans, students must fill out a FAFSA.

The best federal loans are (in order):

Perkins loans: The cheapest federally backed educational loans are awarded by schools only to students with low incomes. Graduate students who qualify can get up to $8,000 a year at an interest rate of only 5 percent. Better yet: The government doesn't charge any interest at all while the student is in school. These loans are made only through schools, so students do not have a choice of lenders. There is a maximum lifetime limit of $40,000, including undergraduate Perkins debt.

Subsidized Stafford loans: The second-cheapest federal loans are awarded only to low-income students. The interest rate is capped at 6.8 percent, and lenders can charge no more than 2 percent in upfront fees, which gives a maximum true annual percentage rate of 7.25 percent. But many lenders will waive some of the fees and knock something off the interest rate, especially for students who pay automatically and on time. The reason these are called "subsidized" is that they don't charge any interest while the student is in school—a savings of several thousands of dollars over the life of the loan. The federal government caps graduate student Staffords at $20,500 a year and $138,500 over a lifetime. No more than $8,500 a year can be subsidized. Most schools allow students to shop for the best Stafford deal.

Unsubsidized Stafford loans: These are awarded to almost every graduate student who applies, regardless of income. Lenders can charge graduate students a maximum of 6.8 percent in interest plus up to 2 percent in fees, which gives a maximum true annual percentage rate of 7.25 percent. But many lenders will waive some of the fees and some will knock something off the interest rate, especially for students who pay automatically and on time. The reason these are called "unsubsidized" is that the interest keeps building up while the student is in school. Students don't have to make payments while enrolled at least half time, but when they do finish school, the total amount they owe has increased, often substantially. The federal government caps graduate student Staffords at $20,500 a year and $138,500 over a lifetime. Most schools allow students to shop for the best Stafford deal.

PLUS: Graduate students who need more money after maxing out their Perkins and Stafford loans can borrow their full remaining educational costs (after other financial aid), including basic living expenses such as transportation, child care, etc., from the PLUS program. Lenders can charge as much as 8.5 percent a year and up to 4 percentage points as fees, giving a true maximum annual percentage rate of 9.42 percent. Some lenders, however, will offer discounts for automatic and on-time payment. Most schools allow students to shop for the best PLUS deal.