The next-best deal is a federal "subsidized" Stafford loan. Students whose expected contribution is less than the cost of their schooling can get loans of up to $8,500 a year that charge no interest while the student is in school and 6.8 percent after graduation. For the 2010–11 academic year, no lender is supposed to charge an additional fee of more than 1 percent. Many lenders waive at least part of those fees.
Any graduate student, no matter how far behind in utility payments or other nonfederal loans, can borrow up to $20,500 a year through the government's "unsubsidized" Stafford program. Those loans charge 6.8 percent interest and up to 1 percent in upfront fees for the 2010–11 academic year. Although no payments are due while the student is in school, the interest does accrue. The government will cut off most graduate students from any new Stafford loans after they've borrowed $138,500 from the program. Medical students have a higher total Stafford limit of $224,000.
Other options. Those who need more than Stafford loans have borrowing options, but they are more expensive and harder to get. Federal Grad PLUS loans, for example, can cover the full cost of attendance (after other aid is subtracted) at an interest rate that is capped at 8.5 percent and with fees of no more than 4 percent of the value of the loan, for a total annual percentage rate of 9.4 percent. (Some lenders charge less. Students who borrow their PLUS loans directly from the federal government, for example, can pay as low as 7.65 percent annual interest and fees of just 2.5 percent, for an APR of a little more than 8.2 percent.)
But the government won't issue Grad PLUS loans to anyone with bad credit, unless the applicant can find a U.S. citizen with good credit willing to cosign.
While all students should avoid overborrowing, Thibeault warns medical and law students, especially, against underborrowing. Avoiding federal student loans can backfire if students have to use credit cards or private loans to tide them over after graduation for residency or exam studies. "Some of the teaser rates on the private loans might start low, but they will probably rise. And it is better to borrow at 8.5 percent than 13," he says. Thibeault recommends that students in their final months of graduate school prepare a budget for the coming year. If it looks as if they'll need extra cash, they should apply for the maximum federal student loans available, which can be disbursed only while a student is enrolled in school. Those who end up not needing the money can repay it quickly, since there is no prepayment penalty for federal loans.
Another big advantage of the federal loans: They now offer a new income-based repayment option that allows students to cap their payments below 15 percent of their incomes. What's more, those who sign up with IBR may have some of their loans forgiven after 10 years of public service or after 25 years of persistently low incomes.
The credit crunch of 2008–09 wiped out almost all other borrowing options for those who didn't qualify for federal loans, such as foreign students. But recent improvements in the economy have encouraged a few lenders and schools to start up some small and attractive alternative loan programs. A handful of highly ranked graduate business schools, including those at Cornell University, Northwestern University, the University of Chicago, and the University of Rochester, are offering private loans to international students who don't have American cosigners. Some smaller lenders, such as credit unions and some nonprofit state agencies, are offering alternative education loans at fixed rates as low as 7.7 percent.
As difficult and confusing as arranging graduate loans can be, paying them off can be even more of a challenge.
Economic troubles have hampered many programs that had promised to pay off students' loans for them. Kentucky, for example, has cut back on student loan payments it had promised to some teachers. Similar programs for public servants, including nurses and soldiers, have been suspended in California, New Hampshire, and Pennsylvania. The Missouri Higher Education Loan Authority has suspended its offer of deeply discounted interest rates to public servants.