The 4 Best Grad Student Loans

The cheapest student loans come from charities, colleges and the federal government.

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A handful of charities and universities lend a little tuition money without charging any interest. But for the vast majority of graduate students, the cheapest and easiest educational loans to attain are those offered by the federal government because they offer advantages such as no payments during school and public service forgiveness. 

Starting in July 2010, it will be much simpler to arrange for those loans. Of course, cheap federal student loans are not offered to non-citizens and those who have defaulted on previous student loans. Nor are they offered to students attending colleges that aren't accredited by a federally approved agency. But for the vast majority of graduate students, recent rule changes have made it easier and cheaper for the vast majority of graduate students to get federal loans to fund their studies. 

All graduate students will have to do is fill out the Free Application for Federal Student Aid with the U.S. Department of Education. No more will students get to—or have to—"shop" for a federal student loan from the thousands of banks, credit unions and other lenders that used to serve as middlemen. Instead, starting July 1, the Department of Education will work directly with all college financial aid officers. Colleges will simply offer grad students their choice of the four different federal education loans available to grad students. Once they choose, students typically have to sign a few loan documents. Then the money will be funneled directly from the federal government to the student's college account. 

[Read What will the new student loan changes do?

The cheapest federal grad student loans are, in order: 

1. Perkins loans: The cheapest federally backed educational loans for graduate students 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. There is a maximum lifetime limit of $40,000, including undergraduate Perkins debt. Even those with bad credit can take out Perkins loans, as long as they haven't defaulted on previous federal educational loans. Unfortunately, many colleges have very little—or even no—Perkins dollars to lend, so students who might qualify for big Perkins loans at one college might get small—or no— Perkins loans at other colleges. 

[Learn more about paying for graduate school.] 

2. Subsidized Stafford loans: The second-cheapest federal loans for graduate students are awarded only to those who, according to the federal government's analysis of the student's FAFSA, need help paying tuition. The interest rate is capped at 6.8 percent, with a fee of no more than 1 percent, which gives a maximum true annual percentage rate of about 7 percent. The reason these are called "subsidized" loans 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 will allow grad students to borrow no more than $8,500 through the subsidized Stafford program each year. Because Stafford loans are made directly by the federal government, all students can get all the money they qualify for, no matter what college they attend. Students with bad credit can take out Stafford loans, as long as the student hasn't defaulted on previous federal educational loans. 

3. Unsubsidized Stafford loans: These are awarded to almost every graduate student who applies, regardless of income—as long as the student is a legal U.S. resident and hasn't defaulted on other federal student loans. These loans also charge a maximum of 6.8 percent in interest plus up to 1 percent in fees, which gives a maximum true annual percentage rate of about 7 percent. The reason these are called "unsubsidized" is that the interest continues to accrue while the student is in school. Students don't have to make payments while enrolled at least half time. (Universities' definitions of "half time" vary, but it typically means taking at least two courses, or six credits, per semester.) While students aren't charged penalties or fines for not making payments while attending school, the accruing interest means that when they do graduate, their total debt has increased—sometimes substantially. M.B.A. candidates who borrow $8,000 in an unsubsidized Staffords their first year typically owe more than $9,000 by the time they graduate. The federal government caps graduate student Staffords at $20,500 a year and $138,500 over a lifetime. Subsidized Stafford amounts count toward these total Stafford borrowing limits. Because Stafford loans are made directly by the federal government, all students can get all the money they qualify for, no matter what college they attend. Students with bad credit can take out Stafford loans, as long as the student hasn't defaulted on previous federal educational loans.