In the last year, graduate student borrowing options have changed significantly. In July 2012, subsidized federal Stafford loans, which didn't charge interest to students while they were in school, were eliminated for graduate students.
In their place, unsubsidized federal Stafford loans, which charge students interest during schooling, were expanded to cover up to $20,500 per year. The difference in interest charged during school could easily top $1,000 dollars during a two-year program.
[Learn more about grad student loan options.]
Graduate PLUS loans are federal student loans that fill in any remaining funding need. For instance, if the cost of attendance at a university is $25,500, a student could borrow the maximum $20,500 in Stafford loans and cover the additional $5,000 with Graduate PLUS loans.
Students should consider the following before taking out Graduate PLUS loans—and also keep in mind that the federal budget cuts that went into effect on March 1 could result in higher origination fees for both Stafford and Graduate PLUS loans.
1. Borrow unsubsidized federal loans first: The interest rates on Graduate PLUS loans are higher than those on unsubsidized federal student loans, which means students will have more to repay.
Since students are allowed to borrow more in unsubsidized Stafford loans than they could as undergraduates, it's best to exhaust unsubsidized federal student loan borrowing amounts first. For the July 1, 2012 to June 30, 2013 school year, graduate students could borrow up to $20,500 through unsubsidized federal loans, while undergraduates in their third year or later had an annual borrowing limit of $12,500.
[Find out when to use private student loans.]
2. Plan to pay interest while in school: "Whenever possible, avoid deferring payments on interest-accruing loans," says Patricia Nash Christel, a spokeswoman for Sallie Mae. Small payments can keep the loan size from ballooning after graduation.
A $5,000 Graduate PLUS loan borrowed in the first semester of a two-year program accrues nearly $800 in interest. Payments of about $33 per month would eliminate that extra $800 to be repaid after graduation. Students who continue to work during school should consider borrowing less, based on how much of their schooling they can afford to pay from their salary.
3. Calculate expected income after graduate school: When Carlos Santos decided to switch from a Ph.D. program in physics to a dual MBA and master's in environmental analysis and decision making, he knew loans were part of the financial equation. While scientific Ph.D. programs had a lot of funding available for students, the programs he was now looking into didn't.
However, he felt his plan had great career potential, and would allow him to move up his company's ladder more quickly, he says.
Santos calculated the amount he could borrow based on the entry-level salaries published on Rice University's website. He then looked at the numbers based on salary increases if he continued to get job promotions to see how he'd manage loan payments in the long term.