Paying for grad school loan options 101

Paying for graduate school may seem like a daunting prospect, but it can be done. Get the breakdown on the two main types of grad school loans.

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No matter where you go for school, you can count on one thing: Getting a grad degree is expensive. Between tuition, rent, food (that’s hopefully not just ramen), and supplies, you’ll likely end up spending tens of thousands of dollars a year to get an advanced degree.

That’s why most of us need to turn to loans in order to afford grad school. Unfortunately, though, “just get a loan” is easier said than done. There are a ton of options out there, and selecting the right path for you can feel overwhelming. I know first hand—I just took out a big loan for business school a couple of months ago.

And now that I’ve gone through the process, I want to make it easier for you. Here are the basics of understanding grad school loan options, which will get you started figuring out the best way to finance your degree.

First Things First

If you are a U.S. citizen, there are essentially two types of grad school loans for you to choose from: public loans and private loans. (International Students only qualify for private loans.) They have some similarities (e.g., you likely won’t need to start paying them off until six months after you graduate), but there are a number of important differences that are worth considering.

Most people base their decision about which loan to get based on two things: interest rates and payment plans. Here’s the run down of how public and private loans stack up.

Public Loans
What Are They?

Public loans are educational loans you can take out from the federal government. Most grad school students will be eligible for two types of public loans: the Stafford loan and the Grad PLUS loan. They have fixed interest rates (Stafford is 6.8% and Grad PLUS is 7.9%), which means that they will stay the same regardless of what happens in the market. Because the Stafford Loan has a lower interest rate, you’ll want to max it out—it allows you to borrow up to $20,500 per year—before starting to borrow through the Grad PLUS loan.

While public loan interest rates are typically higher than what you could find right now through private loans, they do have advantages. Most important to me is the fact that they have a number of flexible payment plans, some of which will give you a break if you work in the nonprofit or government sectors.

Who Are They Best For?

Public loans are the best for people (like me!) who are exploring a variety of career options and aren’t certain that they’ll be moving straight into a high-paying job after graduating. Because their interest rates are currently higher than those of private loans, you may end up paying more in the long run—but their flexible payment plans take a lot of the pressure off if you go into a less-lucrative field. They are also good options if you have a credit score on the lower end and don’t have access to a co-signer.

Anything Else I Should Know?

The government has limits on how much total money you’re allowed to borrow from them, which includes any loans you (or your parents, on your behalf) took out for undergrad, so you’ll need to do some research before applying.

Where Can I Get More Info?

Student Loans.gov is the one-stop shop for all things related to public student loans, from learning more to ultimately applying (and paying back down the road).

Private Loans
What Are They?

Private loans are student loans that you secure through a private bank or lending company. Private loan terms (i.e., payment options, death cancellation, and co-signer requirements) vary a lot from lender to lender, so make sure to really read the fine print! One of the main things that differentiate private loans from public is the fact that they typically have variable interest rates. This is actually a good thing right now—because of what’s happening in the economy, interest rates are very low. That means that, depending on your credit history, you should be able to secure a private loan with a lower interest rate than what’s offered by the federal government. Adding a co-signer with good credit to your loan will also go a long way toward reducing your interest rates. Payment options for private loans vary depending on the lender. While they don’t typically offer the flexible payment plans you can get through the federal government—meaning you will need to pay the loan back in full no matter how much you make after graduation—they may have a longer payment period that will allow you to reduce your monthly loan bill.

These low interest rates, however, will probably start going up over time as the market improves. That means that you’ll have to keep a close eye on your loans and potentially look into refinancing them if they really start to rise. SoFi and Common Bond are two organizations that help students refinance their education debt.

Who Are They Best For?

Given that they have variable interest rates that are likely to go up in the next five years, private loans are best for folks who are planning on going into a high-salary sector that will allow them to pay their loans off quickly. You also may be interested in private loans if you feel comfortable adding a co-signer and refinancing the loan after graduation so that you can take advantage of the initial lower interest rates.

Anything Else I Should Know?

You can always mix private and public loans to get the best of both worlds. International students can usually borrow private loans from U.S. banks as long as they have a U.S. co-signer.

Where Can I Get More Info?

Popular lenders to explore include Discover, Sun Trust, Wells Fargo, and Union Federal. As for applying for loans once you’ve chosen them—well, we’ll be covering that shortly. But in the meantime, I hope this helps give you the groundwork to start deciding how you’ll fund your higher ed!

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This article was written by Leslie Moser from The Daily Muse and was licensed as an article reprint. Article copyright January 16, 2014 by The Daily Muse
The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.
This reprint is supplied by Fidelity Brokerage Services LLC, Member NYSE, SIPC.
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