Consider 4 Factors About Graduate PLUS Loans Before Borrowing

Reyna Gobel

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.

[Weigh graduate school financing options early.]

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.

"Graduate and professional students with PLUS Loans should understand the relationship between their likely monthly pay and expected loan payments," says Thomas Harnisch, assistant director of state relations and policy analysis for the American Association of State Colleges and Universities. The best way to get monthly pay estimates is to chat with career services about likely pay based on the region in which the student would like to live.

"Like any investment, it comes down to math and basic questions: What share of our monthly income will go to paying this loan off? For how long? Can we afford this? Is this a good long-term investment? What alternatives are available?" he says.

4. Understand qualification and repayment: The qualifications for borrowers of Graduate PLUS loans are different than for borrowers of unsubsidized loans. For PLUS loans, students cannot have adverse credit history, defined by the Department of Education as bankruptcy or repossession of personal property within the last five years.

[Use these tips to start repaying student loans.]

Students can still qualify with a cosigner who doesn't have adverse credit history. Students who do not have a cosigner and have adverse credit history should still apply, as it's possible loans will still be approved on a case-by-case basis.

While parents who took out Parent PLUS loans had to start repayment as soon as their children received their undergraduate degrees, students with Graduate PLUS loans do not have to start making payments immediately after graduation.

Graduate PLUS loans don't come due until six months after graduation, just like federal student loans taken out by undergraduate students or unsubsidized loans taken out by either undergraduate or graduate students.

Trying to fund your education? Get tips and more in the U.S. News Paying for Graduate School center.