Whether you’re working toward a promotion or want to boost your earnings, earning a master’s degree can be a smart decision. Those with master’s degrees or higher have median earnings of $74,600, 21% higher than those with bachelor’s degrees. However, graduate school can be a significant investment. The average cost of a master’s degree is around $61,800; furthermore, the average yearly cost of medical school is $57,574, and law school is $48, 828. Although the cost can be high, don’t be discouraged. Most graduate students received financial aid, and 41% of attendees took out loans to pay for school. 1 For graduate school, you have several loan options. Understanding federal graduate vs. private graduate student loans and their differences will help you make the best choice for your situation.
Federal Graduate Student Loans
Federal student loans are a good starting point for graduate students since they don’t have minimum income or credit score requirements. To qualify for a loan, you must be a U.S. citizen or qualifying permanent resident and submit the Free Application for Federal Student Aid (FAFSA). There are two federal graduate student loans to choose from:
Direct Unsubsidized
Both undergraduate and graduate students can use Direct Unsubsidized Loans, but loans used for graduate school have higher rates and different loan maximums. Graduate students can borrow up to $20,500 per year. An aggregate maximum of $138,500 also applies, including all loans used for undergraduate degrees. Loans disbursed between July 1, 2023, and June 30, 2024, have an interest rate of 7.05%. Direct Unsubsidized loans disbursed after October 1, 2020, also have a disbursement fee of 1.057%. This fee is deducted from each loan disbursement. For example, if you took out a $10,000 loan, the $105.70 fee is deducted before disbursing the funds.
Direct Grad PLUS
If you reach the annual or aggregate maximum for Direct Unsubsidized Loans, Direct Grad PLUS Loans are another option. While Grad PLUS Loans do not have minimum income or credit requirements, they do require a credit check; you must not have an adverse credit history — meaning serious issues like bankruptcy or repossession within the past five years — to qualify for a loan. You may need an endorser to be eligible for a loan if you have credit problems on your reports. However, Grad PLUS Loans do not have borrowing maximums; you can borrow up to the total cost of attendance at your school. Loans disbursed between July 1, 2023, and June 30, 2024, have an interest rate of 8.05%, the highest rate on federal loans. Grad PLUS Loans also have a disbursement fee of 4.228% that is deducted from the loan amount.
Private Graduate Student Loans
Unlike federal loans, which are issued by the U.S. Department of Education, private graduate student loans are issued by private lenders. They typically do not have annual or aggregate limits so you can borrow up to the total cost of attendance for your program. And though federal loans only have fixed interest rates, the rates on private loans can be fixed or variable. As of August 2023, the rates on private loans are as low as 4.89% for variable-rate loans and 4.42% for fixed-rate loans. Private graduate student loans are credit-based, so lenders have minimum income and credit requirements. For example, ELFI requires a minimum credit score of 680 and a minimum income of $35,000.* If you don’t meet those requirements, you may qualify for a loan if you add a creditworthy cosigner to your application.
Federal Graduate vs. Private Graduate Students: 5 Key Differences
| Direct Unsubsidized Loans | Direct Grad PLUS | Private Graduate Loans | |
|---|---|---|---|
| Interest Rate Type | Fixed | Fixed | Fixed or Variable |
| Interest Rate | 7.05% | 8.05% | Variable: As low as 4.89% Fixed: As low as 4.42% |
| Origination/ Disbursement Fees | 1.057% | 4.228% | None |
| Repayment Terms | 10 Years (Alternative Payment Plans Available) | 10 Years (Alternative Payment Plans Available) | 5-15 Years |
| Maximum Borrowing Limit | $20,500 Per Year $138,500 Lifetime Maximum | Up to the total cost of attendance | Up to the total cost of attendance |
If you’re trying to decide between federal and private graduate student loans, there are six key differences to consider:
1. Repayment Options
With private graduate loans, you choose a repayment plan and term, usually ranging from 5 to 15 years. Federal graduate loans have a standard 10-year repayment plan. If you cannot afford your payments, a benefit of federal loans is the ability to enter into an income-driven repayment plan. These plans recalculate your payments based on your discretionary income and a term of 20 or 25 years. Some borrowers qualify for payments as low as $0. Federal graduate loans and private graduate loans offer different repayment options. Knowing the differences can help you decide which is a better option for you. Federal graduate loans offer a variety of repayment plans, such as:
- Standard Repayment Plan: Fixed monthly payments over a 10-year period, ensuring the loan is fully paid off at the end of the term.
- Graduated Repayment Plan: Monthly payments start lower then increase every two years over a 10-year period, allowing for gradual repayment.
- Extended Repayment Plan: Offers fixed or graduated payments over a 25-year period, providing borrowers more time to repay, but resulting in higher overall interest.
- Pay As You Earn Repayment Plan (PAYE): Caps monthly payments at 10% of discretionary income and forgives the remaining balance after 20 years of qualifying payments for undergraduate loans, or 25 years for graduate loans.
- Revised Pay As You Earn Repayment Plan (REPAYE): Similar to PAYE but open to a wider range of borrowers, capping payments at 10% of discretionary income and offering forgiveness after 20 or 25 years.
- Income-Based Repayment Plan (IBR): Monthly payments are set at 10-15% of discretionary income, and loan forgiveness is available after 20 or 25 years, depending on the loan issuance date.
- Income-Contingent Repayment Plan (ICR): Payments are based on a percentage of monthly gross income and recalibrated annually, helping borrowers adjust payments according to their income.
- Income-Sensitive Repayment Plan: Payments are based on a percentage of monthly gross income and recalibrated annually, helping borrowers adjust payments according to their income.
- Saving for a Valuable Education (SAVE) Plan: A program that helps families save for education expenses through tax-advantaged accounts, such as Coverdell Education Savings Accounts or 529 plans, to reduce reliance on loans.
However, with each of these repayment options, there are only two options for deciding how and when payments begin; this includes immediate repayment, meaning that payments begin once the loan is disbursed, and fully-deferred repayment, meaning that payments begin following graduation after a grace period. On the other hand, private graduate loans offer a variety of repayment plans, while also offering options for how and when payments begin. When taking out a private graduate loan, you can select the length of your loan term based on your desired monthly payment and repayment timeline. Additionally, with a lender like ELFI, you can select from four repayment options for how and when payments begin:*
- Immediate: Your loan term begins upon disbursement of funds to your school. You will make principal and interest payments while attending school. Full payment of interest and principal will begin 30 to 60 days after disbursement.
- Fixed: Make $25 payments on your student loans while in school and during the six-month grace period after graduation. Full payment of interest and principal will begin 30 to 60 days after your grace period.
- Interest-Only: Make interest-only payments on your student loans while in school and during the six-month grace period after graduation. Full payment of interest and principal will begin 30 to 60 days after your grace period.
- Fully-Deferred: No payments are required on student loans while in school with a six-month grace period after graduation. Full payment of interest and principal will begin 30 to 60 days after your grace period.
2. Loan Forgiveness
Private student loans are not eligible for federal loan forgiveness programs, but federal graduate school loans are. Federal graduate loans are eligible for Public Service Loan Forgiveness, Teacher Loan Forgiveness, income-driven repayment discharge and total and permanent disability.
3. Interest Rates
Graduate loans tend to have higher interest rates than undergraduate loans. And with federal loans, the rate can be quite high; the rate on Grad PLUS Loans is currently 8.05%, the highest it’s been in years. If you have excellent credit (or a cosigner), you could qualify for significantly lower rates with a private loan. Rates are as low as 4.48% for graduate loans.
4. Origination Fees
With federal student loans, there are always disbursement fees. These fees are a percentage of the loan amount, and they’re deducted at the time of disbursement. For federal grad school loans, the fees range from 1.057% to 4.228%. By contrast, private student loans don’t have origination or disbursement fees.
5. Credit and Income Requirements
Federal loans are a good option for students that aren’t employed or need established credit histories since there are no minimum income or credit requirements. You need to undergo a credit check to qualify, but you can qualify for a loan even if you have less-than-stellar credit. With private student loans, the eligibility criteria are more stringent. Lenders generally look for full-time employment and good to excellent credit, or you may need a cosigner to qualify for a loan.
Paying for Graduate School
Federal vs. private student loans, which is best for you? Although federal student loans have more borrower protections and benefits, they tend to have higher rates and fees. And some forms of federal loans have strict borrowing limits. If you have reached the federal borrowing maximum or have excellent credit and want to look for a loan with a lower rate, private graduate student loans can be a helpful alternative. With ELFI, repayment terms range from five to 15 years, and you can borrow up to 100% of the school-certified cost of attendance. You can get a rate quote online without impacting your credit score.
12017–18 National Postsecondary Student Aid Study, Administrative Collection (NPSAS:18-AC), Page 5. Retrieved from https://nces.ed.gov/pubs2021/2021476rev.pdf
