When it comes to funding an undergraduate education, it seems that everyone agrees that federal student loans are a much better option than private loans.
Graduate school can be a bit more complicated. Some people argue that private loans may be a better choice than the federal Graduate PLUS Loans.
Is there an argument to be made for private loans? In what circumstances are they a better choice? (spoiler alert: the federal loans are usually the best option for most graduate students.)
Private Loan Advantages
There are two main advantages to private loans, and they are both significant.
First, many lenders offer private loans with interest rates significantly lower than the 7.00% interest rate that applies to new Grad PLUS loans. With many graduate programs costing a small fortune, a slight difference in interest can make a huge difference in the long run.
The second big advantage is that many private lenders no longer charge loan origination fees (some still do, so it is important to pay close attention). The Graduate PLUS origination fee is currently over 4%. That means if you borrow $10,000, you will actually have to pay back $10,400 plus interest. The origination fee can make the Graduate PLUS loan a more expensive option.
Graduate PLUS Loan Advantages
The perks to Graduate PLUS loans come in the form of consumer protections.
Perhaps the biggest protection is the availability of Income-Driven Repayment plans. Borrowers payments are based upon what they can afford to pay rather than what they owe. If a borrower is unemployed for an extended period, they will not have to worry about student loan payments. Beyond the monthly flexibility of the Income-Driven Repayment plans, there is the possibility of student loan forgiveness. Depending upon the plan selected, the remaining balance can be forgiven after 20-25 years worth of income-driven payments. If an expensive graduate degree doesn’t lead to a big salary, this protection can be life-changing.
Another big advantage to Graduate PLUS loans is the ability to qualify for Public Service Loan Forgiveness. For people who end up working for the government or a non-profit, their student loans can be forgiven after just ten years. This means that individuals who discover a passion for public interest work can pursue their dream jobs without having their student loans hold them back.
Getting the Best of Both Worlds
Many people are justifiably concerned with the high interest rates and origination fees that come with Graduate PLUS loans.
However, it is worth pointing out that there are no prepayment penalties, nor is it a lifetime commitment.
If someone finishes graduate school and locks down a high paying job, they can always refinance. Refinancing can pay off your old Federal PLUS loans in full and replace them with a new private loan. The downside is the federal perks are gone, but the benefit is lower interest rates. In fact, many of the student loan refinancing lenders offer interest rates below the private loan rates.
This means a borrower can have the protections of federal loans during school, but once the risk of underemployment or unemployment has passed, they can refinance and get the low rates. The cost of going this route is the loan origination fee of the PLUS loan and higher interest rate during school. For most, the extra cost amounts to a cheap insurance policy.
Graduate PLUS Loans vs. Private Loans: The Verdict
Nobody goes to graduate school and accumulates debt expecting it to be a bad investment. Unfortunately, it happens to many students.
We highly recommend getting Graduate PLUS Loans for this reason. The cost is slightly higher during school, but this extra cost provides a valuable insurance policy making it a great investment.
The only time we would recommend private loans ahead of Graduate PLUS loans would be for borrowers who need loans in the very short-term. As an example, suppose someone has a solid job and is getting an MBA part-time. This person may need a loan for the tuition for the semester but be able to pay it back within a few months. In this instance, avoiding the origination fees of Graduate PLUS loans makes sense.
Ultimately, picking Graduate PLUS loans isn’t about saving every penny possible. It is about protecting your financial future and providing flexibility. Repaying federal loans is far from a picnic, but the worst student loan nightmares usually involve large amounts of private debt. Opting for Graduate PLUS loans over private loans is a great way to ensure financial stability after school.