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If you need a loan to get you through school, you may be wondering about dealing with payments while trying to focus on your degree. Or maybe they wouldn't mind letting you study in peace? Can student loans be deferred while you're in graduate school toiling away on your marks?
In fact, for most students, student loans can be deferred while you're in graduate school. That doesn't mean they are forgotten. Unless you are in an employer-sponsored student debt forgiveness program or otherwise get the funds to pay them off like a gift from your parents, your student loans don't go away just because you're still in school. The loans still exist and you still have an obligation to repay them, but you can defer the time you have to start repaying.
Of the $1.5 trillion in student debt held by millions of Americans, a significant portion is for the first four years of college. Millennials are also the largest and most educated generation in American history, with about 25% of the massive uptick in student debt estimated to be from graduate students. PhDs are estimated to hold about $98,800 in student debt from both their undergraduate and graduate education, as program funding on an institutional level and financial aid at the individual level is often much harder to come by.
Undergraduate and graduate education costs have soared in the past three decades, but the demand for highly-skilled and educated professionals like doctors, scientists, and writers remains high enough to make the risk worth it for many borrowers. Georgetown University predicts that by 2020, 65% of all jobs in America will require a college degree at minimum, an advanced degree to progress further in your career than was possible in the past.
Nevertheless, if you are considering a graduate degree, here's what you should know about taking additional student loans to finance it and how your undergraduate student loans may be affected.
What Happens to My Student Loans if I Go to Grad School?
You can go into deferment or start making payments.
Most graduate students qualify for deferment on their undergraduate student loans. Because many graduate students immediately enter the workforce or are still attending university for research or fellowships, you only need to attend school half-time to qualify for deferment with a majority of lenders.
Going into deferment means that you don't have to make student loan payments in the period that you're eligible. For example, the job market was doing poorly in your field after you graduated so you decided to enroll in a graduate program. You spend a semester as a full-time graduate student then get a job offer which only enables you to take one class per semester. You no longer qualify for deferment and have to start your student loan payments, not because of the job, but because one class is insufficient time for deferment status.
Whether you are eligible for deferment or not, you can make a payment on your student loans at any time and it's wise to do so.
Do Student Loans Accrue Interest While in Graduate School?
If you've gone into deferment while in graduate school, unfortunately, yes. Student loans that go unpaid will keep on accruing interest.
A common trap that many borrowers fall into is opting for graduate studies to qualify for a deferment, but end up having to pay more far than they originally planned or budgeted for upon finishing their advanced degree. The higher the interest rate attached to your loan, the more exponentially your loan balance will grow while you're in deferment.
Student loan interest compounds, which means that the balanced growth isn't based solely on the amount you initially borrowed to pay for school: it's also interest on the interest. In 2019, the interest rate on a subsidized Federal Direct undergraduate student loan is 4.53%, 6.08% on unsubsidized loans, and 7.08% on a PLUS loan for parents and graduate students. Private student loans can be anywhere from 3-12% depending on the lender and other criteria. No matter which type of loan you have, the higher the interest rate, the more that your balance will snowball while under deferment.
For example, if you took out an unsubsidized Federal Direct loan of $20,000 for undergraduate studies in 2017 when the unsubsidized interest rate was still 6%, your monthly payment would be $222 on a 10-year repayment plan with $6,645 total interest paid over the life over the loan.
If you made no payments for five years while in graduate school under deferment, your new balance would be $26,003, resulting in a higher monthly payment of $288 assuming the same 10-year repayment plan.
Your student loan balance can also spiral out of control if you need to continue your deferment if you can't find a job, or if you switch to income-based repayment if you have a lower income. Monthly payments will be lower but you can end up having to pay more in interest over time due to the slower repayment of principal.
Should I Pay Off My Student Loans Before Going to Grad School?
If at all possible, yes. Paying off your student loans as early as possible will ensure that you have a lower monthly payment than if you wait until the end of your deferment.
However, it ultimately comes down to the ability to pay now versus later and being aware of how much more you will pay in the long run. For millions of graduate students, they have no choice but to go into deferment if they receive no stipends or insufficient funding to cover living expenses in the course of their studies, which makes snowballing interest accrual a common burden for them.
If your cash flow is too constricted while in graduate school to start making sporadic payments, or officially start a payment plan, it may behoove you to go into deferment. But if you have the ability through your first job or any financial gifts to repay your undergraduate student loans, you should do so immediately to avoid larger payments in the future.
Do Graduate Students Get Financial Aid?
At the institutional level, most colleges and universities do not offer financial aid to graduate students although you should always check with the institution you are considering first. Some research programs that are in dire need of graduate students may offer lower tuition or aid packages based on need and/or merit. However, financial aid at the graduate level that is administered through the school is not as ubiquitous as it is for undergraduate students.
There is federal financial aid available to an extent, such as the federal work-study program and teacher education assistance worth up to $4,000 per year if you are going into teaching. Pell Grants are only available to graduate students becoming teachers as well.
States may also offer financial aid or incentives to graduate and professional students through their own education departments. Similarly to undergraduate programs though, you will need to fill out a FAFSA application to determine if you are eligible for any of these programs at the federal or state levels. Unlike filling out FAFSA during your undergraduate years, you can now be considered an "independent student" and don't need to report your parents' income to be counted for potential aid. However, if you got married since, you will need to report your spouse's income on the form which can affect your eligibility.
Going for graduate studies can be an incredible boon to your career but also put you at risk of being burdened with large student loan payments if you don't carefully plan for both your undergraduate and graduate loans.