Student Loan Crunch May Be Easing
Economic recovery and new federal rules make it easier for grad students to borrow
The demand for graduate student loans has never been higher, as alternative financial aid options -- such as college savings, grants, and forgiveness programs -- dry up just as record numbers of adults try to improve their employability with new credentials.
Luckily, although the credit crunch has wiped out private lenders who used to offer easy
The key to finding sufficient and affordable loans, say financial aid counselors, is to start cleaning up credit ahead of graduate school. Once in school, it's smart to stick with the cheapest federal loan programs.
The federal government will not approve new student loans to anyone who has fallen more than 270 days behind on any previous federal education loans. Those who have defaulted can requalify for new loans by consolidating their defaulted debts with the federal government or making at least six on-time monthly payments in a row. Those whose loan troubles have been restricted to other debts, such as credit cards, car payments, mortgages, or even private educational loans, can generally still get at least some new federal student loans without repaying those other bills. Another way prospective students can qualify for some kinds of educational loans is to find a U.S. citizen with good credit who will cosign, which means making a commitment to repay the loans if the student doesn't.
After filing their Free Application for Federal Student Aid, graduate students can ask their school's financial aid office if they qualify for a federal Perkins loan. Those loans of up to
The next-best deals are federal "subsidized" Stafford loans. Students whose expected contribution is less than the cost of their schooling can get loans of up to
Any graduate student, no matter how far behind in utility payments or other nonfederal loans, can borrow up to
Those who need more generally have to jump through more hoops and pay higher rates. Federal Grad PLUS loans, for example, can cover the full cost of attendance (after other aid is subtracted) at an interest rate that is capped at 8.5 percent and with fees of no more than 4 percent, for a total annual percentage rate maximum of 9.4 percent. The government won't issue Grad PLUS loans to anyone with bad credit, unless the applicant can find a U.S. citizen with good credit who is willing to cosign.
While all students should avoid borrowing too much, Thibeault warns medical and law students, especially, against borrowing too little. Avoiding federal student loans can backfire if students have to use credit cards or private loans to tide them over after graduation for resi- dency or exam studies. Thibeault recommends that students in their final months of graduate school prepare a budget for the coming year. If it looks as if they'll need extra cash to pay rent or cram-course fees, they should apply for the maximum federal student loans available, which can be disbursed only while a student is enrolled in school. Those who end up not needing the money can repay it quickly, since there is no prepayment penalty for federal loans, Thibeault notes.
Another advantage of federal loans: They offer a new income-based repayment option that caps payments below 15 percent of a graduate's income. What's more, those who sign up for IBR can have some of their loans forgiven after 10 years of public service or 25 years of persistently low incomes.
The credit crunch wiped out almost all other borrowing options. But recent improvements in the economy have encouraged some lenders, such as credit unions and some nonprofit state agencies, to offer alternative education loans at fixed rates as low as 7.7 percent. And a few highly ranked graduate business schools, including those at
As difficult and confusing as arranging graduate loans can be, paying them off can be even more of a challenge. Economic troubles have sunk many programs that promised to pay off students' loans.
Layoffs. Mass layoffs of attorneys across the country are causing worries among law students and newly minted lawyers about repaying their loans. Although graduates of top-flight M.B.A. programs typically repay their loans within nine years, they, too, need to be realistic. A recent study of graduates of the
But small financial worries shouldn't stop anyone from pursuing a dream education, she adds. "I don't want to discourage people. I am very happy I will be a doctor. If you can afford to do it, you should."
Tip. One key to finding sufficient and affordable loans, say financial aid counselors, is for applicants to start cleaning up their credit before graduate school.
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