by Kim Clark

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 $40,000 student loans on late-night television, the supply of federal education loans is still ample for all citizens who have at least average credit. And new repayment options and tentative signs of thawing in the credit markets hold glimmers of hope for others.

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.

Pitfalls. Dan Thibeault, a founder of Graduate Leverage, a company that provides loans and advice to graduate students, says many student borrowers have run into trouble because they "made terrible decisions," such as taking out private loans with variable interest rates. That's silly, he says, because federal loans have low fixed rates, are available to most citizens, and can be at least partially forgiven in return for public service.

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 $8,000 a year charge no interest while a student is in school and only 5 percent after graduation. Unfortunately, Perkins funds are very limited, so only the neediest students qualify, and even qualified students may not get the maximum.

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 $8,500 a year that charge no interest while the student is in school and 6.8 percent after graduation. For the 2010 -- 11 academic year, no lender is supposed to charge an additional fee of more than 1 percent.

Any graduate student, no matter how far behind in utility payments or other nonfederal loans, can borrow up to $20,500 a year through the government's "unsubsidized" Stafford program. Those loans charge 6.8 percent interest and up to 1 percent in upfront fees for the 2010 -- 11 academic year. Although no payments are due while the student is in school, the interest does accrue. The government will cut off most graduate students from any new Stafford loans after they've borrowed $138,500 from the program. Medical students can borrow up to $224,000.

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 Cornell University, Northwestern University, and the University of Rochester, now offer private loans to international students without American cosigners.

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. Kentucky, for example, has cut back on student loan payments it had promised to some teachers. Similar programs for public servants, including nurses and soldiers, have been suspended in California, New Hampshire, and Pennsylvania. The Missouri Higher Education Loan Authority has suspended its offer of deeply discounted interest rates to public servants.

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 University of Chicago Booth School of Business found that after nine years the men were earning an average of $400,000. But women averaged $250,000. And 13 percent of the women had stopped working altogether, often because of family responsibilities.

Bobbie Daniels, an osteopathic medical student at the University of Medicine and Dentistry of New Jersey, is counting on an eventual six-figure salary to pay down her $200,000 debt. Borrowing so much is not ideal, she says. "Live as frugally as you can starting out. You can't get that money back," she says. And fix any credit problems before enrolling in graduate school, she advises.

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.


Education: Student Loan Crunch May Be Easing | Zach Miners

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