Loans

What Is A Grad PLUS Loan?

In the last several decades, the use of student loans to fund higher education has become increasingly more common in the United States. So common, in fact that the overall student loan debt burden in America has become a financial crisis. Between the rising costs of tuition and the overwhelming expectation that every person entering the workforce have a Bachelor’s degree, the numbers have become staggering.

Growing numbers of Millennials and Gen Z are pursuing postgraduate degrees as undergraduate degrees are becoming as common as high school degrees used to be. Many students choose to fund their graduate education with student loans. Luckily, there are options for ample federal funding for graduate studies, though not as extensive as those offered for undergraduate students. 

Federal Student Loan Options 

Federal student loans are the best option for funding your education if you do not have the necessary funds on hand. Federal student aid provides generous and varied options to undergraduate, graduate, and professional students. The federal government’s financial assistance has lending options which include direct subsidized loans, direct unsubsidized loans, direct PLUS loans, and direct consolidation loans. 

Direct subsidized loans don’t accrue interest while the student is enrolled half-time and are only available to undergraduate students. However, federal direct unsubsidized loans and direct PLUS loans are available to graduate or professional students as well as undergraduates. 

What Is A Grad PLUS Loan?

A grad PLUS loan is a type of federal student aid which is typically referred to as a direct PLUS loan. Direct PLUS loans are available to graduate or professional students in addition to the parents of dependent undergraduate students. In other words, a Grad PLUS loan is a direct PLUS loan used by a student to pay for graduate school.

Though these loans might not be quite as affordable and generous as some of the federal loans you could have qualified for as an undergraduate, graduate PLUS loans are still a far better option than private student loans.

How Grad PLUS Loans Work

A grad PLUS loan works a bit differently from your standard federal direct unsubsidized loan because it requires a credit check as a part of the application process. And, unlike subsidized loans offered to undergraduates, grad PLUS loans have an interest rate that immediately begins accruing at the moment of disbursement. 

Grad PLUS loans have a fixed interest rate set by the federal government. The interest rate is determined each academic year through an index of the long-term U.S. Treasury security rates. When you receive your direct PLUS loan, you won’t have to begin paying it off until the grace period ends six months after you have graduated from your graduate program or drop below half-time enrollment.

Are You Eligible For a Grad PLUS Loan?

You can easily determine what type of federal student loan you are eligible for by using the federal student aid website, which includes the requirements for all funding options provided by the federal government. The eligibility requirements for a grad PLUS loan include: 

  • You must be a graduate or professional student who is enrolled at least half-time at an eligible school in a program that is leading to a graduate or professional degree. 
  • You must not have an adverse credit history unless you meet additional eligibility requirements. 
  • You must meet all the general eligibility requirements for federal student aid, which include, among other things, that the student is a U.S. citizen with a valid Social Security number or an eligible non-citizen.

How To Apply For a Grad Direct PLUS Loan

Potential graduate students can apply for a grad PLUS loan through the federal government’s student financial aid website. The direct PLUS loan application is located within the same application used for all other federal student loan funds called the Free Application for Federal Student Aid (FAFSA). There might be extra steps in the application process depending on your graduate school.

In the approval process, a credit check will be performed to determine if you have an adverse credit history. You will find out your grad PLUS loan amount and other financial aid offers when your school sends you your package of financial assistance. Graduate students are not required to accept all the aid provided if they do not need it.

Getting a Grad PLUS Loan: 3 Things To Know

It is a good idea to get a better understanding of what sets a grad PLUS loan apart from other financial aid like undergraduate loans and direct unsubsidized loans. Here are three things that you ought to know before accepting your graduate PLUS loan offer:

  1. Interest Begins Accruing Immediately

Unlike the subsidized loans offered to undergraduate students, every student loan option available for grad students begins accruing interest at the moment the loan’s disbursed. Unfortunately, this means the balance will be larger than the loan amount you received when you start paying it back. However, just like all other federal loans, you won’t need to start making loan payments until after you graduate or drop below half-time enrollment. 

If you wish to minimize the effects of interest accrual, you can make interest payments throughout your schooling. Making interest-only payments while still in school will put you ahead of the game when you start your repayment plan. 

  1. You’ll Need To Pay a Loan Origination Fee

Borrowers must pay an origination fee for a federal graduate PLUS loan. Typically, the origination fee is deducted from your student loan before it is disbursed. The fee changes as it is set when the federal student interest rate is determined by Congress but most recently hovered between 4% and 5% for a graduate PLUS loan. Unsubsidized loans have a lower origination fee, closer to 2%.

  1. Your Creditworthiness Matters

Unsubsidized loans do not rely on your credit history for approval, but a direct PLUS loan requires a credit check. If your credit report has adverse marks on it, you may still be eligible for a PLUS student loan, but you might need to provide a cosigner (known as an endorser). Some consider it wise to improve their credit before becoming a graduate or professional student.

Federal Student Loans Vs. Private Student Loans

Weighing the pros and cons of a graduate PLUS loan versus a private student loan? In most circumstances, with a few exceptions, it is smarter to take out all federal financial assistance before resorting to private loans. There are several reasons why you are likely to save more money and get more flexibility with federal loans.

Better Interest Rates

Federal loans are going to provide lower interest rates compared to private loans a majority of the time. Interest rates are not determined by your application but are universal for all students according to a fixed interest rate set by the federal government every academic year. 

With a grad PLUS loan, you are likely to have an interest rate fixed somewhere around 5%. A low fixed interest rate can save you a significant amount of money on your student loan. With private student loans, you will experience higher interest rates to compensate for the increased risk. It’s for this reason that financial products like payday loans for bad credit have much higher interest rates.

Generous Repayment Options

Private student loans don’t provide nearly as much flexibility and generosity in their repayment plans. Every loan servicer with federal student aid offers various flexible income-driven repayment plans, including income-based, income-contingent, and Pay-As-You-Earn (PAYE). The best aspect of these repayment plans for borrowers with limited income is that any remaining balance will be forgiven after 20 to 25 years of repayment.

Unique Consolidation, Deferment, and Forgiveness Possibilities

The federal student aid system provides a consolidation option where you can group all your loans into one Direct Consolidation Loan. Consolidating with a federal loan servicer will provide significantly better terms than you’d have available to you when refinancing private student loans

If you are experiencing financial hardship, there are deferment and forbearance options to put your monthly payment on hold temporarily. Additionally, there are forgiveness options for your student loans if you go into eligible careers in public service or education. Private student loans are unlikely to give you the abundance of avenues you can choose from to make your loan affordable with federal student aid. 

References:
Grad PLUS loans | Federal Student Aid
Grad Plus Loan: 6 Things to Know Before You Apply