Personal finance

Is It Better to Take Out Public or Private Loans for Grad School?

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Taking the next step in your education and going to grad school can be an important move toward your dream career. But if your only point of comparison for the cost of a graduate education is your bachelor’s degree, the amount you’ll have to pay might surprise you. 

For the 2014-2015 school year, the average cost of tuition and fees at a public graduate school was $10,428. Compare that to an undergraduate education at a public school, which only cost $8,778 during 2015-2016—$1,650 less per year. While your total cost can vary widely depending on what type of school you go to, in general, you can expect a graduate education to be more expensive than an undergraduate education.

While grants and scholarships may help to mitigate these costs, chances are that you might need to take out student loans. Similar to an undergraduate degree, there are two main types of student loans that you can take out for grad school—public and private. However, these loans come with different provisions than you might have previously encountered.

Public Loans for Grad Students Come with Higher Interest Rates and More Forgiveness Options

Just like your undergrad public loans, grad school public loans are doled out by the federal government and serviced by companies like Navient after you graduate. 

These loans come with the same protections—such as Public Service Loan Forgiveness and income-driven repayment plans—that you may have encountered in college. However, these public loans also come with higher interest rates than your undergrad loans.

For example, federal direct unsubsidized and Direct PLUS loans for grad students are currently charging 6 percent and 7 percent APR as of April 2018. Undergrad loans, on the other hand, are charging just 4.45 percent APR.

It’s also important to note that you aren’t able to take out subsidized loans—in which the government makes the interest payments for you while you’re still in school—for your grad school education like you can with undergrad loans. The only loans you can take out for graduate school are unsubsidized loans, which means that interest will be accruing from day one.

Private Loans for Grad Students Come with Lower Interest Rates and Different Protections

The biggest benefit of taking out private student loans for your graduate education is that you could pay a much smaller interest rate. Right now, CommonBond is charging as low as 3.73 percent APR for graduate school loans, depending on your and/or a cosigner’s credit. This is about half as much as some public grad school loans, if you qualify for this rate.

The downside is that these loans don’t come with federal income-based protections and public service forgiveness programs. However, CommonBond does offer you the option of hardship forbearance.

Which Type of Loan is Best for You?

It’s important to consider what type of student loans might be best for your financial situation. If you think you might be working in public service for at least a decade after graduating, for example, public loans might be the best option for you.

However, for many people, getting a loan with the lowest interest rate possible can pay off in dividends later. You may have a smaller monthly payment upon graduating, pay back less over time, and still be eligible for many of the same protections as with public student loans.

Other factors should also influence your eventual decision. For instance, if you can get a cosigner, that will make it easier for you to take out a private loan, which might be worth it for the interest rate. Likewise, the right private loan company will have more dedicated customer service.

There is no right or wrong answer—it’ll depend entirely on your personal situation. You may even want to do a cost-benefit analysis of whether the lower interest rate you receive from a private loan will save you more money in the long run than a public service forgiveness program. Depending on your personal situation, it may also be wise to consult with a fee-only Certified Financial Planner who can walk through your entire financial picture and come up with a professional recommendation. The most important thing, though, is to make the decision that will work best for you as you begin grad school and embark on your new career.

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