The idea of borrowing more money to fix the problem of too much student debt sounds dumb. After all, you wouldn’t run up more credit card debt to fix your high credit card bills.

However, many borrowers may benefit from additional education, and yes, more student debt.

More Opportunities for Employment

Some students don’t realize their major was a bad idea until it is far too late.

If you are struggling to find a job, a graduate degree in a more marketable field could provide an edge. Obviously, this won’t be the case for all majors and all graduate degrees, but it is worth exploring.

For example, suppose you go back to school and get an M.B.A. from a top business school. Your previous studies combined with your newly earned business expertise might lead to terrific job opportunities.

The critical detail in this analysis is finding the right graduate degree. Those considering graduate school should carefully investigate a school’s employment numbers and the marketability of the degree. If your undergraduate degree isn’t paying off, use those hard-earned lessons to find a graduate degree that does pay off.

Extra Debt is Less of a Risk

If you are already in a student loan nightmare, adding more debt sounds terrifying.

However, the extra debt may not cause any more pain.

One of the big advantages of graduate school is that the federal borrowing limits are significantly higher than the undergrad limits. If you are already dependant upon an income-driven repayment plan and student loan forgiveness, having more debt could simply mean more debt gets forgiven at the end.

There is still a risk. Borrowers should still be wary about the additional debt load and potential tax consequences if forgiveness happens. Forgiveness is no guarantee, and more debt means a more considerable student loan burden.

Converting Private Debt to Federal Student Loans

Many borrowers facing a student loan disaster have a lot of private student loans. They may also be working really hard to keep up with their bills.

Graduate school presents a unique opportunity to essentially convert private debt into federal student loans.

Suppose you work during the summer before each year of graduate school and earn $10,000. Traditionally, many students would use that $10,000 towards tuition for the upcoming year to reduce how much they have to borrow. Instead, borrowers could use that $10,000 to pay down their private student loans. In the fall, they need to borrow an additional $10,000 to pay for tuition. This slight difference means converting risky private debt into more manageable federal debt.

The Mistake to Avoid

Accumulating extra student debt is a risky path out of a student loan nightmare.

Robert Farrington of The College Investor notes that it is an especially bad idea to use extra classes to get a deferment. In general, deferments are usually a lousy option, but borrowing more money just to qualify for a deferment is a colossal mistake.

Farrington thinks borrowers should focus on the return on investment of additional classes.

Final Thought: Doubling Down on Student Debt

If your college degree was a bad investment, running up more student debt might not seem like the answer.

For many borrowers, more debt will only lead to more problems.

However, there are times where additional student loans may be necessary to get to debt freedom. Borrowers that carefully research graduate school and employment opportunities may be pleasantly surprised with the results.

The post How to Use Graduate School as a Path to Student Debt Freedom appeared first on The Student Loan Sherpa.

The transition from undergrad to graduate school often includes attending a new school, a break between classes, and employment changes. These adjustments can make managing student loans complicated.

The good news for most grad students is that many of the essential steps happen automatically. Additionally, there are opportunities for creative grad students to address their undergrad loans during school. Smart decisions during grad school can make repayment after graduation dramatically easier.

Do I have to Make Payments on Undergrad Loans During Graduate School?

Like all other college students, grad students will qualify for in-school deferments on their loans. This deferment will also apply to loans from undergrad.

Qualifying for the in-school deferment should happen automatically for most graduate students who are enrolled at least half-time. This includes students who are attending a new school. However, Non-Degree Seeking students will not be able to qualify for additional federal aid or get an in-school deferment, absent a couple of exceptions. Additionally, PhD candidates may need to reach out to their department to file paperwork for a full-time equivalency to defer their federal loans.

If the student loan company is still trying to collect payments after school has started, students can remedy the issue by supplying the lender with documentation confirming enrollment status.

A Note on Grace Period Changes: Federal student loans and most private student loans come with a six-month grace period after students finish school.

The six-month countdown starts immediately after finishing undergrad, even for the students that start grad school in the fall. Upon finishing grad school, repayment on the undergrad loans may start before the graduate school loans because the grad school loans will have a fresh six-month clock.

Making Payments During Grad School

Borrowers on an in-school deferment are not required to make payments on their loans. However, they always have the option of making payments on the existing debt.

Those who earn an income during the year or over the summer may choose to attack any undergraduate debt that carries a high interest rate. Eliminating private loans before attacking federal debt is typically the preferred approach. Federal loans come with borrower protections such as income-driven repayment and student loan forgiveness. These protections could be incredibly valuable for the borrowers who struggle to find a job or who earn less than expected.

Cleaning Up Debt Obligations

Because private loans are far more unforgiving than federal loans, undergraduate student loan debt can be cleaned up during grad school.

Undergraduate borrowers face strict loan limits for federal borrowing, while graduate students can borrow as much as necessary in most cases. As a result, many graduate students may have both federal and private loans.

If a graduate student earns money during their summer, that money can reduce the amount they have to borrow the following year. By going this approach, new borrowing is limited, but the undergraduate debt stays the same.

However, if the proceeds from summer labor are used to pay down the existing private loans from undergrad, the student will have to borrow more money in the fall. This approach could essentially eliminate some private loans and replace them with federal loans. Even though the total student debt should be the same, the debt is more manageable because a higher percentage of the debt is federal.

Tracking Undergraduate Debt

Even though in-school deferments should be automatic, it is still a good idea for borrowers to keep close tabs on all of their existing loans. Providing lenders updated mailing addresses is important.

If the lender cannot find the borrower, it doesn’t mean the borrower will escape the debt; it just means that the borrower will generate more interest and late fees.

For borrowers entering repayment, tracking down existing student loans can be a challenge. This is especially true when lenders sell student debts to other lenders. Keeping tabs on the old loans from undergrad, and keeping contact information up to date can help borrowers avoid scams and late fees.

Consolidation and Refinancing

Federal direct consolidation and private student loan refinancing are both common strategies for borrowers once they finish school.

Federal consolidation can help borrowers qualify for preferred repayment plans and programs, but this step normally doesn’t need to be taken until after the borrower has finished school.

Similarly, refinancing student loans with a private lender is a popular way for graduates to get lower interest rates on their student loans. However, unless the graduate school student is working full-time or has a co-signer, refinancing will not be an option.

Both refinancing and consolidation are major financial decisions with significant pros and cons to each. Students in graduate school can usually delay making any such decision until after graduation.

The Most Important Borrowing Strategy for Graduate School

Grad school can be very expensive, and it is easy for students to fall into the trap of thinking: what is a few more dollars of debt at this point?

Paying down undergrad loans and/or minimizing graduate borrowing is essential. When students attend college for five to six years, or even more, the mountain of debt can be quite overwhelming, and repayment can take years or even decades.

Extended repayment makes each dollar borrowed more expensive. Borrowing an extra $1,000 at 6% today could cost nearly $3,000 in total if it takes the borrower 20 years to pay off the loan.

Grad school can open many doors, but the students who borrow too much will find that it can cause long term devastation to their finances.

The post What Happens to Undergraduate Student Loans during Grad School? appeared first on The Student Loan Sherpa.

Graduate school can be a bit more complicated. Some people argue that private loans may be a better choice than the federal Graduate PLUS Loans.

Is there an argument to be made for private loans? In what circumstances are they a better choice?

Private Loan Advantages

There are two main advantages to private loans, and they are both significant.

First, many lenders offer private loans with interest rates significantly lower than the 7.00% interest rate that applies to new Grad PLUS loans. With many graduate programs costing a small fortune, a slight difference in interest can make a huge difference in the long run.

The second big advantage is that many private lenders no longer charge loan origination fees (some still do, so it is important to pay close attention). The Graduate PLUS origination fee is currently over 4%. That means if you borrow $10,000, you will actually have to pay back $10,400 plus interest. The origination fee can make the Graduate PLUS loan a more expensive option.

Graduate PLUS Loan Advantages

The perks to Graduate PLUS loans come in the form of consumer protections.

Perhaps the biggest protection is the availability of Income-Driven Repayment plans. Borrowers payments are based upon what they can afford to pay rather than what they owe. If a borrower is unemployed for an extended period, they will not have to worry about student loan payments. Beyond the monthly flexibility of the Income-Driven Repayment plans, there is the possibility of student loan forgiveness. Depending upon the plan selected, the remaining balance can be forgiven after 20-25 years worth of income-driven payments. If an expensive graduate degree doesn’t lead to a big salary, this protection can be life-changing.

Another big advantage to Graduate PLUS loans is the ability to qualify for Public Service Loan Forgiveness. For people who end up working for the government or a non-profit, their student loans can be forgiven after just ten years. This means that individuals who discover a passion for public interest work can pursue their dream jobs without having their student loans hold them back.

Getting the Best of Both Worlds

Many people are justifiably concerned with the high interest rates and origination fees that come with Graduate PLUS loans.

However, it is worth pointing out that there are no prepayment penalties, nor is it a lifetime commitment.

If someone finishes graduate school and locks down a high paying job, they can always refinance. Refinancing can pay off your old Federal PLUS loans in full and replace them with a new private loan. The downside is the federal perks are gone, but the benefit is lower interest rates. In fact, many of the student loan refinancing lenders offer interest rates below the private loan rates.

This means a borrower can have the protections of federal loans during school, but once the risk of underemployment or unemployment has passed, they can refinance and get the low rates. The cost of going this route is the loan origination fee of the PLUS loan and higher interest rate during school. For most, the extra cost amounts to a cheap insurance policy.

Graduate PLUS Loans vs. Private Loans: The Verdict

Nobody goes to graduate school and accumulates debt expecting it to be a bad investment. Unfortunately, it happens to many students.

We highly recommend getting Graduate PLUS Loans for this reason. The cost is slightly higher during school, but this extra cost provides a valuable insurance policy making it a great investment.

The only time we would recommend private loans ahead of Graduate PLUS loans would be for borrowers who need loans in the very short-term. As an example, suppose someone has a solid job and is getting an MBA part-time. This person may need a loan for the tuition for the semester but be able to pay it back within a few months. In this instance, avoiding the origination fees of Graduate PLUS loans makes sense.

Ultimately, picking Graduate PLUS loans isn’t about saving every penny possible. It is about protecting your financial future and providing flexibility. Repaying federal loans is far from a picnic, but the worst student loan nightmares usually involve large amounts of private debt. Opting for Graduate PLUS loans over private loans is a great way to ensure financial stability after school.

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