While the idea of going back to school might be exciting for many, thinking about paying for it is no fun for anyone. Despite this, it’s a reality that needs to be addressed. Learning the differences between private versus federal grad school loans is a good starting point.
The Basic Difference Between Private and Federal Grad School Loans
There are a few key distinctions to be made between private and federal grad school loans. But it’s important to understand the most essential of these before diving into the more nuanced layers.
Federal grad school loans come from the federal government, while private loans come from lending institutions. A variety of enterprises participate in private graduate student lending, such as national and regional banks, credit unions, and also pure lending companies.
There are two main kinds of loans graduate students can receive from the federal government: direct unsubsidized loans and grad PLUS loans. The way to think about these two is that direct unsubsidized loans are your first bet, but if that won’t cover your full education costs, you can then apply for additional funding through a grad PLUS loan. The reasoning for this will be covered later, along with interest rates and credit.
Private loans, since they come from a huge range of lenders, are much less of a uniform offering. Each lender is going to assess the risk of applicants differently based on their own set of criteria. This means you’ll end up with a wide range of offers when it comes to interest rates, repayment terms, and fees.
How Interest Rates Are Determined in Federal Versus Private Grad School Loans
The interest rate is arguably the most important feature in any kind of loan. When comparing federal and private loans, there are a few critical things that need to be considered when it comes to interest rates.
As already mentioned, there are two kinds of loans that are available to graduate students through the federal government. The interest rates for these loans use a standardized formula, which is as follows:
- Direct unsubsidized loans for grad students: 10-year Treasury yield + 3.60%, capped at 9.50%
- Grad PLUS loans: 10-year Treasury yield + 4.60%, capped at 10.50%
If you’re wondering what the 10-year Treasury yield has to do with your ability to get grad school loans, that’s a valid question. The government lends money to students more as a public good than to make a profit, so tying interest rates to federal bond rates is a way of equitably doing this without creating too much financial risk for the government.
While everyone gets the same rate with federal loans, private graduate student loans come in all shapes and sizes. For private loans, it becomes much more important to find the best deal, as a high interest rate can affect one’s ability to repay what they owe. Juno is making this easier for graduate students by negotiating with a group of lenders, and offering the best deal attainable to their platform members. This can save you time, while also helping you secure the best possible rate on a private loan.
It’s also worth paying attention to whether a private loan comes with a variable or fixed rate. A variable rate can change over time based on predetermined conditions. It’s good to lock in a low fixed rate when possible.
Why Your Credit Becomes More Important for Grad School Loans
While your credit score won’t matter when applying for federal loans (though you might need someone to co-sign Grad PLUS loans if you have an adverse credit history), it’s going to have a greater impact when you’re seeking out private grad school loans. Private lenders have stringent risk requirements they need to meet to feel comfortable giving money to borrowers.
Your credit score is going to determine the deal you get on private loans. If you’re below a certain threshold, you might not be able to get many private loans unless they have quite unappealing terms. Working on improving your credit by lowering your utilization ratio and paying your bills on time can help raise your score to get you a better deal.
There’s a lot to know when seeking out loans for graduate school. Understanding the differences between federal and private loans is one of the most important places to start.