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Graduate vs. Undergraduate Student Loans – How These Debts Differ

If you’re heading to graduate school, you may already feel like a student loan pro if you’re familiar with undergrad loans. But there are some key differences between graduate and undergraduate loans for both federal and private student loans.

And knowing those differences can help save you money in the long run, reducing the likelihood you accumulate overwhelming college debt.

In fact, those differences can go right to the heart of your ability to repay your student debt after grad school. For instance, graduate loans have higher interest rates and borrowing limits. And these are just two of the crucial differences.

So before you take on graduate school debt, learn everything you can about the differences between graduate and undergraduate student loans.

Graduate Student Loans Versus Undergraduate Student Loans

As with undergraduate loans, grad students and professional students can borrow private loans and federal loans, including federal direct loans and federal PLUS loans. The differences and similarities among them depend on the type of student loan.

Graduate Versus Undergraduate Federal Direct Loans

Federal direct loans are those made through the U.S. Department of Education (ED).

Eligibility is based on enrollment in an accredited program rather than need. The amounts students can borrow vary based on the year enrolled, and there’s a cap on the total amount one can borrow.

Interest rates and fees also vary depending on whether you’re an undergraduate or graduate student.

Federal direct loans should be your first loan option. They typically have lower interest rates and always have more repayment options than private student loans. And federal PLUS loans only come in to cover gaps in financing that direct loans don’t cover.

If you borrowed for your undergrad degree, direct loans are likely what you already have, so they should be familiar. And direct loans for graduate borrowers have a lot in common with those for undergraduates.

Those similarities include:

  • The Application Process. To apply for graduate financial aid, fill out the Free Application for Federal Student Aid (FAFSA) just as you did for your undergraduate degree. The only difference is that it’s simpler as a grad student because you don’t have to include your parents’ information. The government automatically considers grad students independent.
  • Caps on Borrowing. Just as with undergraduate direct loans, there’s a limit to how much you can borrow annually as well as a total lifetime cap. But it’s significantly higher for grad students, and the yearly cap is the same amount every year.
  • A Federally Determined Fixed Interest Rate. Congress determines the annual interest rate for federal student loans for that academic year, and the rate is fixed for the life of your loan.
  • Automatic In-School Deferment. You aren’t required to pay your federal student loans while enrolled in school at least half time.
  • A Six-Month Repayment Grace Period. After you graduate or drop below half-time enrollment, your loans enter into repayment. But all federal student loans come with a six-month grace period, meaning that you don’t have to begin making payments until six months after you graduate or drop below half-time enrollment.
  • Access to All Federal Repayment Programs. All federal direct loans are eligible for all the ED’s repayment programs, including graduated repayment, extended repayment, and all the income-driven repayment plans (IDR). See our complete guide to repaying federal student loans for more information.
  • Access to Student Loan Forgiveness. Any federal student loans, including graduate loans, enrolled in an IDR plan are eligible to have the remaining balance forgiven after 20 to 25 years of payments (depending on the plan) or 10 years of qualifying payments under the Public Service Loan Forgiveness Program.
  • The Ability to Consolidate Your Federal Student Loans. Typically, once you consolidate your federal student loans, you can’t reconsolidate them unless there’s a qualifying event, such as a new loan to add to the mix. So even if you decide to consolidate all your undergraduate loans before grad school, you can still consolidate your loans again after grad school.

But despite the similarities, there are many differences between direct loans for undergraduates and those for graduate students. And understanding those differences can help you get the biggest return on investment from your graduate degree.

Borrowing Limits Are Higher for Graduate Students

As with your undergrad loans, federal direct loans for grad students have a limit on how much you can borrow per year as well as a limit on how much you can borrow in total.

But graduate students can borrow significantly more than undergraduate students. And that can be both good and bad.

Since federal direct loans typically have the lowest interest rates, it’s helpful that graduate students can borrow more in direct loans than undergrads can, especially for students in costly degree programs like law and medicine.

It means they’re able to cover more of the cost of their education with lower-interest loans and can rely less on higher-rate loans like grad PLUS loans or private student loans.

Graduate and professional students can borrow $20,500 per year. That’s significantly higher than undergrad’s access to between $5,500 and $12,500, depending on length of education and dependency status. And their aggregate limit is $138,500 (including their undergraduate loans, which are limited to $57,000).

Students can borrow even more for medical school and other health professional degrees. The ED refers these students to their school’s financial aid department to discover the amounts, though as recently as 2019, the per-year medical school amount has been as high as $47,160 and the cap as high as $224,000.

While it’s helpful to be able to borrow the most money at the lowest interest rate, it also allows for getting into more significant debt. According to the Pew Research Center, those with six-figure student loan debt are most likely to be graduate students.

Some grad degrees — like law, medical, dental, and Master of Business Administration (MBA) degrees — may earn you lucrative six-figure and multiple six-figure careers. But not all grad degrees do.

For example, teachers are encouraged to pursue master’s degrees, but the median high school teacher salary, according to the Bureau of Labor Statistics (BLS), is just over $62,000 per year

And even college professors, who must have doctoral degrees, earn just under $90,000 per year in median income, according to the BLS. Thus, borrowing that much for a Ph.D. may not be worth it if the doctorate is for teaching.

Plus, since the government doesn’t track how you spend student loan money once you get it, it’s tempting to borrow extra money for living expenses, thus taking on even more debt. To avoid this trap, only borrow exactly what you need for school.

There Are No Subsidized Graduate Loans

As of July 1, 2012, graduate and professional students are no longer eligible to receive subsidized student loans.

Subsidized student loans are those for which the ED covers all the interest during periods of deferment. That includes in-school deferment, economic hardship deferment, and military deferment.

To qualify for a subsidized student loan, one must demonstrate financial need and be an undergraduate.

Thus, for graduate students, every federal loan, whether a direct loan or a PLUS loan, begins accruing interest the moment the government disburses it (transfers it to the school or student), even while you’re still in school.

That means the longer you take to finish school, the more you’ll owe in interest. Plus, the interest is capitalized (added to your principal balance) once you graduate or leave school.

So no matter which type of loan you borrow or at what interest rate, after you graduate, you get a bill for a loan with a higher balance than you borrowed. That surprises many undergraduate students with unsubsidized loans.

So if you didn’t borrow unsubsidized loans for your undergraduate degree, be forewarned things will be different for your graduate loans.

They Have Higher Interest Rates

Another key difference is that graduate students also pay higher interest rates on their loans.

For example, the interest rate for the 2021-22 academic year on undergrad federal direct loans is 3.73%. For graduate and professional students, it’s significantly higher at 5.28%.

Even a 10th of a point can make thousands of dollars of difference when you’re borrowing tens of thousands for a degree, especially if you’re paying back the loan over years or decades.

These numbers change every year, and Congress determines them. But you can always count on paying a higher interest rate as a graduate student. And unfortunately, these interest rates are locked in for the life of the loan.

There are very few ways to change your federal student loan interest rate. So whatever it was the year you borrowed is typically what you’re stuck with.

And when you couple higher interest rates with higher overall borrowing amounts, grad students can really get into trouble if they’re not careful.

IDR Repayment Terms Can Be Longer

Both undergraduate and graduate students are eligible for student loan forgiveness. To be eligible, your loans must be in an IDR repayment plan. See our complete guide to IDR plans for more information.

Typically, unless you request otherwise, your loan servicer enrolls you in the lowest monthly payment program you qualify for. Depending on the program, you could have your undergrad loans wiped out after 20 years of payments. But graduate students face a longer repayment term of 25 years.

Graduate PLUS Loans Versus Direct Loans and Undergraduate Parent PLUS Loans

If federal direct loans aren’t enough to cover your total cost of attendance along with any other financial aid, including grants and scholarships, that’s where federal direct PLUS loans come in.

As with federal direct loans, PLUS loans also come with federally determined fixed interest rates, the ability to defer payments while the student is in school, and access to federal repayment programs and student loan forgiveness. The key difference is that there is no cap on borrowing.

Undergraduate students aren’t eligible to borrow PLUS loans on their own. To avoid private loans, their parents must take out a parent PLUS loan, which you may remember your parents taking out for your studies.

But grad school students have access to the grad PLUS loan. Graduate and professional students can borrow grad PLUS loans to pay for any education expenses not covered by other financial aid.

Just as with the parent PLUS loan, the maximum you can borrow is the total cost of attendance minus any other financial aid you receive, including direct loans, grants, and scholarships. Your school determines the total cost of attendance, not the ED, and it includes tuition, books, fees, and living expenses.

And with that higher borrowing ability comes a higher interest rate and fees than with federal direct loans. These are the same for both types of PLUS loans.

But that’s where the grad PLUS loan’s similarities to direct federal and parent PLUS loans end.

You (the Student) Can Borrow Up to the Total Cost of Attendance

One or both of your parents may have taken out a PLUS loan. That loan enabled them to borrow as much as they needed to cover anything your federal direct loans and other funding sources didn’t.

A grad PLUS loan allows you to do the same. But now, it’s your name on the promissory note.

And unlike direct loans, PLUS loans allow you to borrow as much as you need to cover up to the total cost of your education not paid for by direct loans, grants, and scholarships.

There’s also a cap for PLUS loans. So you can borrow every last cent you need for an unlimited number of graduate degrees.

But as with direct loans, the larger borrowing allowance is a double-edged sword.

It’s helpful that it’s possible to fully finance your education. But since no one monitors what you spend student loan money on once you get it, it’s easy to fall into the trap of borrowing more than you need and using it for nonessential expenses. And this time, you’re on the hook for paying back the loan.

So before committing to borrowing a certain amount, calculate your potential future earnings and compare that to the likely amount of your monthly payments after graduation.

You can use the loan simulator at Federal Student Aid to get an idea of your potential repayment obligation and decide from there whether the PLUS loan seems manageable and worth the investment.

Grad Plus Loans Check Your Credit

Unless you’ve taken out private loans, most undergrad borrowers have never had their credit checked for a student loan. But since you’re the borrower of a grad PLUS loan and not your parents, the ED will check your credit and not theirs.

Many students assume that means you have to have a good credit score to qualify for a PLUS loan, but that isn’t the case. The only thing the ED is looking for when they check your credit is the absence of an adverse credit history.

According to the ED, your credit history is considered adverse if you:

  • Have had an account with a balance greater than $2,085 for which you’ve been more than 90 days late on payments or had placed in collections or charged off within the past two years
  • Have defaulted on a loan within the past five years
  • Have had a bankruptcy discharge within the past five years
  • Have had a repossession within the past five years
  • Have experienced a foreclosure within the past five years
  • Have had any federal student aid charged off within the past five years
  • Have had your wages garnished within the past five years
  • Have had a tax lien within the past five years

Essentially, the ED wants to know you’ll repay the loan. Thus, an adverse credit history is one that shows evidence of failure to repay a loan.

But if you have any of these events on your credit history, it’s still possible to get a grad PLUS loan.

You must either document extenuating circumstances for the adverse credit history or obtain an endorser (the ED’s version of a co-signer) who does not have an adverse credit history and who agrees to repay the loan if you don’t.

They Have Higher Interest Rates

Though the interest rate changes every year, grad PLUS loans, like parent PLUS loans, always have higher interest rates than direct loans.

For example, the interest rate on a federal direct loan for a graduate student is 5.28% for the 2021-22 academic year. For a grad PLUS loan, the interest rate is 6.28%.

Interest begins accruing on your loans the moment they’re disbursed, which means it’s accruing even while you’re in school. So if you borrow a large amount, that higher interest rate could really hurt come graduation day.

Note that just as with a direct loan, it’s a fixed rate for the life of the loan. You can’t change it.

To get an idea of how costly your loan could be, depending on how long it takes you to repay it and under which repayment program, use the loan simulator at Federal Student Aid.

They Have Higher Origination Fees

Grad PLUS loans have higher costs overall than direct loans. In addition to higher interest rates, they also have higher origination fees.

The origination fee is the fee you pay off the top when the loan is disbursed to you. They take it out of the money you borrowed, so you don’t have to pony up the cash. But you’re still responsible for paying back the full amount of the loan, including the portion they kept, and you accumulate interest on the full amount.

So for example, say you borrow the maximum amount allowed for a graduate federal direct loan, $20,500. The origination fee for federal direct loans for the 2021-22 academic year is 1.057%. So you only receive $20,178.15.

For grad PLUS loans, the origination fee is even higher. For the 2021-22 academic year, the origination fee is 4.228%. So, if you borrowed $20,500 as a grad PLUS loan, you’d only get $19,633.26.

You Have Access to All the Federal Repayment Options

Parent PLUS borrowers only have access to one IDR option — the one with the least favorable terms, meaning they could be paying it off well into their retirement years. And even then, they must consolidate the loan with a federal direct consolidation loan first.

But grad PLUS loan borrowers can enroll in any of the federal repayment options, including all four of the IDR repayment plans.

You Have Greater Access to Student Loan Forgiveness

All federal student loans — including both undergraduate and graduate direct loans and both parent PLUS and grad PLUS loans — are eligible for the ED’s loan forgiveness programs.

That includes the standard forgiveness of any remaining loan balance after making 20 to 25 years of payments on an income-driven repayment plan.

It also includes Public Service Loan Forgiveness (PSLF). PSLF allows those who work full time in a qualifying public service job to have their loans forgiven after 10 years of qualifying payments.

The path to student loan forgiveness, whether PSLF or the long 20- to 25-year route, is IDR. You must enroll your loans in an IDR plan to qualify.

So, even though it’s possible for parent PLUS borrowers to obtain forgiveness through ICR, grad PLUS borrowers have significantly more routes to forgiveness.

You Can Consolidate Your Grad PLUS Loans With Other Federal Student Loans

Just as you can consolidate your undergraduate and graduate federal direct loans, you can also throw in your grad PLUS loans. That way, you have a single payment on a single loan after you’ve finished your education.

If your parents took out PLUS loans to help pay for your undergrad degree, they can’t consolidate their PLUS loans with either your undergrad or graduate loans because the loans aren’t in your name.

Just know that it doesn’t always make sense to consolidate your loans.

Graduate Versus Undergraduate Private Student Loans

Private lenders like banks and credit unions issue private student loans as well. Most student loan experts caution against turning to private student loans except as a last resort.

Private lenders don’t offer the same range of benefits as the ED. Private loans have limited repayment options, less generous or nonexistent deferment and forbearance terms, and typically higher interest rates.

But there are some unique circumstances for graduate borrowers that could make private loans worth a second look.

You Can Apply Without a Co-Signer

Private lenders always require a credit check whether you’re an undergraduate or graduate borrower. But as an undergraduate, obtaining any kind of private loan or credit is difficult without an established credit history.

Thus, if you attempted to get a loan as an undergrad, you likely needed a co-signer for your student loan.

But as a grad student, that might not be the case. You likely have a more established credit history than you did as an undergraduate. And that means it’s more likely you can qualify on your own.

But unlike with the ED, private lenders look for more than just the absence of an adverse credit history when they check your credit. They want to see a good credit history, including a high credit score.

Creditworthy Borrowers Can Qualify for Very Low Interest Rates

Though few private lenders can compete with the interest rates on federal direct loans, if you have a high credit score and are considering a grad PLUS loan, it’s worth shopping around to see if you can find a better rate. The most creditworthy borrowers qualify for the lowest rates.

Additionally, some lenders offer different rates for different graduate degrees because those degrees lead to more lucrative careers. For example, CommonBond advertises five distinct fixed- and variable-rate ranges for undergrads, grads, MBA students, and medical and dental students.

So check the interest rates offered by private student loan companies to see if you can save money. Use a comparison tool like Credible, which lets you apply in one place and compare offers from several lenders. Plus, Credible uses a soft credit inquiry to match you with prequalified offers.

So unlike applying to multiple lenders at once, comparing rates with Credible doesn’t affect your credit score.

Many Private Student Loans Charge No Origination Fees

All federal student loans have origination fees, but many private student loans don’t.

That’s especially helpful when you’re borrowing a higher amount for a grad degree. It means more money goes toward your education. Plus, you’re not stuck repaying money you never received.

But don’t let the loan fee be the determining factor in applying for a private student loan over a federal student loan.

The origination fee is a one-time payment of several hundred to thousand dollars. But a lower interest rate could mean the difference of tens of thousands of dollars over the life of your loan.

Thus, finding a low interest rate far outweighs a one-time loan fee and should be the higher priority when looking for a student loan.

Some Lenders Have Unique Perks for Certain Types of Graduate Students

Some private lenders specialize in loans for certain graduate degrees, such as medical and health professional degrees, and offer these types of students special perks. For example, Laurel Road offers health care students full deferment while in school plus an interest rate reduction once they secure employment.

And if you opt to refinance your loans after you graduate, you can find even more private loan refinance lenders with additional perks.

For example, Splash Financial offers the option for qualifying medical students to make low $100-per-month payments during their medical residencies on loans with interest rates that are even lower than federal direct loans.

But opting for a private loan means you don’t have access to all the federal repayment options. Federal student loans have the most favorable repayment terms. No private lender matches the ED in the number of repayment programs.

Plus, many lenders limit how long you can defer or forbear your loans, including in-school deferment. For some lenders, those terms are as short as 12 months.

That means if you’re enrolled in a two-year master’s degree program and take out a private loan your first year, you could have to start paying it back during your second year, when you may not be working a full-time job or otherwise be able to make monthly payments.

On the other hand, all federal loans, including PLUS loans, allow unlimited in-school deferment. As long as you’re enrolled in an accredited academic program at least half-time, you can suspend repayment as long as you need to.

Interest continues to accrue on all unsubsidized loans, but at least you don’t have to worry about how to repay your student loans before you’re making enough income to manage them.

Federal loans also include a lengthy list of borrower protections, such as cancellation and discharge options, if your school defrauds you or you become unable to repay your loans.

And private loans are ineligible for federal loan forgiveness programs, including PSLF. So stick to borrowing federal loans if you’re interested in public service employment or plan to seek student loan forgiveness.

Even with the promise of fantastic interest rates and other financial perks, these aren’t trivial things to risk giving up. Laurel Road even warns potential borrowers about it on their website.

So make sure you check for all borrower benefits offered by private lenders, including repayment options and deferment terms, before you sign for a private loan. Even if you don’t think you’ll need them, you never know what the future holds.

Final Word

Regardless of whether you borrow federal direct loans, federal PLUS loans, or private student loans, the key differences between undergraduate and graduate student loans center on the ability to borrow more money and the higher interest rates on the amount borrowed.

And these differences could have significant repercussions on your future.

Depending on how much you borrow, higher interest rates on higher overall amounts could severely limit any increase in earning potential your graduate degree brings you.

So think carefully about the return on investment when considering whether graduate school is worth it.

On the plus side, many student loan repayment assistance programs exist exclusively for careers that require a graduate degree. Doctors, lawyers, and teachers are among those who could access relief programs offered by state governments, employers, and nonprofit organizations. And utilizing these could go a long way toward helping you pay for grad school.

Sarah Graves, Ph.D. is a freelance writer specializing in personal finance, parenting, education, and creative entrepreneurship. She's also a college instructor of English and humanities. When not busy writing or teaching her students the proper use of a semicolon, you can find her hanging out with her awesome husband and adorable son watching way too many superhero movies.