Whether you’re a recent undergrad heading straight to graduate school or it’s been a few years, you probably have student loan debt left over from your undergraduate degree. According to the 2019 Student Opportunity Index from Cengage, an educational services company, on average, college grads take 20 years to pay off their student loans.
And — even if you’ve decided a graduate degree is worth it — it’s likely you’ll pile on even more student debt to get one. According to data compiled for the 2015 – ‘16 academic year (the most recent data available) by the National Center for Education Statistics (NCES), the average graduate student took on $71,000 of student loan debt to pursue their degree. And that’s in addition to any undergrad debt you may have — the average amount of which is $35,359, according to 2019 statistics from the credit reporting bureau Experian.
Amounts vary widely by program, with medical students taking on the most average debt, according to 2020 statistics compiled by Nitro College, a student loan resource center. But if you combine the average amount of undergrad debt with the average graduate debt, it’s easy to see how your total cumulative debt could soar into six-figure territory. For example, according to NCES data, average loan balances for those who completed medical degrees in the 2015 – ‘16 academic year were $246,000.
Of course, it’s possible you won’t be taking on any additional debt for grad school. But even if that’s the case, ignoring your undergrad loans could be costly thanks to accruing interest and capitalization effects. So deciding on a plan to tackle them before heading back to school will help you save in the long run.
What to Do With Your Undergrad Loans Before Grad School
Dealing with your student loans could include multiple ways to reduce or eliminate your undergraduate student loans or include an in-school deferment. It all depends on your situation and ability to make payments before or during graduate school.
1. Pay Off Your Undergrad Loans Before Grad School
If your undergrad debt is low enough that you can knock it out in a few years on your current income — and you can wait those few years before starting grad school — the absolute best course of action is to pay off your undergraduate loans entirely. That way, the debt doesn’t pile up to an overwhelming level.
Since you won’t have to worry about your undergrad debt if you pay it off, there are many benefits to paying off your student loans before grad school.
- You Can Save Money. If you opt to defer your loans during grad school or even keep paying the minimum, all but your federal subsidized and Perkins loans will continue to accrue interest. But your undergrad loans won’t accumulate interest while you’re in grad school if you pay them off beforehand. And that means less money you’ll have to pay back overall.
- Your Debt Balance Won’t Grow. In addition to accruing interest while in school, once you graduate, that interest is capitalized — added to your principal balance. And that means you’ll have a new, bigger balance you’re paying interest on because capitalization amounts to paying interest on top of interest.
- You Can Gain More Work Experience. Unless you plan to continue working, any time spent in school — whether undergrad or graduate school — is time spent out of the workforce. And that means you’re also missing out on income opportunities — like the kind of work experience that boosts your salary. While work experience and education are equally preferable for some fields, the value of work experience over education varies by career field. For example, for someone working in sales to rise to the top rank of sales manager, experience is more critical, according to the BLS. And that’s because sales is driven by results, and you don’t get sales results from a degree.
But waiting for grad school until you pay off your loans isn’t the best course of action for everyone, as it could mean:
- You Have to Put Your Career Plans on Hold. If you’re heading to grad school to become a doctor, lawyer, or college professor, you won’t be able to do any of those jobs without a graduate degree.
- It Will Be Too Difficult to Pay Off Your Debt on a Lower Income. To get rid of your undergrad loans faster than the standard 10-year repayment track, you’ll have to pay more than the amount of your monthly bill. While that’s doable if you landed a high-paying career with just your bachelor’s degree, it’s less so if you need the grad degree to reach higher income levels.
- You May Lose Money in the Long Run. If you’ve decided a grad degree is worth the cost, it’s likely because it will lead you to a better-paying career. For example, according to the Bureau of Labor Statistics (BLS), the average doctor makes $208,000 per year. But according to ZipRecruiter, a premed bachelor’s degree-holder only earns an average annual salary of $41,050, one-fifth their potential after earning their medical degree. So prolonging school to work at a lower-paying job could result in years of lost income.
Ultimately, you have to crunch the numbers. Use the Department of Education (DOE) loan simulator to discover how much you’ll have to pay in interest, depending on how fast you pay off your loans or what your debt could be upon graduation if you opt to defer payments. Then research your likely income upon graduation using a tool like PayScale’s salary survey. Remember that if your graduate degree is likely to earn you significantly more money — even with the debt you’d have to take on — then it will actually cost you to wait on grad school until you pay off your loans. But if you’re heading to grad school to pursue a passion — but it won’t necessarily give you a massive boost in income — you’re better off waiting until you’ve gotten rid of your undergrad debt before taking on even more.
2. Look Into Careers That Offer Repayment Assistance
Many jobs in specified career fields come with a bonus perk for employees — student loan repayment assistance programs (LRAPs). Whether the assistance comes from a public organization or a private employer, these programs are typically designed to attract highly qualified job candidates to high-need positions. That includes teachers working in shortage areas, health care workers participating in medical research projects, and lawyers willing to work as public defenders. It also includes federal jobs in many departments, such as the Department of Justice and Department of Defense.
Help with repaying student loans is a highly attractive job perk for several reasons:
- You Could Pay Off All Your Loans in Just a Few Years. Although the amount of repayment assistance varies from one program to another, it can be significant. For example, federal agencies are authorized to pay up to $10,000 per year toward a new hire’s student loans, up to a maximum of $60,000. That’s more than enough to knock out the average undergrad student loan balance.
- You Gain Valuable Work Experience. Though working in a federal agency or for a nonprofit organization might not have been your first choice, it means you’ll gain experience that will broaden your resume and could make you a more attractive job candidate for future employers.
- Many of the Jobs Also Qualify Toward Public Service Loan Forgiveness. The purpose of most LRAPs is to attract highly qualified candidates to high-need areas. And that generally means public-sector jobs. When you work full-time in the public sector while enrolled in an income-driven repayment plan (IDR), you’ll qualify for public service loan forgiveness after making 10 years’ worth (120) payments. Note that payments don’t need to be consecutive. So you can defer any remaining loan payments while in school and still have your prior payments count toward eventual forgiveness.
While it might seem there couldn’t be any cons to “free” money, there are some catches:
- Some LRAPs Are Only Available for Jobs that Require Graduate Degrees. For example, to participate in an LRAP for public defenders, you’d first have to be a lawyer. (But you can always apply after grad school to help knock out your total cumulative debt.)
- You Might Have to Work in a Location or Career You Don’t Want To. If you have no interest in working a public-sector job or in a shortage area, you’ll have to do work you’re not crazy about to participate.
- You Could Lose Out on High-Income Opportunities. While LRAPs might give you tens of thousands of dollars toward student loan repayment, you could miss out on hundreds of thousands of dollars of income in a more lucrative — nonpublic-sector — job like working in corporate law or as a surgeon.
- You’ll Have to Put Your Career Plans on Hold. Since it means working a job, paying off your undergrad loans through an LRAP will put your grad school plans on hold unless your LRAP would require you to have the graduate degree already (for example, medical or law school). You’ll have to work for the LRAP for several years — often five or more — to get the full benefit. However, many do give at least some benefit after one or two years.
If you’re drawn to work in the public sector, looking into any applicable LRAPs can help you take a huge chunk out of your student loans — or even eliminate them entirely. But if it means putting more lucrative career plans on hold, think carefully about whether the lost income outweighs the amount of repayment assistance. See our article on jobs that qualify for repayment assistance for more information on specific LRAPs.
3. Consolidate Your Undergraduate Loans
The No. 1 reason to consolidate your student loans is to simplify repayment. Student loan consolidation essentially combines all your student loans into one. Technically, what happens is the DOE pays off your original loans with a new, single loan in the total amount of all the old loans. Thus, you’re left with one loan to repay instead of several.
In addition to simplifying repayment in general, consolidating your loans before grad school — even if you opt for in-school deferment — comes with these benefits:
- You’ll Be Able to Keep Track of Your Loan Balance in One Place. Because you’ve replaced multiple loans with a single one, your total balance will be on one statement. And that’s helpful for your financial planning since that balance will continue to grow while you’re in school thanks to accruing interest.
- You Won’t Lose Access to Interest Subsidization. The DOE keeps track of which portion of your consolidation loan was originally subsidized federal loans. Subsidization means the DOE covers all the interest during certain types of deferment and forbearance, including in-school deferment. So, if you opt for consolidation, you won’t have to worry about losing this benefit.
- You Can Lower Your Monthly Payment. Consolidation allows you to extend your repayment term — up to 30 years, depending on how much you owe. And a longer repayment term could lower your monthly payments to a small enough amount for you to manage paying them while in grad school instead of deferring them altogether. Keep in mind that extending the repayment term won’t save you money in and of itself, as a longer term means paying more interest over a greater number of years. But if you can pay toward the loans while in school, you’ll have them paid off much faster — and they’ll accumulate much less interest — than if you defer them while in school. And that can save you money.
- You Can Reconsolidate Your Undergrad Loans with Your Grad Loans. Although you can’t generally reconsolidate a consolidation loan, one exception is when you want to add in one or more new loans. So, it’s OK to go ahead and consolidate your undergrad loans before grad school. Because once you graduate with your new degree, you can combine everything in one simplified loan.
On the other hand, there’s a lot that consolidation can’t do for your loans. And in some cases, it’s not to your advantage.
- Your Interest Rate Stays the Same. The DOE calculates the consolidation loan’s interest as the weighted average of all your old loans rounded up to the nearest eighth of 1%. A weighted average gives your higher-balance loans more importance in the calculation, so when the math comes out, you’ll essentially be paying the same amount of interest you would have cumulatively on all your old loans. The idea that consolidation lowers your federal interest rates is a common student loan consolidation myth.
- Interest Accrues on Unsubsidized Loans While in School. Any portion of your consolidation loan that was originally unsubsidized continues to be unsubsidized while you’re in grad school. That means interest keeps accruing. So if you opt to defer payments while in school, your balance continues to grow. Consolidation can’t stop that.
- You’ll Lose Benefits on Some Loans If You Consolidate Them. If you’ve been making payments on any of your loans under an IDR plan, you’ll lose the credit toward eventual forgiveness if you include them in your consolidation loan. And if you have a federal Perkins loan, you’ll lose any of those benefits, including the low fixed interest rate and options for discharge and cancellation. That’s because when you consolidate your loans, the old loans no longer exist. But you can always leave any loans on which you don’t want to lose benefits out of consolidation.
- You Can’t Consolidate Private Loans. Only federal loans are eligible for a federal direct consolidation loan. If you want to consolidate private loans, refinancing is your only option.
For most students, there’s little to lose with consolidation. Most of the downsides apply whether you decide to consolidate or not. And you can still opt to defer your loans while in school, even if you consolidate. But consolidation can’t help with any private loans you have. And you should avoid consolidating federal Perkins loans.
4. Refinance Your Undergraduate Loans
In general, there are some excellent reasons to avoid borrowing private loans to pay for your education. Federal student loans come with lower interest rates, more generous deferment and forbearance terms, and extensive options for paying back your student loans.
However, refinancing your student loans with a private lender is different. Although you still lose access to government repayment options, you score a lower interest rate. And that could save you significant money over the life of your loan.
As with consolidation, if you opt to refinance all your student loans, they’ll be “combined” into one. The private lender — typically a bank — issues you a new loan in the total amount of your original loans that pays them off. And you’re left with a single new loan.
But unlike consolidation, private lenders compete for your business by offering lower interest rates. And a lower interest rate means you pay back less overall. That’s one advantage of refinancing over consolidation. Additionally, there are few more advantages to refinancing:
- You’ll Repay Less Overall. Refinance loans offer some highly competitive interest rates, and a lower rate means you repay less over the life of your loan. But if you borrowed a private loan for undergrad, you’re likely facing an excessively high interest rate. And federal interest rates remain fixed for the life of the loan — with nothing you can do to change them. That means if you borrowed money during a year with high interest rates, you’re stuck with them for the life of the loan — unless you’re able to refinance with a private lender.
- Your Monthly Payment Will Be Lower. Since a lower interest rate means you repay less overall — and your monthly payment is tied to the total repayment — your monthly bill will shrink accordingly.
- You Can Repay Your Loans Faster. If you’re able to keep making the same size (or larger) payment as before the refinance, you’ll knock out that balance even faster.
Despite the plusses, refinancing has some significant drawbacks.
- Private Lenders Have Less Generous Deferment and Forbearance Terms. Some private lenders offer no options for in-school or economic hardship deferment. And of those that do, most deferment terms are far less generous than what you get from the DOE. For example, many lenders offer only 12 months of total deferment. That’s not even enough for a master’s degree, much less a law or medical degree or Ph.D. Additionally, most lenders lump together all reasons for deferment. That means if you defer repayment for 12 months while you’re in grad school, you won’t have any remaining option to defer if you fall on hard times. On the other hand, in-school deferment through the DOE is limitless. And it’s completely separate from economic hardship deferment, which means one won’t count against the other.
- You Lose Access to Government Repayment Options. If you refinance your federal student loans — which you can only do through a private lender — you don’t have federal loans anymore. And that means you don’t have access to any of the federal repayment options, including IDR. And while you may not think you need it now, the future is highly unpredictable.
- You’ll Lose Access to Forgiveness Options. Forgiveness, including PSLF, is a federal benefit. No private lender offers loan forgiveness.
If you’re able to qualify, refinancing your undergrad loans before grad school helps you save some money. And if you’re refinancing private student loans, there’s no reason not to. But if you’re considering refinancing federal student loans, there are some significant drawbacks given the unpredictability of the future. For more information, read our article on how to decide if you should refinance your undergrad loans before grad school. Also be sure to compare offers among lenders by using a platform like Credible, which lets you apply to several at once.
5. Defer or Forbear Them While in School
All federal loan borrowers qualify for in-school deferment on their loans as long as they’re enrolled at least half-time at an accredited degree-granting institution. Additionally, those participating in graduate fellowships qualify for a deferment. And those completing medical or dental residencies qualify for a mandatory forbearance (suspension of payments), meaning your loan servicer has to grant it.
A forbearance differs slightly from a deferment in that interest continues to accrue on all federal loans during the forbearance. During a deferment, interest does not accrue on subsidized federal loans and Perkins loans. But either way, you don’t have to make any payments on your loans for the specified period.
Deferment & Forbearance Pros
Deferment and forbearance take the burden of repaying your student loans off your shoulders for at least a short while. That can bring several advantages.
- You Don’t Have to Make Payments While in School. Not having to make payments while you’re in school is a compelling reason to opt for a deferment or forbearance. It means you don’t have to struggle to make payments if you decide to work part time not at all. You also don’t have to worry about how to pay off your undergrad degree while you’re in the process of paying grad school tuition.
- It’s Automatic. You don’t have to do a single thing to get it. Your federal loans are automatically placed in deferment the second you start graduate school as long as you’re enrolled at least half-time. If that doesn’t happen, contact your school’s financial aid department. They may have misreported something. Or fill out the in-school deferment request form at StudentAid (about halfway down the page under “In-School Deferment”).
- There Are No Limits on In-School Deferment. Spend as many years in grad school as it takes. Or get as many graduate (or undergrad) degrees as you want. As long as you remain enrolled at least half-time, your loans will continue in deferment.
- You Don’t Have to Put Your Career Plans on Hold. Because you don’t have to make payments while in school, you don’t have to wait to get your graduate degree. That means if you’re planning a career that requires one — like becoming a doctor, lawyer, or college professor — you can head straight to grad school from undergrad.
- Deferment Could Net You More Money Than Delaying Grad School. If getting a graduate degree will drastically increase your income, delaying grad school to pay off your undergraduate loans could be more costly than the growing balance on them. For example, according to the 2020 Nitro College stats, medical students borrow an average of $161,772 in student loans. But, according to the BLS, the median annual income for a doctor is $208,000. That means a single year’s worth of doctor income could be greater than the total cumulative debt. So the average doctor will be able to manage the payments — even if they’re difficult. Plus, if you delay medical school to pay off your undergrad loans, you’ll miss out on all those years of doctor income. So in this case, it makes sense to go straight to grad school rather than pausing to pay off undergraduate loans. But this is only one example, and an “average” one at that. In the end, it all depends on your borrowing situation and unique career plans. So do the math to see if deferment is worth the cost.
Even though deferment is common, there are many reasons it isn’t always the right choice.
- Interest Continues to Accrue on All Unsubsidized Loans. Only federal subsidized and Perkins loans accrue zero interest during in-school deferment. That means your unsubsidized loans continue to do so. In fact, interest begins to accrue on all federal student loans — except subsidized and Perkins loans — from the moment they’re disbursed (the lender gives the money to your school). That’s what happened with your undergrad unsubsidized federal loans. And it will also occur with any new loans you take out for graduate school.
- You Won’t Make Any Progress on Your Loans While in School. Deferment doesn’t mean your loans go away. You’re simply putting off the payments. Thus, when you graduate, they’ll still be there waiting for you — and unless you have only subsidized loans, they’ll be even bigger than before. To keep your unsubsidized loans from growing while in school, make at least interest-only payments if you’re able to.
- You May Owe Even More on Your Undergrad Loans After Grad School. When your in-school deferment is up — because you’ve graduated or dropped below half-time — the accrued interest on any unsubsidized loans is added to your principal balance. That means you will not only owe more because of accrued interest, you’ll now be paying interest on an even bigger balance. In other words, you’ll be paying interest on top of interest. Many students don’t realize this effect of deferment when they opt to put off paying their loans and are shocked by their new balances. So if you can manage it, be sure to mitigate the eventual debt — and eliminate the capitalization effect — by making interest-only payments on your undergrad loans while in school.
If you stand to make significantly more money with your graduate degree, it might make more sense to defer your undergrad loans rather than delay grad school. But it pays to be aware of the drawbacks of deferment. It doesn’t merely put your loans on hold. Any unsubsidized loans will grow in size while you’re putting off repayment. Also be aware that automatic federal in-school deferment and mandatory forbearance apply specifically to federal student loans. While some private lenders offer in-school deferment, many do not. And it’s not automatic. So if you have any private student loans, be sure to check with your lender for all their available options and let them know when you start grad school.
Getting a graduate degree can mean the ability to pursue a passion like teaching or a significantly higher income in the legal, medical, or business fields. For example, 2019 BLS data shows that Americans with professional degrees earned 49% more that year than those with only a bachelor’s ($1,861 median weekly earnings for a professional degree vs. $1,248 median weekly earnings for a bachelor’s degree).
Yet it can also mean piling on even more student loan debt. Of all the students who owe more than $100,000 in student loans, the majority are grad students, according to 2016 statistics from the Pew Research Center. And that kind of debt can feel overwhelming, regardless of whether your graduate degree lands you a high-paying career.
So, even if you’ve decided a graduate degree is worth the added debt or you’re able to attend grad school without taking on any additional loans, it pays to plan to tackle the debt from your undergrad loans before taking on even more. And it starts with knowing all your options.
Are you headed to grad school? How do you plan to deal with your undergraduate loans?