Comparing Grad PLUS Loans vs. Private Loans

When it comes to funding their studies, graduate students rely on many forms of financial aid. From scholarships to work-study positions, people seeking advanced degrees often explore a range of options. 

Two important possibilities are Grad PLUS Loans and private students loans. If you’re considering grad school or are currently enrolled, you may have heard of each alternative. But before you pursue either type of loan, it’s crucial that you thoroughly understand their differences. 

Depending on your educational goals and financial circumstances, one of these options will probably be more advantageous than the other. And because each kind of loan provides key benefits, you deserve a detailed comparison before deciding how to borrow for graduate school.

That’s exactly what this article aims to provide, breaking down all the distinctions between Grad Plus Loans and private graduate students loans. We’ll simplify the complex financial language, giving you the clarity needed to compare the two with confidence. Without further ado, let’s dive into the details of Grad Plus and private loans, empowering you to choose how to fund your graduate studies.

Grad PLUS Loans

Grad PLUS Loans are one type of federal student loans, meaning that they are provided by the U.S. government and governed by national laws and regulations. In contrast to loans provided by any other financial institution, federal loans offer borrowers a unique range of protections and repayment options.

More specifically, Grad PLUS Loans are one variety of Direct PLUS Loans, which can also be made to undergraduates or parents of students. All Direct PLUS Loans, including Grad PLUS Loans, have a slightly different lending criteria than other federal loans. 

Typically, colleges and universities assess the financial needs of their accepted graduate students, and determine which kinds of financial aid they will receive. If graduate students need more than the other assistance offered in their financial aid packages, they can consider Grad PLUS loans to cover the remaining costs of attending school. 

Grad PLUS loans are not awarded on the basis of financial need, but do depend on creditworthiness of the borrower or cosigner. Some borrowers find this lending criteria surprising, because it is the exact opposite of how certain undergraduate loans are awarded.

The maximum amount one can borrow for a Grad PLUS loan is the total cost of attendance of your program – minus other forms of financial assistance you may be receiving. 

For example, many grad students work as teaching or research assistants to offset the costs of school, or receive some kind of scholarship funding. You can only get Grad PLUS loans for educational expenses not covered by these other kinds of financial support. 

Below, we’ll break down pros, cons, and fine print of Grad PLUS Loans to help you evaluate this option more thoroughly.

Potential benefits of a Grad PLUS Loan

• Grad PLUS Loans offer a variety of repayment plans. One of the key advantages of all federal loans is that borrowers can utilize a wide variety of repayment options. For example, there are several different kinds of repayment plans tied to your income, so that your monthly payment matches your financial means. There are also graduated repayment options, which means payments start small and gradually grow over time. Likewise, extended repayment plans let you make smaller payments over 25 years, though you’ll end up paying more interest. To learn which plan might work best for you, read our comprehensive guide to repayment options.

• Grad PLUS Loans offer deferment and forbearance options. If you encounter personal or professional hardship, federal loans offer more flexible forbearance and deferment options than any private lender can. Both options allow you to pause payments during a difficult time, but deferment means interest won’t accrue while you’re not making payments. To learn more about federal forbearance and deferment, check out our guide to these protections.

• Grad PLUS Loans are eligible for public service forgiveness. The federal government offers student loan forgiveness to members of certain public service professions. Those with qualifying jobs, such as teachers, law enforcement, or other government workers, can make income-based payments for 10 years, then have the remainder of their loans forgiven. Forgiveness demands careful documentation, however, so be sure to record your work and payments religiously.

• Grad PLUS Loans do not require a high income. Whereas private lenders often assess the income of the loan applicant or cosigner, Grad PLUS Loans assess credit history alone. If you have good credit but don’t make much money as a student, you’ll be in good shape to get a Grad PLUS loan without a cosigner.

• Grad PLUS Loans don’t require payments while in school. While it’s always a good idea to pay what you can while still in school, you’re not required to make payments until six months after graduation. Not all private lenders offer similar options.

Potential drawbacks of a Grad PLUS Loan

• Grad PLUS Loans have an interest rate that may be higher than those available through a private student loan. The current Grad PLUS interest rate (for the 2020-21 academic year) is 4.30 percent. Especially when compared to federal undergraduate loans or rates from many private lenders, this rate can seem on the high side. While your borrowing costs will ultimately depend on the size of your loan and repayment timeline, there’s a good chance you’ll pay thousands in interest over the life of your loan. 

• Grad PLUS Loans have a high loan fee. With all federal student loans, a loan fee is subtracted as a percentage of the total you borrowed, decreasing the amount of money you actually receive. For all kinds of Direct PLUS Loans, including Grad PLUS loans, the percentage of the fee is quite high (over 4.2 percent currently). For every $100 you borrow, for example, you’ll only actually get about $95. When it’s time to pay up, however, you’ll be on the hook for all $100.

Who’s eligible for a Grad PLUS Loan?

Eligibility for Grad PLUS loans rests on a few standard requirements:

• You must be enrolled at least half-time in a graduate program at an eligible school. This includes students pursuing graduate or professional degrees, and even those in certificate programs. Most legitimate institutions of higher learning, including some for-profit colleges, are considered “eligible” for purposes of federal financial aid.

• You must meet the general eligibility requirements for federal financial aid. These requirements are fairly basic: You must be a citizen or legal resident of the U.S., for example, and have a valid social security number. However, certain students, such as those incarcerated for specific criminal offenses, may not be eligible for federal aid.

• You must not have an adverse credit history (though you can still get one if you take additional steps). Unlike most federal loans, Grad PLUS Loans do require a credit check. And as one might expect, delinquency on any existing debts or a recent history of collections or foreclosure will raise red flags. For more information on what might constitute an “adverse credit history” consult this resource from the Department of Education. 

• If you do have problematic credit history, you may still be able to get a Grad PLUS Loan. Applicants in the camp can either get a cosigner or describe the circumstances that led to their financial troubles in a manner that satisfies the Department of Education.  If you take either route, you’ll also need to undergo credit counseling.  

How do I apply for a Grad PLUS Loan?

Because Grad PLUS Loans are allocated to students by individual schools, the application process for these loans differs somewhat among institutions. In all cases, however, graduate students interested in federal assistance will be asked to fill out the Free Application for Federal Student Aid. This standardized form explores your financial resources, allowing schools to determine what sort of aid you actually need.

In many cases, you’ll also need to complete the Direct PLUS Loan Application for Graduate/Professional Students, which demands additional information beyond what the FAFSA requires. Some schools collect this information in a different manner, though, so contact your school (or the ones in which you’re interested) for precise instructions on how to proceed.

Private Student Loans for Graduate Students

Whereas federal loans are provided by the federal government and allocated to students by schools, private student loans are offered by financial institutions. These lenders include banks, credit unions, and financial services companies, and their goal is to profit from the interest you pay. 

That doesn’t mean, however, that these companies offer a raw deal. For certain graduate and professional students, private loans offer real advantages, meaning both borrower and lender can benefit. 

But because private loans differ substantially from federal ones, it’s important to understand their contrasts clearly. When working with private lenders, borrowers don’t enjoy all the flexibility and repayment programs that only the federal government can offer. If you don’t need those benefits, however, private lenders can often provide a lower interest rate – and sometimes other attractive perks.

To assess whether a private graduate student loan might make sense for you, jump into the details below.

Potential benefits of a private graduate student loan

• Private lenders can offer much better rates. In fact, borrowers with strong credit or well-qualified cosigners can often secure interest rates multiple percentage points below that of Grad PLUS Loans. Private lenders also offer fixed and variable rates, whereas federal loans have only fixed rates. 

• Private lenders can offer cool perks. Some lenders offer benefits, support, and extras that Grad PLUS Loans definitely don’t include. Some private graduate school loans come with career counseling, partnerships with other brands, or even a positive philanthropic impact. 

• Private lenders may offer better customer service. While some borrowers feel positively about the companies that service their student loans, many do not. And, unfortunately, you can’t control which loan servicer manages your federal debt. On the other hand, some private institutions have an excellent track record for taking care of customers, so you can rest assured you’ll get great service. 

Potential drawbacks of a private graduate student loan

• Private lenders have stricter lending criteria. As we’ll discuss in the next section, private lenders generally have higher lending standards than the federal government does. For example, they’ll want a strong credit history, not just one without obvious problems.

• Private lenders are more likely to require a cosigner. Because private institutions often have tougher lending criteria, you’re more likely to need a cosigner to satisfy their standards. Private loans typically have income requirements, for example, and few full-time students are making high salaries. A cosigner will probably be needed to satisfy that requirement instead. 

• Private lenders don’t offer as many repayment options. Remember all those repayment possibilities associated with federal plans, such as income-driven repayment? Simply put, no private lender can offer that kind of flexibility. Similarly, you can forget about loan forgiveness for certain professions.

• Private lenders have fewer forbearance and deferment options. Private lenders may be willing to work with struggling borrowers, but they can’t possibly match all the federal forbearance and deferment options we discussed. 

Who’s qualified for a private graduate student loan?

Each lender may have slightly different requirements for private student loan borrowers. Generally speaking, however, lenders will look for the following attribute in assessing applicants for graduate school loans. Remember that if you don’t meet a lender’s criteria, you may still be able to obtain a loan by bringing in a cosigner. 

• You or your cosigner should have a strong credit history. Lenders usually aren’t enthusiastic about lending large sums of money to those with poor records of repayment. To obtain private student loans, you or your cosigner must usually have a solid credit score. Moreover, a better score may help you obtain a better interest rate.

• You or your cosigner should have a substantial income. Financial institutions want to know that you or your cosigner make enough money to repay them. If you’ll be doing grad school full-time, you’ll probably need a cosigner to demonstrate a solid income stream. In many cases, lenders will assess income in light of your existing debt obligations, requiring a debt-to-income ratio below a certain threshold.

• You’ll need to meet many of the same basic eligibility requirements as federal loans. While lenders differ on their exact requirements, most want borrowers or their cosigners to be citizens or legal residents and enrolled in a legitimate program. 

How do I apply for a private graduate student loan?

Thankfully, most private lenders make it easy to apply for their loans via online application processes. It’s worth noting, though, that many require a hard credit check before they can quote you exact interest rates. Accordingly, it’s smart to compare lenders ahead of time and only submit applications for loans you’re actually interested in. 

Affording an Advanced Degree

We hope this article clarifies key differences between Grad PLUS loans and private loan options for graduate students. Ultimately, the option you choose should reflect your own financial and academic needs, both now and in the future. Certain types of students will find each option advantageous, and you have the information you need to decide which camp you’re in.

If you’re pursuing an advanced degree, it’s probably safe to assume you’re sharp and thoughtful. With the right information at your disposal, we’re confident that you’ll make great decisions about financing your studies and building a rewarding career.

At CollegeFinance.com, we’d be honored to support you through every stage of that journey. From deciding on specific loans to your overall repayment strategy, we have info and advice you’ll need to achieve financial freedom. Check out all our articles and resources today to see just how helpful we can be.