Problem
If
y
is 45 percent of
x
and
z
is 25 percent of
x
, what is
y
+
z
in terms of
x
?
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Cassandra Lopez was cornered. She'd worked, gotten a few small scholarships, and maxed out her federal Stafford loans. But she needed nearly $10,000 extra last fall to cover her second year of law school at the University of California-Davis. Her only option seemed to be a private loan-at 11 percent interest. "I felt like I was being robbed blind," she says.
Luckily, the federal government came to her rescue. Last summer, it started allowing graduate students to borrow from the educational loan program known as PLUS. After UC-Davis told Lopez of the change, she quickly got a Grad PLUS loan at 7.9 percent. She's grateful for the break but still angry she'll be forced to borrow as much as $100,000 by graduation. Payments will be at least $1,000 a month, she says, threatening her dream of serving the poor as a public interest lawyer.
Lopez's story is an increasingly common one. Graduate students are snatching the opportunity to reduce the interest rates on their educational IOUs. Alas, any benefit is likely to be offset by massive increases in the amount they actually borrow. The average debt load of newly minted M.D.'s, for example, has been rising by more than $6,000 a year since the beginning of the decade and now tops $112,000.
Shaving expenses
Graduate students and aid officers say a few simple strategies can reduce the chances of being saddled with a lifetime of onerous payments. It starts at the very beginning, with the choice of grad school. But even if students don't choose a low-cost school, they can reduce their debt while they are in school by minimizing their expenses and shopping for better rates.
Chad Dybdahl, 24, slashed his potential grad-debt load while he was a senior at Willamette College in Salem, Ore. He turned down the prestigious but pricey University of Southern California's physical therapy program after realizing he'd probably need to borrow $100,000 to go there. Now in his second year at San Francisco State University, he's been packing his own lunches and eliminating extras like cable. "I wanted to stay away from loans as much as I could," he says.
But, as Dybdahl discovered, even the best penny pinchers can't always avoid debt. And aid officers say the best source for graduate students who need to borrow is federal Stafford loans, which charge maximum interest of 6.8 percent.
About a third of all schools give their students no choice but to take their loans directly from the federal government, a policy that saves taxpayers money. The rest permit shopping around. Students who limit their searches to their school's preferred lenders may miss the best deals, which may be offered by nonprofits and for-profit upstarts. The Missouri Higher Education Loan Authority, for example, cuts rates for students all over the country by at least 2 percentage points for on-time automatic payment. (A list of nonprofit lenders can be found at www.efc.org. Another site, www.simpletuition.com, lists competing deals from for-profit companies.)
Grad students can cut borrowing costs further by filling out a Free Application for Federal Student Aid, or FAFSA, to see if they qualify for subsidized Staffords with an additional break. The federal government pays the interest on as much as $8,500 worth of subsidized Staffords each year for needy grad students as long as they stay enrolled. Borrowers can defer payments on the unsubsidized Staffords while they are in school, but the interest adds to the total debt.
The major drawback to Staffords, for many students, is the limit on borrowing. The maximum loan for the 2007-2008 academic year will be $20,500 a year ($138,500 total). Medical, dental, and other health students, however, can borrow $40,500 a year ($189,125 total).
Unfortunately, that's not enough for many, and Grad PLUS loans offer the next best deal. Grads may balk at them because some lenders charge up to 8.5 percent and subtract as much as 4 percent from the principal as fees. But even companies making private loans say the PLUSes are, in the long run, a better deal for borrowers. "There may be ways to get money cheaper, but people need to be careful and read the fine print," says Rob LaBreche, president of consumer marketing for the College Loan Corp, a San Diego-based for-profit lender.
It pays for students to keep loan shopping after graduation, as well. Here's why: New graduates can consolidate all of their federal education loans into a single debt. To ease financial pressure early in their career they can stretch repayment of consolidated loans for up to 30 years. Of course, doing so increases the total amount of interest charged.
Second bite
Smart consolidators can cut interest costs even further. New graduates who apply for the best consolidation terms offered by an institution other than their original lender often get come-back offers from that lender that are sweeter than anything advertised. "It's a competitive world," says LaBreche.
Shaving a few points off the interest rate doesn't solve the larger problem, however. Graduate program administrators say rising debt payments are rippling out to affect the communities their students serve. Joseph Taboada, associate dean of the school of veterinary medicine at Louisiana State University, says his graduates are increasingly turning down offers from farming communities because higher-priced suburban pet care is more likely to cover a $1,000-a-month loan payment.
The growing shortage of rural veterinarians has sparked one of the few hopeful developments for anyone considering graduate school. Farming communities in Kansas, Ohio, and other states have become so desperate that they are offering to repay some educational debts for veterinarians who settle in and serve their areas. So if they are lucky, a growing number of professionals could have society repay their debts.
Four Simple Steps To Fiscal Sanity
1. Minimize costs. Apply to at least a couple of graduate schools that won't require big loans, such as public schools and private schools that might consider you a catch and thus be more likely to award scholarships or assistantships. Once in school, live frugally.
2. Stick with the federal loan programs. At 6.8 percent, Staffords are the best deals. Only those who have borrowed the maximum allowable under the Stafford program should consider turning to federal PLUS loans, which are capped at 8.5 percent.
3. Shop for lenders, if possible. Two thirds of schools expect students to shop for better Stafford and PLUS deals. Some nonprofit and upstart for-profit lenders are offering interest rate discounts and principal reduction incentives; check them out, because these may reduce debt burdens by thousands of dollars.
4. Consolidate. Students who've left school can bundle all of their educational loans into one longer-term loan that can slash their monthly payments by 40 percent or so. Students who threaten to consolidate with a company other than their original lender are sometimes offered extra discounts and rebates to return. It's worth asking!
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