I Am In … Now How Do I Pay for It? – Part 2/8 (Loans)

by on December 25th, 2013

One of the main ways that most b-school students finance their education is through loans and I won’t be any different. Of course, I would like to take out as few loans as possible but with an estimated student budget of $93,000+ per year, my MBA program won’t exactly give me too many options. I was fortunate as an undergrad in that I didn’t have to take out very many loans and I was able to pay them off relatively quickly after school. Many have it way worse, even coming into their MBA program already saddled with undergraduate debt.

Graduate school seems to have less government loan options than I remember from my undergraduate experience. I remember that Pell Grants and Subsidized Stafford loans were in high demand. Unfortunately, it doesn’t seem like they are available for graduate students. Basically, the government sponsored loan options available to incoming MBA students are Perkins loans, Unsubsidized Stafford Loans, and Federal Graduate PLUS Loans.

After reading up on the subject, it seems like students tend to finance their education as follows:

  • PERKIN’S LOAN – If you qualify, Perkin’s Loans will pay up to $8,000/year (or a lesser amount you qualify for) of graduate school
    • Most people don’t qualify, they are designed for students with “exceptional financial need”
    • Subsidized, interest paid by government while in school
    • Interest rate is 5%
    • No origination or default fees
  • UNSUBSIDIZED STAFFORD LOANS – The more likely scenario, your first $20,500/year will be paid by Unsubsidized Stafford Loans
  • GRADUATE PLUS LOANS – Then, after Perkins Loans and Unsubsidized Stafford Loans are maxed out - Graduate PLUS Loans can cover the balance of the cost of attending.
    • The maximum loan amount is the student’s cost of attendance (determined by the school)
    • Interest rate is 6.41%
    • 4.288% origination fee
    • Unsubsidized
  • PRIVATE LOANS – Any additional funding that needs to be borrowed is generally covered by private loans.
    • Interest rates vary
    • Some organizations or affiliations might have more desirable interest rates (e.g.:  USAA).

Average student loan debt reaches six-figures at some schools and I am not surprised. With MBA programs being notoriously expensive and repayment of loans in the far distant future (you know, back in the real world?), I will have to be careful not to borrow more than I responsibly need. Hopefully, this will save myself a massive loan payment after my program is over as well as paying back a ton of interest.

To illustrate, look at the following loan scenarios taken from the student loan calculator on FinAid’s website.

1.  Moderate (in my opinion) student loans ($20,500/year for two years in Unsubsidized Stafford Loans, for a total of $41,000) mean a $443/month loan payment..

2.  Moderate-High (again, in my opinion) student loans ($20,500/year for two years in Unsubsidized Stafford Loans AND $20,000/year in Graduate PLUS loans, for a total of $81,000) mean a loan payment of $895!

3.  High (who doesn’t think this is high?) student loans ($20,500/year for two years in Unsubsidized Stafford Loans AND $29,500/year in Graduate PLUS loans, for a total of $100,000) mean an, unfortunately all too common, loan payment of $1,110/month and a whopping $33k in interest! That is a mortgage!!

I am hopefully going to keep this information in mind when it is loan time for me. The first step in the loan process, filling out the FAFSA (Free application for student aid) is only a few months away…

P.S.: if you want a preview of what the FAFSA will say you are eligible for, you can give the FAFSA4caster a try.

Related Stories:

I Am In … Now How Do I Pay for It? – Part 1/8

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