If you have a child or grandchild considering grad school, I want you all to understand that new loan rules can make borrowing for an advanced degree even more expensive. I need you and your studious loved one to understand the potential costs and risks before anyone commits to this big financial obligation.
Starting July 1, the federal Graduate PLUS loan program for new borrowers will be closed down. Until now, that program has allowed graduate students to borrow up to the full cost of attendance, with no aggregate limit.
In its place are strict new federal borrowing caps. Graduate students will generally be limited to $20,500 per year, with a $100,000 lifetime borrowing maximum. (Students in certain professional programs, such as law and medicine, can borrow up to $50,000 per year, with a $200,000 lifetime cap.)
For many graduate programs—especially multi-year degrees at expensive schools—that may leave a significant gap between what federal loans cover and what the degree actually costs. And the most likely way students will be encouraged to fill that gap is with private loans.
This is where you need to pay close attention. Private loans are much riskier than federal loans, and typically will have much higher interest rates.
Private Loans Are a Completely Different Animal
Federal student loans come with protections many borrowers don’t think about until they need them: fixed interest rates, income-driven repayment options, loan forgiveness for some professions, and programs that can temporarily suspend your payments if you hit a financial rough patch.
Private loans are different. They often carry variable interest rates that can be much higher and rise over time. There is typically no flexibility in repayment plans tied to actual income, and typically no help if the borrower hits that financial rough patch.
Your Job Is Not to Fix the Gap
With a federal loan, there is no qualifying hurdle; as long as you are enrolled in a graduate program, you are eligible. Private loans work more like a car loan or mortgage: the borrower has to qualify. Without a solid credit score and income, private lenders will often require the borrower to get a co-signer, who has income and a strong credit score.
I know your instinct will be to sign on. Please be very careful. You are legally taking on that debt. If your child misses payments, your credit score will be negatively impacted, and you are legally responsible for making the payments.
Co-signing a private student loan is not a casual favor. It is a long-term financial obligation that can follow you for years and potentially put your own retirement at risk.
And that brings up another point: parent borrowing that doesn’t involve the student.
Federal Parent PLUS loans still exist, and while rules are tightening, they remain a way for families to take on additional debt. Before you consider going down that path, be brutally honest with yourself. Are you fully on track with your retirement savings? Do you carry no high-interest debt? Will your mortgage be paid off before you retire?
If the answer to any of these is no, borrowing to fund your child’s graduate degree means putting your own financial security at risk.
What You Can Do Instead
Help your child ask harder questions before committing to a program. What is the total cost? What is the realistic starting salary? The safe rule of borrowing is that all your college debt (undergrad and grad) should not be more than what the borrower can expect to earn in the first year out of school. Stick to that guideline, and repayment should not be too big a burden.
And if federal loans don’t cover the full cost and no other funding fills the gap, it may be worth reconsidering the program, the school, or the timing—rather than turning to private loans that can take decades to repay.
Your love for your child is not in question. But the most helpful thing you can do right now is make sure they understand the financial burden of borrowing, especially private loans for graduate school. Being careful now is how you protect them and you.
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